Taxes: Due Diligence Checklist

Taxes: Due Diligence Checklist
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Due diligence means that the tax preparer has done the required work prior to filing a tax return. Failure to complete a due diligence can result in penalties and fines for the preparer. To ensure that the letter of the law is followed, the Internal Revenue Service (IRS) provides due diligence checklists for a preparer to follow.


A "practitioner"—what the IRS calls a "preparer"—must exercise due diligence, or extra caution in regard to the accuracy of the return he is preparing. According to the IRS Circular 230, "due diligence must be exercised in the preparing or in the assisting to prepare or file tax returns, documents, affidavits and other papers relating to IRS matters."

Extra caution must also be taken in the accuracy of oral or written statements made to the IRS on the behalf of their clients, as well as the accuracy of oral and written statements made to the clients on any matter administered by the IRS.


When the return is complete and the client has signed the return, the client is held responsible for what the return claims. The assumption is made that the preparer exercised due diligence if he relied on the word of the client and on the work completed by any hired staff who worked on the return. As long as the preparer exercised due diligence in the hiring, supervising, training and evaluation of the work performed, it is considered due diligence in reliance on others.

This understanding is assumed unless the preparer has encouraged the client to take an indefensible position on a tax return that would be considered 'frivolous.' In other words, if a reasonable person believes the position has a less than fifty percent chance of holding up upon close examination, that position would be considered 'frivolous.'

Earned Income Credit

The Earned Income Tax Credit (EIC) program was created to help single parents with dependents get back to work. Abuse of the credit became commonplace, with some tax payers exchanging dependents when claiming them would be of a greater benefit, even if they had no right to do so. The IRS law states that if a person is committing EIC fraud, they cannot claim EIC for ten years, so the IRS created a due diligence checklist for preparers to follow. Form 8867 is a series of 30 questions regarding the tax payer, the child, and the situation determining whether the child is qualified or not.

Form 8867

The preparer must ask the client each question on this form. The last part of this form includes four questions for the preparer to answer. The first question is, "Did you complete Form 8867 based on information provided by the taxpayer or reasonably obtained by you?'"

The second question asks if the EIC worksheet located in Form 1040 has been completed. The third asks about knowledge requirements. For example, if the client is supposed to be the child's mother, and has to come in with the birth date and social security number on a piece of paper rather than from a prior year return or social security card, the client is more than likely not the child's mother.

The final question regards which records were kept on site at the tax office. Should the IRS ever audit the business, these written forms must be kept safe in file cabinets or another safe area locked away from prying eyes.