The 10 Most Common Due Diligence Mistakes Tax Preparers Make

As tax professionals, we know that due diligence is not optional. It is a requirement when preparing returns that claim the Earned Income Credit (EIC), Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), American Opportunity Tax Credit (AOTC), and Head of Household (HOH) filing status.

Yet every year, thousands of tax preparers receive IRS warning letters, examinations, and penalties because proper due diligence procedures were not followed.

The reality is that many of these issues are avoidable.

After years in the tax industry and multiple due diligence examinations, I've seen firsthand where tax professionals get into trouble. Here are the 10 most common due diligence mistakes and how you can avoid them.

1. Failing to Ask Additional Questions

One of the biggest mistakes preparers make is accepting information at face value.

If something appears inconsistent, incomplete, or unusual, the IRS expects you to ask additional questions.

For example:

• A taxpayer claims Head of Household but recently got married.

• Income seems too low to support household expenses.

• A child appears to have lived in multiple locations during the year.

Your responsibility is not just to enter information into software. You must make reasonable inquiries when something doesn't make sense.

2. Poor Documentation of Client Conversations

Many preparers have conversations with clients but fail to document them.

Years later, when the IRS conducts an examination, the preparer remembers asking questions but has no evidence to prove it.

Keep detailed notes regarding:

• Questions asked

• Client responses

• Documents reviewed

• Any explanations provided by the taxpayer

If it isn't documented, it may as well not have happened.

3. Completing Form 8867 Incorrectly

Form 8867, Paid Preparer's Due Diligence Checklist, is one of the first documents reviewed during a due diligence examination.

Common errors include:

• Missing questions

• Incomplete answers

• Incorrect responses

• Failing to retain a copy

Take your time and ensure every section is completed accurately before filing the return.

4. Not Verifying Head of Household Eligibility

Head of Household is one of the most misunderstood filing statuses.

Preparers often assume a taxpayer qualifies simply because they have children.

However, qualifying for Head of Household requires meeting several tests, including:

• Marital status requirements

• Residency requirements

• Support requirements

• Qualifying person requirements

Never assume. Verify.

5. Ignoring Red Flags

The IRS expects tax professionals to recognize and address red flags.

Examples include:

• Multiple taxpayers claiming the same child

• Income that appears fabricated

• Self-employment income that seems designed solely to maximize credits

• Inconsistent addresses or residency information

Ignoring red flags can lead to substantial penalties.

6. Failing to Retain Required Records

Due diligence doesn't end when the return is filed.

The IRS requires preparers to retain records supporting compliance with due diligence requirements.

This includes:

• Form 8867

• Worksheets used to calculate credits

• Documentation reviewed

• Notes from client interviews

Good recordkeeping can be the difference between winning and losing an examination.

7. Accepting Self-Employment Income Without Proper Inquiry

Schedule C income often receives increased scrutiny during due diligence reviews.

If a taxpayer reports self-employment income, you should ask questions about:

• Business activities

• Recordkeeping methods

• How income was calculated

• Expenses claimed

You do not have to audit the taxpayer, but you must make reasonable inquiries when information appears incomplete or questionable.

8. Relying Solely on Tax Software

Tax software is a tool, not a substitute for professional judgment.

Many preparers mistakenly believe that if the software accepts the information, everything must be correct.

The IRS holds the preparer—not the software—responsible for meeting due diligence requirements.

Your knowledge, judgment, and documentation matter.

9. Inadequate Staff Training

If you operate a tax office with multiple preparers, every member of your team must understand due diligence requirements.

A common mistake is assuming experienced preparers already know the rules.

Tax laws change. IRS expectations evolve.

Regular training helps ensure your entire office follows consistent procedures and reduces risk.

10. Waiting Until an IRS Letter Arrives

Many tax professionals don't take due diligence seriously until they receive a warning letter or examination notice.

By then, the damage may already be done.

The best approach is proactive compliance:

• Create written procedures

• Train your staff

• Review returns for quality control

• Conduct internal audits

• Maintain detailed documentation

Preparation is always less expensive than dealing with penalties.

Final Thoughts

Due diligence is about more than avoiding penalties. It is about protecting your business, your PTIN, your reputation, and your clients.

The most successful tax professionals understand that compliance and profitability go hand in hand.

Every return you prepare is an opportunity to demonstrate professionalism, protect your practice, and build a business that can thrive for years to come.

If you're unsure whether your current due diligence procedures would withstand IRS scrutiny, now is the time to review your processes and strengthen your systems before the next filing season begins.

Need help improving your due diligence procedures? Explore our Due Diligence Training, Compliance Resources, and Coaching Programs designed specifically for tax professionals who want to stay compliant, reduce risk, and build a stronger tax business.