Satisfying Due Diligence Requirements for Tax Returns: Form 8867, Circular 230, IRS Inquiries and Audits

Tax practitioners are obligated to exercise due diligence in the preparation of tax returns. In Circular 230, Section 10.22, Due diligence as to accuracy includes:

(a) In general. A practitioner must exercise due diligence—

(1) In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters;

(2) In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and

(3) In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the Internal Revenue Service.

Although there are no clearly defined rules for satisfying due diligence requirements, some requirements are precise. Form 8867, Paid Preparer's Due Diligence Checklist, must be completed, filed with a tax return, and retained for any return that contains an earned income credit, child tax credit, or the American Opportunity Tax Credit. Interviewing a client and properly completing the form creates additional burdens and costs for both taxpayers and return preparers.

Also clear are the penalties and sanctions that the IRS can assess for noncompliance. The penalty, indexed for inflation, is $635 per failure in 2025. Since penalties are assessed "per failure," multiple penalties can be imposed on the same tax return. Employers of preparers can also be penalized for failing to conduct proper due diligence.

Equally frustrating for practitioners can be the receipt of IRS Letter 4858, 'You May Not Have Met Your Due Diligence Requirements,' when they have taken ardent steps to fulfill the requirements. Tax practitioners must understand how to meet due diligence requirements and respond effectively to IRS inquiries regarding due diligence.

Listen as our panel of seasoned tax professionals outlines best practices for meeting IRS due diligence requirements for the preparation of tax returns.