As a tax professional, you know that due diligence is essential for staying compliant with the IRS, especially when you're dealing with returns that claim credits like the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), American Opportunity Tax Credit (AOTC), or Head of Household (HOH) status. But with all the rules and regulations, it's easy to feel a bit overwhelmed by the whole due diligence process. The good news? These audits are designed to keep both you and your clients on the right side of the law, and understanding how they work will help you protect your practice, avoid penalties, and maintain the trust of your clients. Let’s break it down.
What’s the Deal with Due Diligence Audits?
The IRS uses due diligence audits to ensure tax preparers are following the specific requirements laid out in the Internal Revenue Code (IRC) and Treasury Regulations. These audits are most often triggered by claims for certain tax benefits like the EITC, CTC, AOTC, and HOH status. The main goal of these audits is to verify that you, as the tax preparer, have done your due diligence in confirming the accuracy of your client's information and their eligibility for these credits. The IRS wants to make sure that tax benefits are being claimed fairly and correctly, protecting the overall integrity of the tax system.
Nailing the Steps the IRS Looks For
When the IRS audits a tax return for due diligence, they’re looking at whether you've followed the right steps. One of the big steps is completing Form 8867, the Paid Preparer’s Due Diligence Checklist. You need to file this form with your returns that claim the credits mentioned above. But it’s not just about filling out the form. The IRS will also be checking if you’ve asked the right questions and verified any inconsistencies or gaps in the information provided by your clients. For example, if something doesn’t seem to add up, you should be digging a little deeper and documenting your efforts. Keeping thorough and accurate records—everything from the questions you ask to the client’s responses—is essential, just in case you get audited.
Common Slip-Ups (and Why They’re Costly)
We know that staying on top of every little detail can be tough, but it's important to recognize some of the most common issues that can lead to problems during a due diligence audit. Missing information or incomplete responses on Form 8867 are frequent mistakes, as is failing to maintain records of your inquiries and the client's answers. It’s also easy to fall into the trap of just trusting what your clients say without checking for accuracy, especially when the details seem like they should be right. But these oversights can lead to penalties—$500 per violation, to be exact (and yes, that amount does get adjusted for inflation). If things get really bad, serious violations can get reported to the Office of Professional Responsibility (OPR), where you could face consequences like suspension or even losing your ability to practice. It’s a lot of responsibility, but the good news is that you can prevent all this with some extra diligence.
How to Stay on Top of Your Due Diligence Game
To stay on top of your due diligence game, it’s all about creating a systematic, organized approach. Make sure you’re keeping detailed records of all your communications with clients. Use Form 8867 as more than just a checkbox. Treat it as a checklist to make sure you're hitting every step. Stay current on any changes in tax laws or eligibility criteria for credits, as these can shift over time. Training your staff regularly is another key to making sure everyone in your office knows exactly what’s expected when it comes to due diligence. And don’t be afraid to ask follow-up questions! If something feels off, dig deeper, document your inquiries, and protect yourself by covering your bases.
Why Due Diligence Is About More Than Just Rules
At the end of the day, due diligence audits are there to protect everyone involved: your clients, the IRS, and your practice. When you take the time to meet the requirements, you’re not just staying out of trouble you’re building trust with both the IRS and your clients. You’re showing that you’re committed to doing things the right way, and that’s invaluable in the world of tax preparation. By staying organized, continuously educating yourself, and taking the time to verify your clients’ information, you’ll sail through due diligence audits with confidence. Think of it as a way to prove that you're not just a tax preparer, but that you are a trusted professional who takes your role seriously. So, remember: due diligence isn’t just about compliance. It’s about being thorough, careful, and ethical. When you approach it with the right mindset, you’ll avoid penalties, protect your reputation, and contribute to a tax system that’s fair for everyone.
Hayley Bales
Tax Protection Plus
References
1."Due Diligence Requirements for Tax Return Preparers." IRS.gov. Last modified January 2024. https://www.irs.gov/tax-professionals/due-diligence-requirements.
2."Form 8867: Paid Preparer's Due Diligence Checklist." IRS.gov. Last modified January 2024. https://www.irs.gov/forms-pubs/about-form-8867.
3."IRC § 6695(g) - Penalty for Failure to Comply with Due Diligence Requirements." 26 U.S.C. § 6695(g). https://www.law.cornell.edu/uscode/text/26/6695.
4."Penalties and Consequences for Failing to Meet Due Diligence Requirements." IRS.gov. Last modified January 2024. https://www.irs.gov/tax-professionals/penalties-and-due-diligence.
5."Due Diligence and Audit Process: Common Issues and Compliance Strategies." Taxpayer Advocate Service. Last modified January 2024. https://www.taxpayeradvocate.irs.gov/due-diligence-audit-process.
6."Appeal Rights and Penalty Mitigation Strategies." IRS.gov. Last modified January 2024. https://www.irs.gov/tax-professionals/appeal-rights-and-penalty-mitigation.