The ABCs of due diligence for tax professionals

By snapme | April 11, 2025 |

Tax professionals who are paid for their tax preparation services are required to practice due diligence when preparing federal tax returns, especially when the returns claim tax credits.

If a paid preparer has a reason to doubt any information provided by a client that impacts client eligibility for the Earned Income Tax Credit, Child Tax Credit (including the Additional Child Tax Credit and Credit for Other Dependents), American Opportunity Tax Credit, or Head of Household filing status the preparer must:

Ask the client additional questions if a reasonable and well-informed tax return preparer would conclude the information furnished seems incorrect, inconsistent, or incomplete.
Be smart. Don’t rely on information if you know the information provided is incorrect, inconsistent, or incomplete.
Create records at the time of the interview to document the questions asked and the client’s answers.

Due diligence also involves completing Form 8867, Paid Preparer’s Due Diligence Checklist, and keeping records for three years. When meeting with a client, ask questions, listen, and clarify unclear information. Document responses, ask follow-up questions, and request necessary documentation. Complete Form 8867 accurately and on time.

The consequences could be severe for paid tax return preparers who do not meet due diligence requirements. These consequences include penalties for each failure imposed on the preparer as well as potential penalties imposed on the preparer’s employer. The IRS may also audit their clients, leading to credit or filing status disallowance, penalties, and interest. Practicing due diligence ensures return accuracy and a positive client experience and prevents time-consuming and expensive follow-up.

Additional Resources:

Common Letters received by paid return preparers from the IRS

Letter 5025-F, “You Prepared Inaccurate Tax Returns – You Risk Penalties from an Audit”
Letter 4858, “You May Not Have Met Your Due Diligence Requirements”
Letter 5364, “Missing Form 8867”
Letter 6595, “Pre-Filing Season Phone Call Letter”

IRS Help tools for tax professionals