Why Most Tax Pros Get Fined: The Truth About the Knowledge Requirement

By Dr. Gwennetta Wright, Tax Coach

If you want to know the number one reason tax professionals receive Due Diligence fines during an IRS examination, here it is, failure to meet the knowledge requirement.

On Line 3 of Form 8867, every tax preparer is asked whether they have met the knowledge requirement for the taxpayer. Most pros check “Yes” without having anything in the file to prove it. That is where the trouble starts.

Many tax preparers do not fully understand what the knowledge requirement actually means. But the IRS is clear. Line 3 outlines two specific things you must do to remain compliant.

First, you must interview the taxpayer, ask appropriate qualifying questions, and document their answers at the time of the interview. This is not optional. It is required by law.

Second, you must review the taxpayer’s information and documents to determine if they are eligible to claim the credits or Head of Household filing status. That includes verifying the correct amount of each credit claimed.

Both steps are required. If you skip the interview or fail to document what the taxpayer said, you are not compliant. And that is exactly why the fine rate is so high. Most tax pros try to take shortcuts and check boxes without doing the actual work.

This is one of the most important parts of due diligence. If you are not asking the right questions and writing strong notes, you are risking your business.

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