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May 24, 2019


IRS expands due diligence requirements for tax preparers

Tax preparers now have a new due-diligence duty: to document their investigative efforts to confirm client eligibility for claiming head-of-household status.

U.S. tax preparers are subject to tax laws that require them to exercise due diligence when they prepare tax returns for taxpayers who claim certain financially advantageous credits:

  • Earned Income Tax Credit or EITC: A substantial credit mainly for low- and middle- income families with children
  • Child Tax Credit or CTC: A credit for taxpayers with certain qualifying children, usually reduces tax, but rarely increases refunds
  • Additional Child Tax Credit or ACTC: May allow refund not allowed under CTC
  • American Opportunity Tax Credit: Educational credit for eligible students during first four years of postsecondary education

In November 2018, the IRS finalized regulations that expand tax-preparer due-diligence requirements to also include instances when they prepare returns for taxpayers filing as head of household. Head-of-household status gives an unmarried filer with a qualifying dependent tax advantages over those filing as single, so the agency wants to be sure that head-of-household filers really qualify, since these filers will likely owe less tax.

What is due diligence?

Basically, the IRS requires that a tax preparer who prepares a return for a client that claims any of these credits or head-of-household status thoroughly interview and question the taxpayer and collect documentation to show that the taxpayer is qualified for the tax advantage. The tax preparer must keep documentation and records for at least three years.

If the preparer determines that taxpayer information collected appears to be insufficient or incorrect, it may not support a claim for a credit or HOH filing status. The preparer must carefully document questions asked and responses.

The preparer must prepare and file Form 8867, the Paid Preparer’s Due Diligence Checklist, as well as complete any worksheets or forms in the return or connected with the particular credits claimed.


The IRS can audit a tax preparer for compliance with these requirements. The penalty for failure to comply is $520 (for tax year 2018) per failure, which could be more than one in a single return, quickly becoming very expensive. The agency is motivated to audit tax preparers because of a history of some unscrupulous preparers fraudulently filing for these credits, especially the EITC.

It behooves any preparer with questions about compliance or who has been approached by the IRS to immediately contact an attorney with specific experience with this area of law. The lawyer will help to respond to the inquiry and be able to negotiate with the agency, if necessary.

The lawyers at Brown, PC, in Fort Worth advise tax preparers about compliance with due-diligence requirements and represent them in responding to IRS audits in Texas and across the country.