Tax Return Preparers: Conduct Comprehensive Due Diligence Before Filing a Refundable Credit Return

By Kevan McLaughlin

Tax return professionals face a variety of liability risk challenges in their line of work, and they are not themselves immune from the IRS.  In fact, tax preparer investigations are a common occurrence. CPAs, Enrolled Agents and non-registered return preparers may encounter such IRS problems as injunctions, preparer penalties and ethic investigations. One of the growing areas center on the expansion of due diligence requirements by return preparers when they prepare tax returns that claim certain refundable credits.

A few years ago, the IRS adopted the Earned Income Tax Credit Due Diligence Standards of which, by regulation, return preparers must meet four different requirements. The first two cover filling out the correct forms and calculating the penalty correctly. The next two, however, bring about the most prominent consternation for these professionals; that being to ensure that they did not knowingly receive incomplete, inconsistent or incorrect client information. Furthermore, preparers must keep that specific information in their client files for a certain period to document this claim.  The failure to meet any one of the four due diligence standards could subject a return preparer to a $500 penalty, for each failure, with an adjustment for inflation.

The record keeping edict poses the biggest problem for tax return preparers. Under the law, professionals must document the questions they asked and the responses they received. Preparers must keep this information in the file, contemporaneous with the interview and before filing the return. Prior to the new law, these requirements applied only Earned Income Tax Credits (“EITC”) returns. Recent legislation now expands these mandates to other refundable tax credits. Earned income and refundable tax credits mean the taxpayer may get money back instead of negating the tax. Tax return professionals who file a return for a client that is claiming Head of Household filing status must also meet the same due diligent requirements for those specified refundable tax credits by documenting all the questions asked and answered received.

Moreover, this trend will likely continue to accrue and apply to even more refundable tax credits. In response, tax preparers must increase their documentation and business process capabilities to stave off what could become a rise in IRS investigations.

About the author: As the founder of McLaughlin Legal, San Diego tax attorney Kevan P. McLaughlin focuses his practice on all aspects of Federal and California tax law, with a particular emphasis on representing taxpayers in civil and criminal tax litigation and controversy cases. Reach him at

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