IRS Due Diligence Examinations: 7 Things Every Tax Preparer Should Know
Tax professionals, let me clear up some misinformation about IRS due diligence examinations.
I've been seeing statements circulating throughout the tax industry that are simply not accurate.
And when tax professionals rely on misinformation, they can put themselves and their businesses at risk of significant penalties.
Due diligence is not something you can afford to misunderstand.
Here are seven things every paid tax preparer should know.
1. IRS Due Diligence Examinations Are Happening
If you believe the IRS is no longer conducting due diligence examinations, think again.
In just two weeks, 54 tax professionals reached out to me after receiving IRS due diligence examination letters.
These are real tax professionals dealing with real examinations.
Just because you've never received an examination letter doesn't mean other preparers aren't receiving them.
Don't confuse your personal experience with what's happening throughout the industry.
2. Being Selected Doesn't Automatically Mean You Committed Fraud
Receiving a due diligence examination letter does not automatically mean the IRS believes you've committed fraud.
These examinations evaluate whether paid preparers satisfied applicable due diligence requirements when preparing returns involving:
Earned Income Tax Credit (EITC)
Child Tax Credit, Additional Child Tax Credit, and Credit for Other Dependents (CTC/ACTC/ODC)
American Opportunity Tax Credit (AOTC)
Head of Household (HOH) filing status
The IRS may examine how you evaluated eligibility, what questions you asked, whether additional inquiries were necessary, and what documentation you maintained.
The focus is whether you met your responsibilities under the law.
3. Completing Form 8867 Is Not Enough
This is one of the biggest misconceptions I encounter.
Some tax professionals believe that completing Form 8867 and entering a few notes into their tax software means they're compliant.
That's not necessarily true.
Paid preparer due diligence generally involves four requirements:
Completing and submitting Form 8867 when required.
Meeting the applicable credit computation requirements.
Satisfying the knowledge requirement, including making reasonable inquiries when necessary.
Maintaining required records.
Form 8867 is part of the process—not the entire process.
4. You Can Be Examined More Than Once
Some preparers assume that successfully completing one examination means they won't be selected again.
That is incorrect.
A preparer can be selected for another examination, even after a previous examination resulted in no penalties.
No one can guarantee that a tax professional will never receive an IRS due diligence examination letter.
The goal should not be to avoid selection.
The goal should be to maintain compliant procedures regardless of whether you're selected.
5. Hiring Representation Does Not Replace Proper Documentation
Professional representation can be extremely valuable during an IRS examination.
However, representation cannot change what actually occurred when the return was prepared.
If you failed to ask necessary questions or maintain required records, hiring someone after receiving an examination letter does not automatically resolve those issues.
Your representative can help evaluate the facts, explain the law, organize existing evidence, and respond to proposed penalties.
But your responsibility begins long before an examination letter arrives.
Your client files should demonstrate the work you performed.
6. Understand What the IRS Is Examining
Due diligence examinations focus on whether paid preparers complied with the requirements applicable to covered tax benefits.
However, tax professionals should not confuse those requirements with other preparer obligations.
For example, Form 8879 relates to electronic filing authorization. It is not one of the four due diligence requirements under IRC §6695(g).
That distinction does not eliminate your separate electronic filing responsibilities.
Understanding which requirements apply—and why—is essential.
7. Experience Alone Does Not Guarantee Compliance
I've been preparing tax returns for more than two decades.
Throughout my career, my business has served a high volume of taxpayers claiming the Earned Income Tax Credit.
Between my preparers and me, we've experienced eight IRS due diligence examinations involving 11 IRS agents.
Some were conducted in person. Others were correspondence examinations.
All eight examinations ultimately resulted in $0 in final penalties.
That doesn't mean the process was always easy.
I personally handled two appeals involving proposed penalties of approximately $47,000 and $6,000.
Both were ultimately reduced to $0.
I handled those matters without hiring outside representation.
But I also understood the importance of knowing the tax law, maintaining client records, and responding appropriately to the IRS.
That's the experience I bring into my classroom.
I'm not teaching due diligence based solely on what I've read.
I'm teaching from years of preparing tax returns, managing tax professionals, and personally navigating IRS due diligence examinations.
And because I continue preparing tax returns, I understand that I can be selected again.
Final Thoughts: Don't Wait Until the IRS Comes Calling
Tax professionals, please understand something.
You don't want to wait until an IRS due diligence examination letter arrives to begin learning what the IRS expects.
You need to understand:
What questions to ask during client interviews.
When additional inquiries are required.
What information to document.
What records to maintain.
How to apply the law to different taxpayer situations.
What happens during a due diligence examination.
Due diligence is not about how long you've been preparing taxes. It's about whether you're meeting the requirements.
Your experience matters.
Your education matters.
And your documentation matters.
Take Your Due Diligence Knowledge to the Next Level
My 2-Day Due Diligence Masterclass is November 11–12, and I'm inviting you to join me!
November 11–12, 2026 | 8–10 PM EST | Virtual | $157
Don't get so comfortable with your experience that you stop investing in your education.
Register here: Due Diligence Masterclass
Dr. Gwennetta WrightXpert Business Solutions
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