Due Diligence Requirements: Questions Tax Preparers Must Ask Taxpayers

Under the Tax Cuts and Jobs Act, tax preparers must receive additional information from clients who qualify for any of the following tax credits:

  • Earned Income Tax Credit (EIC)
  • Child Tax Credit (CTC)
  • American Opportunity Tax Credit (AOTC)
  • Head of Household filing status (HOH)

In addition to interviewing the client and gathering the required information needed to answer all of the due diligence questions on Form 8867, Paid Preparer’s Due Diligence Checklist, tax professionals also must ask additional questions when the information their client provides seems incorrect, incomplete, or inconsistent.  Tax preparers must keep copies for three years (either paper or electronic) of any documents provided by the taxpayer that were relied on to determine whether any child is a qualifying child. Tax preparers must also keep all worksheets showing how the credit was computed. 

Penalty for Failure to Perform Due Diligence

For returns filed in 2019, the penalty is $520 per failure to meet the due diligence requirements.  This penalty applies to each credit that is subject to the due diligence requirements.  As a result, a single return could contain more than one $520 penalty!

IRS Letter 5025

The IRS is sending letters to tax professionals who have submitted returns with questionable claims for refundable credits and head of household status errors.  Letter 5025 is generated as an educational effort to notify preparers who submit a high number of returns containing these credits that they may not have met the due diligence requirements.  While the letter is informational only, it serves to notify the tax professional that the IRS is monitoring returns prepared by them.  The letter advises tax preparers to educate themselves on the due diligence requirements by taking an online training module.

Form 8867

As a taxpayer, you can view the form that tax professionals need to complete here:


So if you’re wondering why we might be asking for more information from you than in prior years, it’s because the IRS is requiring us to complete the due diligence checklist for taxpayers with these tax credits.