Due diligence requirements help maintain preparer professionalism

Taxpayers who seek professional tax preparers’ assistance expect the preparer will know how to prepare their returns properly. So does the IRS. To help maintain that standard of professionalism, the IRS has required paid tax preparers who submit a federal income tax return claiming the earned income tax credit (EIC) and other credits to file Form 8867, Paid Preparer’s Due Diligence Checklist, with the return filed after Dec. 31, 2011.

In addition to the EIC, the form is required when a paid preparer prepares a return claiming any of the following:

• Child tax credit (CTC)
• Additional child tax credit (ACTC)
• Credit for other dependents (ODC)
• American opportunity tax credit (AOTC)
• Head of household filing status (HOH)

While Congress put the due diligence requirements in place to reduce the number of individuals who were fraudulently claiming the specified tax credits, submitting Form 8867 along with those claims also provides protection to paid preparers. The form includes a checklist that demonstrates to the IRS that the preparer performed their due diligence if the agency should question whether a taxpayer is entitled to the claimed credits. They also protect clients from the delays or penalties that may result from mistakes.

The penalties a paid preparer may face for not submitting a required Form 8867 can be steep. For 2025, the IRS can assess a $635 penalty for each failure to submit the form as required, up to $2,540 per return or claim. The IRS may also assess due diligence penalties against a preparer’s employer should they not comply with due diligence requirements. If a Form 8867 has been submitted and all or a portion of the claimed credits are disallowed, the client must pay back any amount refunded in error plus any additional assessments.

Penalty exceptions

According to regulations (Reg. §1.6695-2), the due diligence penalty will not be applied to a paid preparer with respect to a tax return or claim for refund if they can demonstrate to the IRS’s satisfaction that, when considering all of the facts and circumstances, both of the following are true:

• The return preparer’s normal office procedures are reasonably designed and routinely followed to ensure compliance with the due diligence requirements
• The failure to meet due diligence requirements with respect to a return or claim for refund was an isolated and inadvertent event

Special rule for firms

Additionally, the regulations explain that a firm employing a tax return preparer who is subject to a due diligence penalty will also be subject to a penalty if any of the following are true:

• One or more principal managers of the firm or branch participated in or knew of the failure to comply prior to the time the return was filed
• The firm did not establish reasonable and appropriate procedures to ensure compliance with due diligence requirements
• The firm disregarded reasonable and appropriate compliance procedures through willfulness, recklessness or gross indifference in the preparation of the tax return or claim for refund for which the penalty was imposed

If you have additional questions about a preparer’s Form 8867 due diligence requirements, NATP has the following on-demand webinars:

• Due Diligence and the Tax Office (included with NATP membership!)
• EIC Due Diligence and Enforcement
• Ethics and Due Diligence Requirements of Tax Preparation (included with NATP membership!)