⚠️ The IRS Penalties Most Preparers Don’t Expect — Your 2025 Guide to Due Diligence & Compliance
Refundable credits like EITC, ACTC, and AOTC generate billions in refunds each year — and because of this, the IRS enforces some of its strictest rules on paid preparers.
If you assist clients with these credits, Form 8867 Due Diligence is mandatory, and penalties apply per credit, not per return.
1️⃣ What Is Due Diligence?
Due Diligence requires paid tax preparers to verify eligibility, ask questions, document their findings, and maintain records for IRS review.
When a taxpayer claims certain refundable credits, you must file Form 8867 with the return.
The IRS does not accept “my client told me” as evidence.
You must maintain written proof and ask adequate questions.
2️⃣ Form 8867 — Required Credits
Form 8867 is required when claiming any of the following:
- Earned Income Tax Credit (EITC)
- Additional Child Tax Credit (ACTC)
- American Opportunity Tax Credit (AOTC)
- Head of Household (HOH) filing status
If a return includes EITC + ACTC + HOH →
Form 8867 covers all three, and penalties apply per item if missing.
Preparers must also keep documentation proving the taxpayer meets eligibility requirements, including residency records, school enrollment, earned income support, and dependency evidence.
3️⃣ 2025 Due Diligence Penalties — Charged Per Credit
The Due Diligence penalty applies per credit or item when requirements are not met.
This means a single return can trigger multiple penalties.
- Failure to submit Form 8867
- Failure to compute credit properly
- Failure to ask questions / maintain records
- Failure to retain documentation for three years
A return claiming EITC + AOTC + HOH with no documentation
= 3 × penalty amount → thousands in fines
4️⃣ IRS Audit Triggers Preparers Must Know
- EITC child residency not documented
- Claiming HOH without proof of maintaining a household
- Incorrect earned income on Schedule C
- Improper AOTC claims without Form 1098-T
- Dependent claimed on multiple returns
- PTC claims mismatching Form 1095-A
Returns involving self-employed income + refundable credits are among the IRS’s highest audit priorities.
5️⃣ Preparer Penalties — IRC §6694 & §6695
Beyond Due Diligence, tax preparers face additional penalties under the Internal Revenue Code.
- §6694(a) — Negligence / unreasonable positions
- §6694(b) — Willful or reckless conduct (much higher penalties)
- §6695 — Recordkeeping failures, EFIN issues, signature violations
- Circular 230 violations → potential suspension or disbarment from practice
If a preparer knowingly understates self-employment income to increase EITC → §6694(b) “willful or reckless” applies → heavy penalties + EFIN risk + possible OPR action
6️⃣ Frequently Asked Questions
- Q1. Do taxpayers filing their own returns need Form 8867?
No — Due Diligence rules apply only to paid preparers. - Q2. Is HOH always a Due Diligence item?
Yes. HOH is one of the four mandatory Due Diligence elements. - Q3. What is the most common reason preparers are penalized?
Missing documentation + failure to ask required questions.
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- 2026 Filing Season at a Glance — EA Tax Guide Mini-Book
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