4 Due Diligence Requirements
Performing proper due diligence is not a task to be taken lightly, as failure to satisfy the requirements may result in substantial penalties from the IRS. This can include a fine, injunction, referral to the IRS’ Office of Professional Responsibility (OPR) or an administrative assessment of professional sanctions.
According to the IRS, the proper way to conduct the aforementioned is by obtaining information from the client, evaluating it to determine whether the claim is likely to be eligible and taking a number of steps to verify that the claim is accurate. This may include requesting a copy of the document, asking questions, and keeping records of the responses. It is also important to note that this does not include medical, school, or other related documents. However, a tax return preparer may rely on a third party’s information for the purpose of preparing a return.
In recent years, the Digital Due Diligence requirement has expanded to cover other tax claims. For example, the American Opportunity education credit, Head of Household status and the Earned Income Credit all have their own special requirements. In order to understand these, it is useful to review the IRS’s regulations on this topic.
What Are the 4 Due Diligence Requirements?
While the tax code does not provide exhaustive guidelines on the subject, the IRS does offer a number of resources to help preparers navigate the requirements. One of these is the Preparer Toolkit. It provides a free CPE credit to those who complete the Due Diligence Training Module.
Another resource is the IRS’s web site. The site provides a free online training program. It is aimed at tax return preparers and provides a comprehensive overview of the requirements for performing due diligence, including the requirements for a new client. The site is accompanied by an FAQ section and a listing of frequently asked questions.
The best part of this training program is that it provides a free CPE credit for those who complete it. As a paid preparer, it is important to understand the requirements for performing due diligence. While it is not mandatory for you to perform due diligence on every claim, the requirements for claiming the American Opportunity Credit, the Earned Income Credit and Head of Household status apply to all of your claims. This means you will need to keep a record of your due diligence questions and their answers, as well as maintain the information for three years from the date of filing or the return’s due date. Keeping the right records will enable you to avoid any pitfalls in the future.
Using the information provided in the web site, you can begin to assess your own office’s procedures. You can then compare your own practices with those of your peers and make adjustments. For example, you could add a formal written policy, a checklist of best practices, or a formal process for completing Form 8867, the Paid Preparers Due Diligence Checklist. All of these are intended to ensure that you can meet your requirements and minimize any potential penalties.