Specifically, a paid tax return preparer must interview the taxpayer, ask questions, and obtain information to determine taxable income and tax credits to be compliant with the tax law. In addition, the IRS has identified common due diligence situations.


Pursuant to IRC §7701(a)(36), a tax return preparer is anyone who prepares for compensation, or who employs one or more persons to prepare for compensation, a federal income tax return whether it has a tax liability or a tax refund request. A paid tax return preparer is required to exercise due diligence when preparing any client’s tax return or claim for refund. As part of exercising due diligence, a preparer must interview the client, ask adequate questions, and obtain appropriate and sufficient information to determine and document the correct reporting of income and claiming of tax benefits.

Treas. Reg. §1.6695-2 provides specific due diligence requirements for a tax preparer and tax preparer’s firm to follow for (1) the earned income tax credit (EITC); (2) the child tax credit (CTC), the additional child tax credit (ACTC), and the credit for other dependents (ODC); (3) the American opportunity tax credit (AOTC); and (4) head-of-household filing status. (Although there are six items listed, the CTC, ACTC, and ODC are treated as a single item.)

A tax preparer can be assessed a penalty adjusted for inflation of $540 for a 2020 tax return filed in 2021 ($545 for a 2021 tax return filed in 2022) for each due diligence failure. That means a tax preparer could be assessed up to four penalties for a tax return or claim for refund that involves all three credits and the head-of-household status (IRC §6695(g))—as much as $2,160 (see, for example, IRS Publication 4687).

In addition, if any part of the return results in an understatement of tax liability due to an unreasonable position, the IRS can assess a minimum penalty of $1,000 against the tax preparer (IRC §6694(a)). And if the understatement is due to a willful attempt, or a reckless or intentional disregard of rules or regulations, the minimum penalty is $5,000 (IRC §6694(b)).


To satisfy the due diligence requirements, a tax preparer must comply with the following requirements. First, Form 8867, Paid Preparer’s Due Diligence Checklist, must be completed and submitted with the client’s tax return. It must be completed based on information obtained from the client or information otherwise reasonably obtained or known.

Second, the tax preparer needs to complete the appropriate worksheets (or a self-created worksheet) associated with each credit. More importantly, the worksheets and information assembled need to be retained by the tax preparer for a period of at least three years.

Third, the taxpayer must satisfy the knowledge requirement. To meet this requirement, a preparer must interview the taxpayer, ask questions, and document the taxpayer’s responses to determine the eligibility of the taxpayer as stated on Form 8867 (Part I, Item 3). In addition, the preparer must make reasonable inquiries if the information appears to be incorrect, incomplete, or inconsistent and at the same time document this in the taxpayer’s files.


The IRS warns that it assesses more than 90% of all due diligence penalties for failure to comply with the knowledge requirement of IRC §6695(g). To assist the tax preparer, the IRS has provided a list of the most common due diligence situations for the EITC on its website along with PDF presentations that can be downloaded for each situation (bit.ly /3d9Lm54). The PDFs provide a series of questions to ask the client and the different outcomes that occur based on the questions and the responses given.

The most common situations include (1) separated spouses and the claiming of the EITC on the child, (2) a child (age 18) living with his or her parents and who purportedly also has a 2-year-old child, (3) a 22-year-old with two sons and claiming the EITC, (4) a self-employed house cleaner claiming head of household and the EITC, and (5) a taxpayer claiming single and one qualifying child in the prior year and then two qualifying children in the current year.

Depending on the questions and answers for each situation, a different conclusion arises. These examples show how asking the right questions can help a tax preparer get all the facts. And again, it’s critical to document any questions asked and the answers given at the time of the interview either in the client file or within the software.


In addition to the due diligence penalties in IRC §6695, there are other penalties that a tax return preparer can be assessed if he or she fails to satisfy requirements of this Code section:

  • A $50 penalty per return is assessed for failing to furnish a copy of the completed tax return to the taxpayer.
  • A $50 penalty per return is assessed for failing to sign the tax return.
  • A $50 penalty per return is assessed for failing to include the preparer tax identification number (PTIN) on the taxpayer’s tax return.
  • A $50 penalty per return is assessed for failing to retain a copy of the return or a list of the tax returns for a period of at least three years.
  • A $500 penalty per check issued to the taxpayer that the tax preparer endorses or cashes. It doesn’t matter if the taxpayer authorizes the preparer to endorse the check or if it’s a settlement for money owed to the preparer.

The maximum penalty for each of these violations is $25,000. The penalty can be waived if the preparer can show that the failure is due to reasonable cause and not due to willful neglect.

Although tax preparers aren’t expected to interrogate or audit their clients when preparing tax returns, they are required to reasonably determine clients’ eligibility for claiming each tax credit and head-of-household status. And it’s important to note that this work needs to be documented at the time it’s gathered, or it may not be considered to exist by the IRS.

© 2021 A.P. Curatola

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