The Biggest Misunderstanding About Due Diligence: Documents Alone Are Not Enough

By Dr. Gwennetta Wright, Tax Coach

So of course, I had to jump into the conversation around collecting documents for Due Diligence because too many tax pros are being misled.

Let me be very clear: Collecting documents like birth certificates, school records, or medical forms is not required by law to meet Due Diligence requirements. The IRS even states this in their official training and publications at irs.gov.

The only time you are legally required to have documents is if you list them on Line 5 of Form 8867. If you claim you relied on a document, you must have that document in your client file. That is record retention. That is the rule.

Now, collecting documents can be a good business practice. But here is the truth, most of the documents tax pros collect do not actually prove eligibility for credits. For example:

• A letter with a name and address does not prove a child lived in the home over six months

• Bank statements are useless unless you review them, reconcile income, and document what they show

• Many documents are rejected by the IRS during audits because they do not verify what you think they do

  
  

If you do collect documents, you must:

• Review them thoroughly

• Address inconsistencies between documents and taxpayer responses

• Ask follow-up questions

• Document those responses clearly

  
  

Due Diligence is not about stacking paper. It is about knowing the law, asking questions, and documenting your process like a professional.

Here is what real Due Diligence includes:

• A thorough client interview

• Strong knowledge of IRS credit rules

• Additional inquiries when something is unclear or inconsistent

• Clear notes that tell the client’s story

• Proper record retention and documentation

• A correctly completed Form 8867

  
  

I know this message might make some people uncomfortable, especially those who were taught to collect documents and stop there. But everything I just shared is backed by IRS guidance and personal experience.

Do not take shortcuts. Do not just follow what software says. Software companies build features to help, but they are not tax law experts.

If you are ready to learn what Due Diligence compliance really looks like, join my next Virtual Due Diligence Masterclass. I am not guessing. I am teaching from experience, and even the IRS does not teach it like I do.