Due diligence is a process, not a final checkbox. A preparer has to reach a supportable conclusion from the information provided, notice answers that do not fit together, ask reasonable follow-up questions, complete the required computations and form, and retain the prescribed record.
The work often begins before the interview. Intake questions should collect the facts needed for the return without suggesting a preferred answer. Office procedures should give a preparer time to stop, ask, and document rather than rewarding speed alone.
The four federal due diligence requirements
| Requirement | Working file evidence | Common failure |
|---|---|---|
| Form 8867 | A completed current-year form submitted as required, plus the retained copy | Treating the software interview as a replacement for the filed form |
| Computations | The applicable IRS worksheet or an equivalent record showing how each amount was determined | Keeping only the final credit amount without the calculation record |
| Knowledge | Notes showing how questionable facts were identified, what was asked, who answered, and what resolved the question | Accepting an answer that appears incorrect, incomplete, or inconsistent |
| Records | The form, worksheets, supplied information, relied-on documents, and inquiry notes kept for the required period | Saving a generic checklist with no return-specific facts or date trail |
The IRS explains these duties in its paid-preparer due diligence rules. The current Form 8867 instructions contain the operative filing and retention details.
Before the client interview
- Confirm that the software, Form 8867, instructions, worksheets, and tax-year reference material all match the return year.
- Identify which covered credit or filing-status questions are triggered by the intake facts.
- Review prior-year information as a lead, not as proof that the same facts continue.
- List missing dates, relationships, addresses, household members, support facts, income records, school records, and custody facts before the meeting.
- Give staff a written escalation path for inconsistent answers and unfamiliar facts.
- Keep client documents inside the firm's approved secure collection and storage process.
A prior-year return can expose a change that needs an explanation. It can also carry forward a mistake. Ask what happened during the year instead of copying the old filing status, dependent list, address, or income treatment.
Interview prompts by fact pattern
These prompts are starting points. Ask only what the return requires, adapt the follow-up to the answer, and record the response in ordinary language.
Household and filing status
- Who lived in the home, and during which months?
- Who paid rent, mortgage interest, utilities, food, repairs, and other household costs?
- Was the taxpayer married on the last day of the year? If so, when did the spouses last live together?
- Did another person contribute to household expenses or claim a person in the home?
Child or dependent facts
- What is the person's relationship to the taxpayer?
- Where did the person sleep during the year, including temporary absences?
- How old was the person at year end, and was the person a student or permanently and totally disabled?
- Who provided the person's support, and did the person provide more than half of their own support?
- Could another taxpayer claim the person? If two people may qualify, which tie-breaker facts apply?
Income and earned income
- What work did the taxpayer perform, for whom, and during what period?
- How were payments received, and what records support the amount?
- For self-employment, how were gross receipts and ordinary business expenses reconstructed?
- Does the reported income fit the described work, time, rates, and household facts?
Education credit facts
- Who was the student, and which eligible institution did the student attend?
- Was the student enrolled at least half time in a program leading to a degree or recognized credential?
- Which payments were for qualified expenses, when were they paid, and who paid them?
- Were expenses reduced by tax-free assistance, refunds, or other exclusions?
- Had the student already claimed the American opportunity tax credit for four tax years?
Facts that call for another question
The knowledge requirement is triggered by what the preparer knows or should know. A mismatch is a reason to pause, not an automatic conclusion that the client is wrong.
- A child is described as living with two different taxpayers for the full year.
- Income appears too low to support the stated household costs, with no explanation of savings, gifts, benefits, or another contributor.
- Self-employment income is reported as a round number and the client cannot explain how it was derived.
- The taxpayer asks to omit legitimate expenses because a different profit number may change a credit.
- A Form 1098-T amount is treated as the credit amount without tracing payments, scholarships, refunds, and qualified expenses.
- The current account conflicts with the prior return, school record, custody document, address history, or another document in the file.
Record the question, the answer, the date, the person who supplied it, and any document consulted. If the issue remains unresolved, do not file a return that depends on the unsupported fact.
Before the return is released
- Reconcile the interview answers, source documents, worksheets, return, and Form 8867.
- Confirm that every required follow-up note is understandable to a reviewer who did not conduct the interview.
- Check that each covered credit and filing-status section of Form 8867 is complete for the return.
- Confirm that the correct paid preparer's PTIN and signature information will be included.
- Obtain the required client and preparer signatures through the firm's approved process.
- Save the due diligence record with the return-year file and apply the retention date required by the current instructions.
- Route unresolved technical or factual questions to a person qualified to decide them.
Office controls for owners and reviewers
- Train preparers on current-year rules with fact patterns, then document the training date and materials.
- Review a sample of covered returns for inquiry notes and calculation support, not only for a completed software screen.
- Separate sales incentives from credit amounts and refund size.
- Prohibit invented income, omitted expenses, unsupported dependents, and answers chosen to force an outcome.
- Track rejected returns and recurring errors so the office can correct its process.
- Restrict access to due diligence records and include them in the written information security plan.
The IRS may assess due diligence penalties by failure and by benefit or filing-status claim. Employers can face consequences in specified circumstances. Check the IRS page on preparer contacts and penalties for the current amount and standards rather than carrying an old penalty figure into office materials.
Official sources checked
Common questions
What readers ask next
Which tax benefits trigger paid-preparer due diligence?
For 2025 federal returns, the current Form 8867 covers the earned income tax credit, child tax credit, additional child tax credit, credit for other dependents, American opportunity tax credit, and head of household filing status. Check the form and instructions for the return year being prepared.
Is completing tax software questions enough?
No. The paid preparer remains responsible for the knowledge requirement, reasonable inquiries, required computations, Form 8867, and records. A software interview can support the process, but it cannot resolve an answer that appears incorrect, incomplete, or inconsistent.
How long must a paid preparer keep due diligence records?
The current Form 8867 instructions require covered records to be kept for three years. The date that starts the period depends on how the return was prepared and delivered, so use the instructions to determine the date for each file.
Does the IRS require a birth certificate or Social Security card for every child?
No. The IRS says those documents are not required in every case solely to verify a child's age. When information appears incorrect, incomplete, or inconsistent, the preparer must ask reasonable questions and document the answers and any records relied on.
Can this checklist replace Form 8867?
No. This is an office workflow aid. Use the current Form 8867, its instructions, the applicable credit or filing-status rules, and the facts of the return.