IRS Due Diligence for Schedule C Clients: How Tax Pros Stay Compliant with Self-Employed Returns

Written by Dr. Gwennetta Wright

If your Schedule C client is claiming the Earned Income Tax Credit (EITC), the IRS is going to pay close attention to how you determined their income and expenses. Self-employment returns are one of the biggest triggers for due-diligence audits, and even honest mistakes can lead to costly penalties.

The key to staying audit-proof is documentation. You must be able to show how you got every number on that return—and why.

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Let’s break down exactly what you need to do to protect yourself and your business.

1. Don’t Just Write the Numbers—Explain Them

When a client gives you bank statements, spreadsheets, or a profit-and-loss report, your job isn’t to copy the totals. You need to document how you arrived at the final numbers.

Your notes should clearly show:✅ What numbers you used✅ What you excluded and why✅ Any changes you made based on verification or discussion

Example:

If your client’s deposits total $12,000 but you only reported $9,000 as income, your notes might say:

“Client confirmed $3,000 were personal transfers from family, not business income.”

That one sentence can save you thousands if the IRS questions your calculation.

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2. If You Rely on a Document—It Must Match Your Notes

Whenever you list a document (like a bank statement or ledger) on Form 8867, make sure your notes explain exactly how it supports the numbers on the return.

The IRS expects consistency between your documentation and your explanation.If the two don’t line up, it looks like you guessed—and that’s where penalties come in.

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3. If You Didn’t Rely on a Document, Don’t List It

Sometimes clients bring spreadsheets or summaries that you don’t use directly because you verified the numbers another way. In that case, don’t list those documents as your “source” on Form 8867.

✅ Instead, keep them in the client file as backup.

✅ Clearly note what you did rely on—like an interview or other data cross-checks.

That shows the IRS you were intentional, not careless.

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4. Always Keep Extra Documents (Even If You Don’t List Them)

The IRS loves documentation. The more complete your file, the easier your defense.

Even if certain documents weren’t your primary source, include them anyway—receipts, screenshots, invoices, and statements all strengthen your case.

Paper trail = peace of mind.

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5. Your Notes Should Tell the Full Story

Your file should make sense to anyone reviewing it. It should show:📍 Which documents you reviewed📍 The questions you asked📍 Why you reported income and expenses the way you did

When your notes connect every dot, you’re protected. The IRS doesn’t expect perfection—they expect proof.

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Schedule C clients will always be on the IRS radar. But when you document carefully, you can handle any review with confidence.

Be the tax pro whose files speak for themselves—clear, detailed, and compliant.