You make the call

Question: Donna got an IRS letter regarding her level of due diligence when preparing a Form 1040 that included an EIC. The IRS Letter 4858 indicated that Donna may not have met her due diligence requirement and that no action need be taken. The letter went on to state that the IRS would continue to monitor the returns she prepares when credits like the earned income credit, child tax credit, additional child tax credit, credit for other dependents or American opportunity credit and head of household are included. Donna thinks she failed to include Form 8867, Paid Preparer’s Due Diligence Checklist, in a paper-filed return, but she still feels she has met her requirements – should she have gotten a letter?

Answer: Donna may get a letter or other attention from the IRS as part of its educational campaign to ensure that preparers are not fraudulently preparing tax returns with credits for ineligible taxpayers. The IRS has a due diligence education program where it may take several actions when it suspects a credit has not been scrutinized properly.

In addition to sending letters, the IRS might call preparers with questions, or even visit preparers for an “educational office visit.” A preparer who is not following the four tenets of due diligence may face penalties for fraudulent or inattentive preparation under §6695(g).

The due diligence tenets that must be met, including filling out Form 8867, when the above credits (and filing status) are included in a return, are:

1. Document all questions asked that are needed to verify a claim (know the facts)
2. Make reasonable inquiries to determine eligibility (compute the credit based on facts)
3. Complete and submit Form 8867
4. Keep records for three years (Form 8867 and worksheets)

IRS Publication 4687, Paid Preparer Due Diligence, provides additional details about the four tenets and has examples of what could be judged a lack of due diligence by the IRS. Further, an IRS toolkit for due diligence can be found at IRS.gov/toolkit. The toolkit includes a free due diligence training module and other resources.