IRS Due Diligence Training: Requirements, Penalties, and Audits

Paid preparer due diligence requirements are the four steps the IRS makes you take on every return that claims the Earned Income Tax Credit, the Child Tax Credit and its variants, the American Opportunity Tax Credit, or Head of Household filing status: satisfy a knowledge standard, complete and submit Form 8867, document the credit computation, and keep the records for three years. Miss any one of them for any one benefit and the IRS can assess $650 per failure on returns filed in 2026, with no reasonable cause defense and no annual cap.¹

Which Returns the Rules Cover

Due diligence attaches whenever a paid preparer files a return or refund claim involving any of these:

Earned Income Tax Credit (EITC)
Child Tax Credit (CTC) and Additional Child Tax Credit (ACTC)
Credit for Other Dependents (ODC)
American Opportunity Tax Credit (AOTC)
Head of Household (HOH) filing status

Each benefit on a single return carries its own due diligence obligation. A return claiming EITC, CTC, and HOH requires three separate compliance efforts, not one combined review.²

The rule reaches anyone paid to prepare or assist in preparing the return, including employees at tax preparation firms, enrolled agents, CPAs, and attorneys.³

The Four Requirements

Treasury Regulation 1.6695-2 sets out four distinct duties. Each applies separately to each covered benefit on the return.⁴

Knowledge

You cannot know, or have reason to know, that any information used to determine eligibility is incorrect. Accepting what the client says at face value is not enough. When something in the client’s information looks inconsistent or incomplete, you have to ask follow-up questions and document the answers. Ignoring the implications of what a client tells you, or what you pick up during the interview, is itself a failure.⁴

This is where most failures occur in practice. A client files Head of Household but the intake form lists a spouse at the same address. A client claims three qualifying children for the EITC on wages that don’t square with the living arrangement described. Those are the moments that call for follow-up. Skipping the conversation is exactly what auditors look for.

Form 8867

You must complete Form 8867, the Paid Preparer’s Due Diligence Checklist, for every return claiming a covered benefit. Its answers must rest on information the taxpayer provided or that you otherwise reasonably obtained. When you e-file, the completed 8867 goes with the return electronically. On paper, it’s attached.⁵

Credit Computation

For each credit, you either complete the applicable worksheet from the Form 1040 or Form 8863 instructions, or keep your own record showing how you arrived at the amount. Feeding numbers into software and taking the output without understanding the calculation doesn’t meet the standard. The worksheet or record has to reflect what the taxpayer actually gave you.⁴

Recordkeeping

Keep the following for three years from the later of the filing date or the return’s due date:

The completed Form 8867 for each applicable benefit
Credit computation worksheets or your own calculation records
Notes from the client interview, including additional questions you asked and the responses, especially around inconsistencies
Taxpayer-provided documents you relied on for eligibility or credit computation

Paper or electronic is fine, as long as records are secure and available if the IRS asks.⁶ The three-year clock runs from the later of the two dates, so a return filed in February still runs from the April due date.⁷

What a Failure Costs

The penalty on returns filed in 2026 is $650 per failure.¹ Because the penalty applies per requirement per benefit, one return claiming EITC, CTC/ACTC/ODC, AOTC, and HOH can produce four separate penalties totaling $2,600. Two features make this penalty harsher than most preparer penalties:

No reasonable cause defense. Other Section 6695 penalties let a preparer escape by showing the failure was due to reasonable cause rather than willful neglect. Subsection (g), which governs due diligence, contains no such language. If the requirement wasn’t met, the penalty applies regardless of why.⁸
No annual cap. Other Section 6695 penalties top out at $25,000 per calendar year. The due diligence penalty has no ceiling.⁹

A high-volume preparer running hundreds of EITC returns without proper documentation can face penalties in the tens or hundreds of thousands of dollars in a single season.

When the Firm Is on the Hook

The penalty doesn’t stop at the individual preparer. The employing firm can also be penalized, but only if one of three conditions is met:

A principal officer or branch office manager participated in or knew about the failure before the return was filed.
The firm never established reasonable procedures to ensure its preparers follow due diligence rules.
The firm had procedures in place but disregarded them through willfulness, recklessness, or gross indifference.

A firm with real training and review that genuinely enforces its process has a defense when an employee slips. A firm that treats due diligence as a paperwork exercise doesn’t.⁴

How Due Diligence Audits Work

The IRS picks preparers for due diligence visits by identifying patterns of high-error returns coming from the same preparer’s prior-year filings. Visits can happen before or during filing season.¹⁰

Contact usually begins with one of two letters. Letter 6199 requests a face-to-face visit at your office. Letter 6222 initiates a correspondence review with a telephone interview. Both require a response within 14 days. During filing season, the IRS may show up without advance notice, though a letter about a potential examination will have gone out earlier.

The examiner reviews a minimum of 25 client returns and files: your due diligence records, the probing questions you asked, questionnaires and worksheets, and taxpayer documents supporting eligibility. If failures show up in that first batch, the review can expand by another 25. The examiner also confirms your PTIN is current and that your own personal and business returns are filed.

This is why recordkeeping is worth so much. A preparer who asked every right question but didn’t write it down looks identical to a preparer who never asked at all.

Appealing a Proposed Penalty

If you receive a proposed due diligence penalty, start with a written request to the IRS asking that it be removed. If the IRS denies the request, you generally have 30 days from the denial letter to request a hearing with the IRS Independent Office of Appeals. The denial letter states the exact deadline and appeal rights.¹¹

Because the statute has no reasonable cause exception, the ground you can stand on is narrower than for other preparer penalties. Your strongest position is showing that you did meet the four requirements and have the documentation to prove it.

Beyond the Per-Return Penalty

The financial penalty isn’t the only exposure. Attorneys, CPAs, enrolled agents, and other practitioners who violate Circular 230 can face discipline from the Office of Professional Responsibility, including censure, suspension, disbarment from practice before the IRS, and additional monetary penalties. A disbarred practitioner cannot represent clients before the IRS or prepare federal tax returns.¹²

The IRS can also seek a federal court injunction under IRC 7407 to stop a preparer from filing returns. Courts can issue these when a preparer has engaged in conduct subject to penalty under Section 6694 or 6695 and an injunction is needed to prevent recurrence. When the conduct has been continual or repeated, the court can bar the person from acting as a tax return preparer at all.¹³

1
Internal Revenue Service. News and Updates for Paid Preparers
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Internal Revenue Service. About Form 8867, Paid Preparer’s Due Diligence Checklist
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Internal Revenue Service. Due Diligence Law, Regulations and Requirements
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eCFR. 26 CFR 1.6695-2 – Tax Return Preparer Due Diligence Requirements
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Internal Revenue Service. Instructions for Form 8867 (Rev. November 2025) – Paid Preparer’s Due Diligence Checklist
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Internal Revenue Service. Due Diligence Requirements for Tax Preparers
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Internal Revenue Service. Form 8867 (Rev. November 2024), Paid Preparer’s Due Diligence Checklist
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Office of the Law Revision Counsel. 26 U.S. Code 6695 – Other Assessable Penalties With Respect to the Preparation of Tax Returns for Other Persons
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Internal Revenue Service. Rev. Proc. 2025-32
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Internal Revenue Service. Auditing for Due Diligence Compliance
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Internal Revenue Service. Penalty Appeal
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Internal Revenue Service. Treasury Department Circular No. 230 (Rev. 6-2014)
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GovInfo. 26 USC 7407 – Action to Enjoin Tax Return Preparers