Paid Preparer’s Due Diligence Checklist (Form 8867) – YouTube video text script

Hi, I'm Rick Miller, Auditor for the IRS. My goal today is to help you avoid sitting across from me or one of my colleagues during a due diligence examination.

One of the most effective ways to avoid a due diligence examination is to understand key sections of Form 8867, Paid Preparers Due Diligence Checklist.

Before I go over key sections of the form, I'll explain its purpose.

Form 8867 is to document that you, a paid tax preparer, met all your due diligence requirements under Internal Revenue Code 6695 G.

These requirements apply to returns that claim earned income tax credit, child tax credit, additional child tax credit, credit for other dependents, American opportunity tax credit, or head of household filing status.

Part 1 is to ensure that you are meeting your basic due diligence requirements.

Therefore, you may need to ask additional questions to determine whether your clients are eligible for the benefits claimed.

Furthermore, it's very important that you complete all applicable worksheets, forms, and schedules.

Not only is it a due diligence requirement, doing so helps you determine your client’s eligibility and the correct benefit amount.

I've seen many instances where the paid tax preparer checks Line 2 on Form 8867 without completing the related worksheets, forms and schedules.

If you skip this step, you have not met due diligence and may be subject to penalties.

Line 5 under Part 1 is to ensure that you're meeting the record retention requirement.

Here, list the documents you relied on to determine eligibility and retain the document for three years.

This line is very important because it shows exactly what you use to support the benefits claimed.

Do not list documents from your clients if you did not use the information to determine eligibility.

Unfortunately, many of my due diligence audits are related to Line 5 issues.

I use the information you provided to determine whether you satisfied the record retention requirement and if you had the necessary records to support the benefits claimed.

So pay special attention to line 5, Parts 2 through 5.

Ensure that your clients are eligible for the specific benefits.

As a paid tax professional, thoroughly interview your clients to determine eligibility and ask follow up questions when information appears incomplete, inconsistent, or incorrect.

As a reminder, even if you answer yes to the specific questions in that section of the form, your clients must still meet all eligibility requirements.

So again, complete the related worksheets, forms, and schedules for the benefits claimed.

Remember to document and retain both the questions you asked and your client’s responses.

I'll determine whether you met the knowledge requirement by your ability to show documentation of your inquiries.

Keep in mind, simply writing a note that states you asked the questions or that you've known the client for many years does not replace your due diligence responsibilities.

Part 6 Eligibility Certification is where you sign Form 8867 under penalty of perjury affirming that you met your due diligence requirements.

Please note that just completing the form does not mean you satisfied your requirements.

I can't tell you the number of times paid tax preparers asked me does Form 8867 alone satisfy due diligence?

And my answer is always no.

The form is required in addition to your worksheets, client documentation, and any other additional information you use to determine eligibility.

Paid tax preparers such as yourself play a very important role strengthening the integrity of our tax system.

Meeting your due diligence requirements helps IRS address billions of dollars in refundable credit improper payments.

Additionally, failure to meet your requirements may result in a $665 penalty, which can be up to $2,660 for each return.

Over my career, I've seen countless shocked faces when I inform the tax preparer about the total amount of penalties I proposed.

Keep in mind that IRS may also audit your clients, or your firm may be subject to penalties if you fail to meet your due diligence responsibilities.

IRS has information to help you meet your due diligence responsibilities.

Visit the IRS Tax Preparer Toolkit on IRS.gov For more information.

Remember, due diligence protects you, your clients, your practice, and our tax dollars.