The IRS can impose up to four penalties for a return or request for a refund that claims all three credits and the civil filing status of the HOH. To meet due diligence requirements, the tax preparer must meet the following requirements. This does not include the number of other tax returns filed (such as corporate and corporate tax returns, excise tax returns, inheritance and gifts, or state tax returns) or any other tax compliance activity. The attorneys at Brown, P.C., in Fort Worth, advise tax preparers on compliance with due diligence requirements and represent them in responding to IRS audits in Texas and across the country.
In the letter, the IRS reports that it believes the tax preparer filed returns with inaccurate statements. The agency focused particularly on tax returns with refundable tax credits, such as the earned income tax credit and the additional child tax credit, as well as on applications for head of household (HOH) status. While tax preparers are not expected to question or audit their clients when preparing tax returns, they are required to reasonably determine clients' eligibility to apply for each tax credit and the status of head of household. A paid tax return preparer may face potential consequences for not meeting due diligence requirements.
Specifically, a paid tax return preparer should interview the taxpayer, ask questions and obtain information to determine taxable income and tax credits to comply with tax law. Learn more about due diligence requirements for preparers and companies that employ preparers in the due diligence FAQs, including ways an employer can avoid sanctions. The agency is motivated to audit tax preparers because of the track record of some unscrupulous preparers who applied for these credits in a fraudulent manner, especially the EITC. In the months following the last tax filing season, the IRS began reaching out to tax professionals to remind them of the importance of understanding tax law and due diligence responsibilities.
More importantly, the tax preparer must keep the worksheets and information collected for a period of at least three years. As part of the exercise of due diligence, the preparer must interview the client, ask the appropriate questions, and obtain adequate and sufficient information to determine and document the correct income statement and the application for tax benefits. The status of head of household gives a single taxpayer with a qualifying dependent tax advantages compared to those who claim to be single, so the agency wants to ensure that taxpayers who are heads of household actually qualify, since these filers are likely to owe less taxes. However, if you receive a due diligence letter, you should know that the IRS will continue to monitor the tax returns you prepare in the future to apply for these credits.
In addition, the IRS encourages preparers to take advantage of the updated content available in national tax forums and other professional education opportunities.