Tax Preparer Due Diligence: Requirements and Best Practices
Tax Preparer Due Diligence: Why It Matters
Some of the most valuable tax benefits for working families are also the most frequently claimed in error. The earned income tax credit alone can be worth up to $8,231 for 2026 for a family with three or more qualifying children, and the child tax credit, American opportunity tax credit and head of household filing status each depend on facts the IRS cannot see on a W-2. Because errors in these areas are common and costly, federal law places specific tax preparer due diligence requirements on paid preparers who claim them.
These rules are not general advice about being careful. They are defined obligations with a defined penalty for each failure, assessed against the preparer personally. This guide explains what the IRS due diligence rules cover, the four requirements every paid preparer must meet, how Form 8867 due diligence works in practice, what failures cost and how to build a process that holds up if the IRS reviews your files. It is written for seasonal preparers, independent practice owners and firm managers who supervise others, since paid preparer due diligence applies at every level of a practice.
Meeting IRS Due Diligence Requirements
What the rules cover. Paid preparers must meet due diligence requirements when a return or refund claim includes any of four benefits: the earned income tax credit; the child tax credit, additional child tax credit or credit for other dependents; the American opportunity tax credit; or head of household filing status. The requirement applies whether the preparer signs the return or is a non-signing preparer who handles substantive parts of it.
The four requirements. First, complete Form 8867, Paid Preparer's Due Diligence Checklist, truthfully and accurately, based on information from the taxpayer, and submit it with the return. Second, complete the computation worksheets, or equivalent records, showing how each covered credit was calculated. Third, meet the knowledge requirement: do not know, or have reason to know, that any information used to determine eligibility or the amount of a benefit is incorrect. That means interviewing the taxpayer, asking adequate questions, documenting the questions and answers at the time, and making reasonable inquiries when information appears incorrect, inconsistent or incomplete. Fourth, retain the required records.
The knowledge requirement in practice. This is where most failures occur. A preparer cannot simply accept that a child lived with the taxpayer for more than half the year, that self-employment income is accurate or that a taxpayer qualifies as unmarried for head of household purposes. If a 22-year-old claims two children aged 10 and 11, or a taxpayer reports exactly the Schedule C income that maximizes the earned income credit with no records, the preparer is expected to ask more questions and document the answers.
Recent eligibility changes. Beginning with tax year 2025, the taxpayer claiming the child tax credit or additional child tax credit must have a Social Security number valid for employment, and on a joint return at least one spouse must meet that requirement. Children identified with an ITIN or adoption taxpayer identification number can no longer be claimed for the child tax credit or additional child tax credit. Due diligence interviews should confirm these identification requirements along with residency, relationship and age.
The penalty. Under section 6695(g), each failure to meet due diligence requirements carries a separate penalty. For returns filed in 2026, it is $650 per failure, and the IRS has set it at $665 for returns filed in 2027. The amount applies per covered benefit, so one return claiming all four could generate four penalties. Firms that employ preparers may also face penalties in certain situations, and preparers with repeated failures can face additional enforcement.
Other rules still apply. Meeting the four due diligence requirements does not replace a preparer's broader obligations. The understatement penalty under section 6694 can apply when a return reflects an unreasonable position, and Treasury Department Circular 230 requires practitioners to exercise due diligence in preparing returns and to make reasonable inquiries. Taxpayers face consequences too: a taxpayer whose earned income credit is denied for reckless or intentional disregard of the rules can be barred from claiming it for two years, or ten years for fraud. Explaining this to clients often helps them understand why the questions matter.
Due Diligence Best Practices
These practices help preparers meet the requirements consistently.
Client Interview
Use a structured interview for every return with a covered benefit. Ask about each child's relationship, age, residency and support, and the taxpayer's marital status and household costs. Ask the same questions of returning clients each year, since households change.
Document Verification
Review documents that support eligibility, such as school or medical records showing a child's address, or business records supporting self-employment income. Note what you reviewed, even when you do not keep a copy of the document itself.
Form 8867
Complete Form 8867 based on your actual conversation with the client, not as a checkbox exercise. Every "yes" should reflect questions you asked and answers you recorded. Use the current revision of the form and its instructions.
Record Keeping
Keep Form 8867, computation worksheets, copies of documents relied on and notes of questions and answers for three years from the latest applicable date. Records may be kept on paper or electronically.
Ask Questions
When facts seem inconsistent, ask follow-up questions and write down the responses. If the answers do not resolve the concern, do not claim the benefit. Explain the decision to the client and document it.
Stay Current
Review annual changes to credit amounts, identification requirements and Form 8867 itself. Rules for covered benefits changed significantly for the 2025 and 2026 tax years. The IRS EITC Central site publishes preparer resources throughout the year.
Use Software
Use your software's due diligence interview tools, but add your own notes. Prefilled answers without documented conversations do not satisfy the knowledge requirement. Carried-forward answers from last year are a common trap.
Implementing Due Diligence in Your Practice
Start with a written procedure. Describe how the office handles every return with a covered benefit: which questions are asked, which documents are requested, where notes are saved and who reviews the file before filing. A written procedure makes training easier and gives you something to show if the IRS asks how your practice meets its obligations.
Train every preparer before the season begins, including seasonal staff and non-signing preparers. Walk through realistic scenarios such as divorced parents who both want to claim the same child, a grandparent raising grandchildren or a taxpayer whose self-employment income has no supporting records. Practice the follow-up questions and the documentation until they become routine.
Build review into the workflow. A second set of eyes on returns claiming the earned income tax credit or head of household status catches gaps before filing. Reviewers should confirm that interview notes exist, that they match Form 8867 and that any inconsistencies were addressed.
Retention deserves its own system. Due diligence records must be kept for three years from the latest of the return's original due date, the date it was filed electronically, the date a paper return was presented to the taxpayer for signature or, for a non-signing preparer, the date the information was submitted to the signing preparer. Store records securely and index them so a specific client file can be produced quickly.
Set expectations with clients before the interview. Many taxpayers are surprised by detailed questions about their children or household, especially if a previous preparer never asked. A short explanation that the law requires these questions for every return claiming certain credits, and that the answers protect them if the IRS reviews the return, usually turns resistance into cooperation. Put the explanation in your intake materials so clients arrive prepared with school records, leases or other documents.
Finally, be prepared for contact from the IRS. The agency conducts outreach and compliance visits to preparers whose returns show patterns of errors in covered credits. Clean, consistent files make those contacts far easier to resolve.
The IRS explains each requirement on its page about due diligence requirements for tax preparers. Its consumer overview of how to file a tax return is helpful when discussing filing options with clients. Experienced preparers looking to strengthen compliance systems can review Manifest & Multiply Financials' advanced opportunity for tax professionals, which includes advanced training resources and ongoing mentorship.
Frequently Asked Questions
Complete and submit Form 8867, complete computation worksheets, meet the knowledge requirement through documented interviews and reasonable inquiries, and retain records for three years. The same four requirements apply to the other covered benefits.
For any return or claim involving the earned income tax credit, child tax credit, additional child tax credit, credit for other dependents, American opportunity tax credit or head of household status. It is submitted with the return, whether filed electronically or on paper.
$650 per failure for returns filed in 2026 and $665 for returns filed in 2027. Penalties apply per covered benefit, so a single return can generate more than one. The amount is adjusted for inflation each year.
Three years from the latest of the return's due date, the e-file date, the date a paper return was presented for signature or the date submitted to the signing preparer.
Its advanced program provides training resources, mentorship and tax season support for experienced preparers. Each preparer remains responsible for meeting IRS due diligence requirements on every return they prepare, regardless of program participation.
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