Due Diligence Is Not Just a Form: What Tax Professionals Need to Understand

Due Diligence is one of those topics in the tax industry that some professionals do not take seriously until they receive a letter from the IRS.

That is a mistake.

Tax professionals who prepare returns involving the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), American Opportunity Tax Credit (AOTC), or Head of Household filing status need to understand that Due Diligence is much bigger than checking boxes and completing Form 8867.

It is about the process you follow before that return is filed.

The IRS Is Paying Attention to Tax Preparers

The IRS has procedures addressing refundable-credit compliance and return preparer Due Diligence, including information within the Internal Revenue Manual related to its Refundable Credits Return Preparer Strategy.

Why should tax professionals care?

Because the IRS is not only looking at individual taxpayers. Return preparer compliance matters too.

Certain types of returns and patterns can raise questions, particularly when refundable credits, filing status, dependents, or business income are involved.

That does not automatically mean a return is fraudulent.

A taxpayer may have an unusual situation that is completely legitimate.

A father may qualify to claim his children.

A grandparent may actually provide a home for a grandchild.

A taxpayer may legitimately qualify for Head of Household.

A Schedule C taxpayer may have facts that affect eligibility for refundable credits.

The issue is whether the tax professional properly evaluated the facts and fulfilled their Due Diligence responsibilities.

“My Client Told Me” Is Not Always Enough

Every experienced tax professional eventually learns an important lesson:

Clients do not always give you the entire story the first time you ask.

Sometimes they misunderstand the question.

Sometimes they leave out information they do not think matters.

Sometimes their circumstances are complicated.

And yes, sometimes clients provide information that simply is not true.

That is why our responsibility cannot stop with data entry.

If information provided by a taxpayer appears incorrect, inconsistent, or incomplete, the tax professional may need to make additional inquiries.

And those conversations matter.

Your Documentation Matters

Imagine preparing a return today and being questioned about it months—or even years—from now.

Would your client file tell the story?

Could someone reviewing that file understand:

• What the taxpayer told you?

• What questions you asked?

• Why you asked additional questions?

• What answers the taxpayer provided?

• What information or documentation you relied upon?

• How you determined the taxpayer qualified?

That is the difference between simply preparing a return and building a compliant tax practice.

Your notes should help demonstrate the work you actually performed.

Form 8867 Is Not the Entire Due Diligence Process

This is where some tax professionals get confused.

They complete Form 8867 and believe their Due Diligence responsibility is finished.

It is not that simple.

Form 8867 is important, but Due Diligence also involves knowing when additional questions need to be asked, accurately completing the required information, maintaining required records, and exercising professional judgment when something does not make sense.

Your tax software can help you complete a return.

It cannot replace your professional responsibility.

EFIN Holders and Tax Business Owners Have an Additional Concern

If you own a tax office, this conversation becomes even more important.

You may understand Due Diligence personally—but what about your team?

What happens when one preparer takes shortcuts?

What happens when another preparer does not document client conversations?

What happens when everyone in the office has a different standard for what should be kept in a client file?

That is why tax businesses need written procedures, training, review processes, documentation standards, and accountability.

Your team should not have to guess what compliance looks like inside your office.

Don't Build Your Tax Knowledge From Social Media

Social media has made tax information more accessible than ever.

It has also made incorrect information easier to spread.

A tax tip can be shared thousands of times before anyone stops to determine whether it is actually correct.

Tax professionals should be verifying information through authoritative sources and reputable professional research resources.

Do not build your business around what is popular.

Build it around what you can support.

This Is the Season to Get Serious About Compliance

The tax industry continues to evolve.

Technology is changing.

The IRS is changing.

Tax laws change.

But our responsibility as tax professionals remains.

We have to continue learning.

We have to ask questions.

We have to document.

We have to train our teams.

We have to establish procedures.

And we have to know what is being filed under our EFINs.

Being a tax professional is about more than knowing how to enter numbers into software.

It is about understanding the responsibility attached to the work.

Tax pros, this is not the season to be loud and wrong.

This is the season to be educated, compliant, documented, and audit ready.

Because Due Diligence is not just a form.

It is your responsibility.

— Dr. Gwennetta WrightXpert Business Solution