PAID PREPARER DUE DILIGENCE

Paid preparer due diligence is a critical responsibility for tax professionals who prepare federal tax returns for compensation. The IRS imposes specific due diligence requirements to ensure that tax preparers accurately report information, verify eligibility for tax credits, and comply with federal tax

laws. Failure to meet these obligations can result in significant penalties and disciplinary actions. This article provides an in-depth look at what due diligence entails, the key requirements, and best practices to help tax preparers stay compliant.

1.    What is Paid Preparer Due Diligence?

https://www.eitc.irs.gov/tax-preparer-toolkit/preparer-due-diligence/due-diligence-law/eitc- due-diligence-law-and-regulation

Due diligence refers to the thorough and careful effort that tax preparers must make to ensure that the tax returns they prepare are accurate and comply with IRS regulations. This responsibility is particularly crucial when it comes to claims for tax credits, such as the Earned Income Tax Credit

(EITC), Child Tax Credit (CTC), American Opportunity Tax Credit (AOTC), and Head of Household (HOH) filing status.

Tax preparers must verify the information provided by their clients, ensure that all necessary documentation is in place, and ask the appropriate questions to confirm that the tax return is

accurate and truthful. The goal of due diligence is to prevent errors, fraud, and abuse in the tax filing process.

2.   Key Due Diligence Requirements:

https://www.eitc.irs.gov/tax-preparer-toolkit/preparer-due-diligence/knowledge-and-record- keeping-0

The IRS outlines specific due diligence requirements that paid tax preparers must follow. These

requirements are outlined in Form 8867, the Paid Preparer’s Due Diligence Checklist, which must be completed and filed with the tax return if any of the following credits or statuses are claimed:

•  Earned Income Tax Credit (EITC)
•  Child Tax Credit (CTC) or Additional Child Tax Credit (ACTC)
• American Opportunity Tax Credit (AOTC)
• Head of Household (HOH) filing status

Here’s a closer look at each requirement:

a.    Complete Form 8867

Form 8867, Paid Preparer’s Due Diligence Checklist, must be completed and attached to each tax

return or claim for refund that includes one of the credits or filing statuses mentioned above. This form requires the tax preparer to confirm that they have met the due diligence requirements by asking the necessary questions, verifying documentation, and keeping records.

B.     Knowledge Requirement

Tax preparers are required to thoroughly review the information provided by the taxpayer. This includes verifying that the information is consistent, complete, and accurate. If any information seems

incorrect or incomplete, the preparer must make reasonable inquiries to obtain clarification and additional details.

c.    Record Retention

Tax preparers must retain copies of Form 8867 and any other documents that were relied upon to determine eligibility for the credits or filing statuses. These records must be kept for a minimum of three years from the later of the due date of the return or the date it was filed. Records can include client responses to questions, worksheets, and copies of any relevant documents, such as birth

certificates, school records, or proof of income.

D.     Reasonable Inquiries

If the information provided by the taxpayer appears inconsistent, incorrect, or incomplete, the tax preparer is obligated to ask follow-up questions. This step is essential to ensure that the return is accurate, and that the taxpayer is eligible for the credits or filing status being claimed. The preparer must document these inquiries and the taxpayer’s responses.

3.   Consequences of Failing to Meet Due Diligence Requirements

https://www.eitc.irs.gov/tax-preparer-toolkit/preparer-due-diligence/consequences-of-failing- to-meet-your-due-diligence

Failing to meet due diligence requirements can result in significant penalties for tax preparers. The IRS can impose penalties for each failure to comply with the due diligence requirements. As of the current year, the penalty is $600 per failure, which can quickly add up if multiple errors are found on a single return or across multiple returns.

Additionally, the IRS may conduct an audit of the preparer’s files to ensure compliance. If the IRS determines that a preparer has willfully or recklessly failed to comply with due diligence

requirements, they may face further disciplinary actions, including suspension or revocation of their PTIN, EFIN, or other credentials.

4. Best Practices for Ensuring Due Diligence Compliance

To help tax preparers meet their due diligence obligations and avoid penalties, here are some best practices to follow:

a.    Stay Informed

Tax laws and IRS requirements can change frequently, so it’s important to stay up-to-date on the latest regulations and guidance. Regularly attend continuing education courses, participate in IRS webinars, and stay informed through reliable tax resources.

b.    Use IRS Tools and Resources

The IRS provides a variety of tools and resources to help tax preparers comply with due diligence

requirements. These include the IRS Tax Preparer Toolkit, FAǪs, and instructional videos. Familiarize yourself with these resources and use them to guide your due diligence processes.

c.    Implement a Comprehensive Review Process

Develop a thorough review process for each tax return you prepare. This process should include reviewing all relevant documents, completing Form 8867 accurately, and making any necessary inquiries to verify the taxpayer’s information. Double-check your work to ensure that nothing is overlooked.

d.    Maintain Detailed Records

Keep detailed records of all communications with clients, copies of documents reviewed, and notes on any inquiries made during the preparation process. Organize your records in a way that makes them easy to retrieve in the event of an audit.

e.    Educate Your Clients

Help your clients understand the importance of providing complete and accurate information.

Educate them on the documentation they need to support their claims and explain why you may need to ask follow-up questions. This can help prevent misunderstandings and ensure smoother preparation.

Paid preparer due diligence is a fundamental aspect of tax preparation that ensures the integrity of the tax system and protects both the preparer and the taxpayer. By adhering to the IRS’s due diligence

requirements, tax professionals can avoid costly penalties, maintain their professional credentials, and provide accurate and reliable services to their clients. By following best practices, staying

informed, and maintaining thorough records, you can successfully meet your due diligence obligations and continue to build trust with your clients.

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