What Is Due Diligence for Tax Preparers?

By Dr. Gwennetta Wright, Tax Coach

Due diligence is one of the most important responsibilities you have as a tax preparer, and it is also one of the most misunderstood.

Many tax pros think due diligence is just filling out Form 8867, but that is only a small part of it. Due diligence is the process of making sure you are preparing an accurate tax return by asking the right questions, verifying information, and documenting how the taxpayer qualifies for certain credits and filing statuses.

The IRS requires tax preparers to follow due diligence rules when claiming credits such as Earned Income Credit, Child Tax Credit, education credits, and when using Head of Household filing status. But the responsibility goes beyond checking boxes.

You are required to interview your client, ask questions that help determine eligibility, and document their answers at the time you prepare the return. This is known as meeting the knowledge requirement. You also have to review the information provided to make sure it makes sense and is consistent.

If something does not add up, you are expected to ask additional questions and document those responses. You cannot ignore missing, incomplete, or inconsistent information.

Another part of due diligence is record retention. If you rely on certain documents to prepare the return and list them on Form 8867, you must keep those documents in your client file for at least three years.

The biggest mistake tax preparers make is thinking due diligence is about paperwork. It is not. It is about proving that you did your job correctly.

Due diligence protects your client, but more importantly, it protects your business from penalties and fines.

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