Law and Audit - The Due Diligence process - YouTube video text script

Hello, and welcome to today's webinar, Law and Audit - The Due Diligence Process. I see that it's top of the hour. We're glad you joined us today. My name is Kenji Chavez, and I'm a Senior Stakeholder Liaison with the Internal Revenue Service. And I'll be your moderator for today's webinar, which is slated for approximately 60 minutes.

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Again, welcome. We're glad you joined us for today's webinar. Before we move along with our session, let me make sure you're in the right place. Today's webinar is Law and Audit - The Due Diligence Process. This webinar is scheduled for approximately 60 minutes from the top of the hour.

Now, let me introduce today's speakers. We are joined today by Kyle Hatherley and Courtney King. Kyle is a Senior Program Analyst in the Return Integrity and Compliance Services whose mission is to encourage eligible taxpayers to apply for a refundable credits and reduce number of claims paid in error. Kyle specializes in return preparer due diligence and has been with the IRS for 15 years in various roles from customer service representative to Fraud Analyst to a Senior Program Analyst. She is a member of the return preparer strategy team that is responsible for selecting return preparer compliance treatments administered during the pre-filing and filing seasons. These treatments include educational notices and visits as well as compliance letters, all of which you will hear more about later in this session.

Courtney King is also a Senior Program Analyst in the Return Integrity and Compliance Services. He began his IRS career 24 years ago at the Atlanta Submission Processing Center and has held numerous technical, analytical and managerial roles. He is responsible for coordinating with internal and external stakeholders to help balance IRS's compliance programs with refundable credit improvement initiatives.

And with that, I'm going to turn it over to Kyle to begin the presentation. Kyle, the floor is yours.

Great. Thank you so much, Kenji. Good afternoon or morning depending on where you're joining us from. I want to thank you all for attending today's informative webinar Law and Audit - The Due Diligence Process. By the end of this webinar, you'll be able to apply the four paid preparer due diligence requirements when completing and submitting tax returns for your clients claiming the earned income tax credit, EITC, the child tax credit, the additional child tax credit, and the credit for other dependents also the American Opportunity Tax Credit, AOTC, and finally, the Head of Household filing status.

The four paid preparer due diligence requirements are, 1, the knowledge requirement 2, the worksheet requirement 3, Form 8867, the completion and submission and 4, is record retention. You will be knowledgeable of the IRS's methods for contacting paid preparers in the due diligence audit process. And finally, we will inform you of an online educational tools and resources to assist you the tax professional.

So let's get this presentation started to ensure we cover all the important points. We're here to help make this session as informative and engaging as possible. So, let's dive in. I'll start with the four due diligence requirements for paid preparers and the key aspects of each requirement. However, before I review the four due diligence requirements, I'd like to pose an open-ended question to the audience.

How would you define due diligence in your own words? And it's perfectly okay if you're not ready to answer that right now. It's not like we have online prizes anyways, but we are confident that by the end of this webinar, you will know that answer. As we navigate through various topics, we encourage you to keep that question in mind. Reflect on what you initially thought due diligence requirements were and compare it with the insights we'll share today.

Now let's dive into paid preparer due diligence requirement. Treasury Regulation, Section 1.6695-2 describes the four due diligence requirements a paid preparer must meet when preparing a return or claiming for refund claiming. 1, the earned income tax credit; 2, the child tax credit and that also includes the additional child tax credit and the credit for other dependents; 3, the American Opportunity Tax Credit and lastly the Head of Household filing status.

Okay. So now I hate to be the bearer of bad news, but a paid tax return preparer can face consequences such as potential penalties for not meet their due diligence requirements. A firm employing a preparer can also be subject to penalties for an employee's failure to follow the due diligence rule. So where does the IRS's authority to assess due diligence penalties against paid preparers come from?

Well, it's under Section 6695(g) of the Internal Revenue Code, which provides that paid preparers who fail to comply with due diligence requirements as specified in the regulation shall pay a penalty of $500 for each failure to properly determine the client. A, eligibility to file the Head of Household status and B, eligibility for the amount of those credits, the EITC, CTC which includes both ACTC and ODC or the AOTC credit. So that will be a total of four different tax benefits. The penalty amount currently adjusted for inflation is $650 per failure for returns and claims been filed in 2026.

Let's be very clear here. In 2026, if you prepare a return claiming all four of those applicable tax benefits and you fail to meet the due diligence requirements for all four of them. The IRS may assess a penalty against you of $650 per failure or $2,600 per return. Now that's a very big number. So let me fill you in on the specifics, so you'll be ready for the upcoming tax season. The best place to start is by looking at each of the four due diligence requirements. But before we dive into the specifics for each of those, let's take our first poll question.

Audience. It's time for our first polling question. And the polling question is, the penalty amount under Internal Revenue Code Section 6695(g) for one return or claim for refund filed in 2026 can be up to A, $650 B, $500 or C, $2,600. Take a moment and click the radio button that answers the question. If you do not receive the polling question, please enter only the letters A, B, or C that corresponds with your question in the ask question text box. Your response is timestamped.

Audience, please remember that you need to answer at least three polling questions and participate in the live broadcast from the official start time for at least 50 minutes to earn one IRS CE credit. The polling example we did at the beginning of this presentation will count towards the requirement. I'll give you a few more seconds to make your selection and/or submit your answer in the ask question feature.

Okay. We're going to stop the polling now, and let's share the correct answer on the next slide. And the correct response is C, $2,600. Let's take a look and see how you all been with this question and it looks like 82% of you responded correctly. That is a great -- correct response rate.

Kyle, I'll turn it back over to you.

Great. Thank you. So now let's take a look at each of those due diligence requirements. And first up is the Knowledge Requirement. This one is the first and arguably the most important is the knowledge requirement. So how is this requirement met? Well, by asking all the right question. A paid preparer must not know or have known reason to know that any information used to complete the tax return is incorrect. You may be thinking, well, how would I know?

Well, you need to make sure you ask your clients the right questions, or in other words relevant questions to establish if they are eligible to claim the credits and the head of household filing status. You should ask open ended questions that you do not want to put words in your client's mouth.

So now what if you think the response your client provide is incomplete? You should rely on your education, your experience, and your interview expertise to determine if the information your client is giving you appears to be incorrect, incomplete, or inconsistent. If it is, you must continue to ask additional questions until you're comfortable with the information provided. Equally important, you must contemporaneously document the questions asked and the answers provided. This information can be kept on paper or electronically.

Now how about we take another poll question? And this one is related to one of our most frequently asked questions.

Audience, here's our second polling question, which is your client, Roger, preparers automobiles. He would like to report the income from his business using a Schedule C, Form 1040. Roger may be eligible to claim the earned income tax credit. What questions should you, the paid preparer ask Roger? Is it A, Have you received your 1099-NEC or 1099-miscellaneous to support the income? B, Do you have a separate banking account for personal or business transactions? C, How long have you owned your business? or D, all of the above.

Take a moment and click the radio button that best answers the question, if you do not receive the polling question please enter only the letters A, B, C, or D that corresponds with your response in the ask question text box. Your response is timestamped. I'll give you a few more seconds to make your selection and/or submit your question in the ask question feature.

Okay. We're going to stop the polling now. And let's share the correct answer on the next slide. And the correct response of course is D, all of the above. And I see 81% of you responded correctly. Good job. Now, Kyle, what about the worksheet requirement?

Thank you. We are indeed going to move on #2, which is the worksheet requirement. And this involves calculating the applicable credits using the appropriate IRS worksheets or forms of your own as long as they are similar and contain the same information as the IRS. The worksheets are included with most professional tax preparation software. Also, you must base these calculations on information obtained from your client or information you recently obtained or already know.

The third due diligence requirement is to complete and submit the Form 8867. This form needs to be thoroughly reviewed by you and prepared and submitted annually as needed. Based on the information obtained from your client or information you otherwise reasonably obtain or know, you must complete the form and take one of these three actions. Number one, electronically submit to the IRS with the e-filed return or the claim.

#2, for a return that's not e-filed provide a copy of it to your client to include when mailing in their return. Or #3, if you are the non-signing partner preparer please provide an electronic or paper copy of it to the signing preparer for an inclusion with the-filed return or claim. If you provide a paper Form 8867 to your client, please stress the importance of including the form with the return package sent to the IRS.

Additionally, please note that Form 8867 must not be sent to the IRS separately. Doing so has no effect on the potential preparer penalty assessment. We receive hundreds of these annually and after the corresponding return has been filed. There is no way to associate the orphan Form 8867 with its parent return, so please do not send these forms separately.

Also, the worksheet requirement and Form 8867 completion are typically completed simultaneously. And in most cases, your tax preparation software handles the majority of the work. All you need to do is utilize the information you gathered from asking your client the right questions and applying the relevant tax law. This allows you to compute the credit accurately based on the facts and to ultimately complete and submit the Form 8867.

Now the final requirement is the record retention requirement. Simply put, you must keep all records used to determine eligibility and to compute the credit. Keep copies for Form 8867 and the applicable credit worksheets along with a record of how, when, and from whom you obtained that information used to prepare them. Also, keep a record of all additional inquiries you made contemporaneously to comply with the knowledge requirement along with your client's responses.

And as mentioned previously, copies of any client provided documents you relied on to determine eligibility for the tax benefits or to compute the amount of the credit. Safeguard these records and ensure you can retrieve them either in paper or electronic form.

Remember to keep these records for three years from the latest date that applied, the due date of the return, the date the return or the claim was e-filed, the date you gave it to your client for signature if you're giving a paper return to your client, or the date you gave the signing preparer the partner of the return that you were responsible for if it you did not sign the return yourself. Again, keep these records secure in either a paper or electronic format.

Now how about we check your understanding? You guys guessed it. We have another poll question.

It is indeed and time for our third polling question, which states your new client, John, is a first time-filer for tax year 2025. What should you, the paid preparer, ask your new client? Is it A, Have you ever been married? B, Are you claiming any dependents? C, Have you completed the first four years of post-secondary education with an eligible educational institution? D, Did you pay more than half of your living expenses for yourself and a qualifying dependent? Or E, All of the above.

Take a moment and click the radio button that best answers the question. If you do not receive the polling question, please enter only the letters A, B, C, D, or E that corresponds with your response in the ask question text box. Again, your response is time stamped. I'll give you a few more seconds to make your selection and/or submit your answer in the ask question feature.

Okay. We're going to stop the polling now, and let's share the correct answer on the next slide. And the correct response is E, all of the above. And it looks like 99% of you responded correctly. What a wonderful response rate. Kyle, it seems that the audience is still with us. So I'll turn it over back to you.

Great. Thank you so much. Well, that concludes our review of the paid preparer due diligence requirement. But before we move on to the next topic, I would like to again remind you of the consequences of not meeting your due diligence requirement. If you fail to meet your due diligence requirements, there may be consequences for both you and your client.

As we mentioned earlier, the IRS may assess a penalty of $650 per failure or up to $2,600 per return for any returns filed in 2026. Additionally, your clients can be subject to an audit, and this will have -- they will have to pay back any amount refunded in error if we disallow certain credits. The amount includes interest and penalties. So it is very important that you meet your due diligence requirements for both you and your clients.

Now as a quick recap, we discussed your due diligence requirements as paid tax preparers. Now let's turn the presentation over to my colleague who will talk about what happens if you are not applying due diligence and the IRS contexts you regarding your due diligence issues. Courtney, the floor is yours.

Well, thank you, Kyle, and hello to all of our participants. Yes. The IRS may send educational letters or notices to inform you about the due diligence requirements, as well as potential errors or requests for additional information. So at this point in the presentation, I'm going to give you an overview of our various contact methods.

Now first of all, if the IRS contacts you, please, the first thing to do is not to panic. I know that's easier said than done, but just take a few deep breaths, open the envelope. Please do not ignore that letter. The IRS may send educational letters or notices to inform you about your due diligence requirements.

And so it is important to know that not all letters or notices from the IRS proposed penalties or request money. We also send educational letters and notices to paid tax return preparers like yourselves. That notices do not propose penalties, but they do remind you of your due diligence requirements. They also will provide you with additional information that can help you meet your requirements and highlight some online resources such as our Tax Preparer Toolkit that we have on IRS.gov.

However, if we do send you an educational letter or notice and there's still an indication that the returns that you're filing may have some due diligence issues, then we will follow-up with additional letters and notices. We may also follow-up with educational phone calls or visits or client audits or even a due diligence audit. So if you receive one of our educational letters, what can you do to improve your due diligence?

Well, it's a good practice to review your office procedures regularly because you want to ensure that all four of the due diligence requirements are truly being met. And I'm sure everyone on the call today knows a lot about tax law. But just like technology, situations can change and so does the tax law. So it's a good idea to review the tax requirements that apply to the credits to make sure that the law has not changed, and you should implement any additional steps to ensure that your client's returns are in fact accurate.

So now let's go over some of the educational letters and notices that we send out to our paid return preparers. First of all, let's talk about Letter 5025-F. This letter is titled, You Prepared Inaccurate Tax Returns - You Risk Penalties From an Audit. This is an educational letter. It is sent out after the filing season, and it's addressed to paid return preparers who prepare tax returns that claim one or more of the credits or head of household filing status. And our review of those returns indicates that the preparer may not have met their due diligence requirements.

Included in this letter, as you can see, is a QR code that when scanned will direct the preparer to the Tax Preparer Toolkit on IRS.gov, which again contains valuable information for paid preparers.

Next up, let's talk about Letter 4858. And this letter is titled, You May Not Have Met Your Due Diligence Requirements. Again, this is an educational letter, but this one is sent during the filing season when it appears that a paid preparer may not be meeting their due diligence requirements when filing their client's current year tax returns. And this letter serves to remind the preparer of the due diligence requirements, and again, it alerts them that they may not have met the requirements for the returns they filed. And just like with the other letters. Letter 4858 also includes the QR code to direct the preparer to the Tax Preparer Toolkit on IRS.gov.

Next letter is Letter 5364, and Letter 5364 is titled Missing Form 8867. And this is a letter that we send to paid preparers who do not submit the Form 8867 with paper returns. Even if your client is adamant about mailing their own tax return, you need to ensure that they include your completed Form 8867 when they send their return to the IRS. And IRS will send the Letter 5364 as a reminder to the preparer when we observe that multiple paper returns are missing the required Form 8867.

Also, as Kyle mentioned a few moments ago, please do not send the IRS any missing Forms 8867 as we do not have a way to associate that form with the client's original tax return. As we see, the letter also contains the QR code to direct the preparers to the Tax Preparer Toolkit on IRS.gov when scanned.

Before we go to our next letter, I'm sure some of you are probably thinking that you don't have to worry about getting the Letter 5364 because you only file electronic tax returns. While that may be true that you wouldn't have to worry about receiving the Letter 5364 in that scenario, we will, however, send you an electronic alert if you e-file a return that is missing the Form 8867. However, that will not affect the acceptance or processing of the client's tax return.

So now let us move on to the next letter, and this is going to be Letter 6595, Pre-Filing Season Phone Call Letter. Now we might send the Letter 6595 to a preparer, again, that has filed inaccurate returns when claiming the tax credits and benefits we are discussing today, and they have possibly failed to meet their due diligence requirements. The calls are educational in nature, but they do deliver a compliance message because we're calling to help you avoid errors in preparing your client's returns as well as avoid any potential due diligence penalties. We do not ask for personal information about your client.

Also, during these calls, the IRS employee will not ask for or will not provide specific information about your client nor will they ask you as the preparer to disclose any client information. However, what that IRS employee will do on the call is explain to you that the returns submitted to the IRS are being monitored. They will also review with you the due diligence requirements and discuss possible consequences for not meeting the requirements, and they will also offer you resources on due diligence educational products and training. Again, we're reaching out because we want to warn you that you're filing inaccurate tax returns.

The next letter that we're going to discuss is an invitation to our pre-filing season webinar. And this is with Letter 6597, which is titled Knock and Talk or KTV Webinar Invitation. A Knock and Talk visit is an educational visit by an IRS employee to discuss due diligence. And don't worry we're going to we're going to talk about the Knock and Talk Visits in more detail just a little bit later. But the IRS will send the Letter 6597 to preparers when the returns they're preparing indicate that the tax benefits, meaning the credits and the household filing status may have been claimed inaccurately, and the letter instructs that preparer to register for and attend our due diligence webinar typically held in January of each year. And as a bonus, most attendees will qualify for a continuing education credit.

Okay. The next letter that we're going to discuss is the letter that notifies the preparer that their client is being audited, and that would be Letter 5138, Return Preparer Client Audit Notification. And this letter highlights one of the actions that the IRS might take when there are indications that the returns prepared by a paid preparer are not following due diligence rules. In this case, that action is the client audit. The Letter 5138 will not disclose which clients are being audited, but it will specify the tax year and the credit that is being audited.

Next letter that we're going to discuss today is going to be Letter 6199, the Due Diligence Visit Appointment Request. And this letter, Letter 6199 notifies the tax preparers that they have been selected for an examination or audit as part of our due diligence program, and that paid preparer must call the IRS to arrange an examination visit.

Now the final educational letter that we're going to discuss is going to be Letter 6223, Knock and Talk Visit notification. The main purpose of a Knock and Talk Visit is to educate the preparer. It allows an IRS employee to discuss the current due diligence laws as well as address with that preparer any potential due diligence errors and share information on how preparers can comply with their due diligence requirements going forward.

Knock and Talk Visits, they're generally conducted by an IRS revenue agent, and they may also be accompanied by a special agent from our criminal investigation division. Now these visits are actually very beneficial to the preparer because they are essentially free tax law training. So if you should receive one of these letters, a Letter 6223, please take advantage of that opportunity and that service.

So now that we've discussed our contact methods, we've discussed our letters. Let's now walk through a scenario to help us understand what happens when a paid preparer receives the Letter 6199 and proceeds through an actual due diligence visit. So, this scenario is hopefully going to equip you with some essential insights about that process as well as give you some useful guidance that you can apply to your practices.

First up, though, let's do a brief recap. So far, we've covered the four prepared due diligence requirements for the refundable credits, that being the EITC, the CTC, which also includes ACTC and ODC, the AOTC, and the Head of Household filing status. And as a quick reminder, these four due diligence requirements, once again, they are the knowledge requirement, the worksheet requirement, the Form 8867 completion and submission requirement, and lastly, the record retention requirement.

Furthermore, Kyle also shared earlier that the $650 penalty amount for preparers who failed to comply with the due diligence requirements, and she also discussed the IRS's educational letters and notices that provide information about your due diligence requirements. So let's now take a second to go over this scenario to tie all of this information together.

So in this scenario, we have our tax preparer. Let's say his name is Mr. Anthony Hargrove, and Mr. Hargrove contacts the IRS agent listed on the letter to set up the due diligence meeting after getting the Letter 6199, which again is the Due Diligence Visit Appointment Request Letter. That letter requests for Mr. Hargrove to call the IRS and set up the appointment with the revenue agent within a specified time frame. It also includes the revenue agent's phone number, and it emphasizes the importance of calling the IRS.

Now suppose Mr. Hargrove decided that he's just going to ignore the letter and not bother to call the agent. Do you think that the IRS will forget about Mr. Hargrove? Well, in short, the answer would be no. If the revenue agent does not hear from Mr. Hargrove to schedule his appointment, then the agent will attempt, of course, several more times to reach Mr. Hargrove. But if they do not get a response, then they may proceed with proposing penalties under IRC Section 6695(g).

Keep in mind, if you are selected for a due diligence visit, whether it's in-person or via correspondence, you still have the option of seeking representation. And if that is something that you want to avail yourself of, then your designated representative must complete and submit a Form 2848, which as we know is the Power of Attorney and Declaration of Representative by mail or fax to the IRS by the date of your appointment.

Once that appointment is scheduled, the revenue agent is going to meet with Mr. Hargrove, and they're going to review the client documents that they requested. And that's generally going to include a minimum of 25 client returns and the associated files for those returns. And during that initial visit, the agent is also going to conduct an interview with Mr. Hargrove, and he or she may ask general question that include, what is the length of time and your level of experience in the tax preparation business? Do you use a check sheet or an intake form? Do you ask additional questions or just the questions on the check sheet or intake form? Have you completed any due diligence training? Do you train and review the work of your other preparers that you employ? And do you use IRS worksheets, or do you have your own worksheets?

And when that initial visit is complete, the agent will meet once again with Mr. Hargrove at a later date to share their findings during something called a closing conference. And at the closing conference, there are two possible outcomes. The first possible outcome is that the revenue agent's review might result in penalties being proposed due to non-compliance. The second possible outcome is that there's a determination that Mr. Hargrove did, in fact, comply with his due diligence requirements under Section 6695(g).

So to wrap up the discussion about the scenario and discuss the information that the revenue agent shared with Mr. Hargrove during the closing conference, the agent tells Mr. Hargrove that he unfortunately did not meet his due diligence requirements. The agent provided an examination report along with Letter 1125, and that letter is Titled Transmittal of Preparer Penalty Report, and it lists the proposed penalties. And, again, as a reminder, there are four different tax benefits subject to due diligence. And with the penalty amount being $650 for each failure, that means there could be a penalty of up to a total of $2,600 per tax return.

So the scenario doesn't end here because Mr. Hargrove still has options at this stage. He can either agree with the examination findings, or he can appeal those findings. If he agrees with the findings and the penalties, he'd simply need to sign Form 5816, which is titled Report of Tax Return Preparer Penalty Case, and he can pay the entire amount of the penalty or he can make a partial payment, and he can request for the IRS to send him a bill for the remainder. And he can even request an installment agreement just as he would with an individual balance on an individual return.

However, if Mr. Hargrove does not agree with the findings and the proposed penalties, he still has his appeals rights as well. In fact, the Letter 1125 advises preparers that they have 30 days to file an appeal, which is then going to be forwarded to the IRS appeals office. The letter also outlines what information should be included in the written appeals request when it's sent to the IRS.

But if Mr. Hargrove just decides not to respond or decides not to contact the IRS within the 30-day period, then the IRS will proceed with closing the examination and assessing the proposed penalties. But be aware that beyond penalties, the IRS may pursue further actions. For example, there may be some cases where the IRS can obtain an injunction. The justice department's tax division along with the IRS under the civil injunction program can seek a court order called an injunction that bars a person or a business from engaging in specified misconduct or from preparing tax returns for others in this scenario.

The injunctions are a very important part of the IRS's efforts to assure honest taxpayers and honest tax preparers that those who want to cheat won't get away with it. And there may also be instances where the IRS refers preparers that willfully file fraudulent returns to our criminal investigation division or to the office of professional responsibility.

Again, the IRS can take punitive actions beyond just an educational letter or a Knock and Talk Visit. So as tax professionals, it is critical to respond promptly to IRS communications as well as to maintain thorough documentation and train your staff and adhere to the due diligence responsibilities.

So that completes our overview of the IRS contact methods and due diligence visit. At this point in the presentation, I want to take a few minutes to go over two frequently asked questions that our office receives all of the time.

And I'm sure you all are interested to know some of those questions. This first one here, I think, is one that many of you are probably asking yourselves. I've known my client for years. So do I still need to perform due diligence?

Great question. And in short, the answer is yes. Absolutely. You must make reasonable inquiries to determine your client's eligibility for the credits and head of household filing status and document, document, document your client's responses. Even if you believe that you already know the answers because you've known your client for years, you still need to follow your due diligence procedures. It's the law.

Your client might have experienced a life event that changed the type of credits that they're eligible for, but you're not going to know that unless you ask the right questions. And this is especially true when it comes to qualifying children for the credits because while that relationship may not change, residency might change from year-to-year. Remember, you don't live with your clients, so you need to perform your due diligence. Great first question.

The second question that is very common that we receive is what documents should I ask for when interviewing my client for a tax return that claims the tax benefits and head of household filing status? Well, everyone, this answer may surprise you, but you don't necessarily have to request any documents.

However, you must make reasonable inquiries if the client provides information that appears to be incorrect, incomplete, or inconsistent. Well and in some, if not most cases, it is considered a best practice to request specific documents. Don't forget, as Kyle mentioned earlier, if your client brings documents to support their eligibility to claim the credits or the head of household filing status and you rely on that documentation, then you must keep a copy to comply with the record retention requirement.

Some examples of some supporting documentation that you could receive could include school records, Forms W-2, Forms 1099 or Forms 1098-T.

All right. I think at this point in time, this is a great point to ask another poll question. So, Kenji, I'm going to turn it back over to you.

Great. Thanks, Courtney. And that's correct. Our final polling question. And the question is, when is Form 8867, the Paid Preparer's Due Diligence Checklist required? Is it A, For a return claiming the EITC, CTC, ACTC, ODC, AOTC, or HOH filing status B, When completing an electronic return, per Internal Revenue Code 7896 or C, For a return that claims the credit for child and dependent care expenses.

Take a moment and click the radio button that best answers the question. If you do not receive the polling question, please enter only letters A, B, or C that corresponds with your response in the ask question text box. Your response is time stamped. I'll give you a few more seconds to make your selection and/or answer in the ask question feature.

Okay. So we're going to stop the polling now, and let's share the correct answer on the next slide. And the correct answer is A, and I see 95% of you responded correctly. Audience, that is an impressive response rate.

Courtney, I think we move on to the final section of the presentation to discuss educational resources.

Thank you, Kenji, and kudos to everyone for the great, great response rate. The IRS provides useful resources that help returns preparers determine refundable credit eligibility and securely upload important documents to the IRS. And some examples of some of the useful tools that can assist you are our EITC Chat Bot, our EITC Assistant, the Interactive Tax Assistant, and the IRS Document Upload Tool.

Now the EITC Chat Bot is designed to answer your frequently asked questions about eligibility to claim the EITC. The EITC Assistant helps you determine whether your client qualifies for the credit, and it even estimates the potential refund amount. The Interactive Tax Assistant provides answers to several tax law questions specific to an individual circumstance. It can determine filing status. It can also determine whether income types are taxable or whether a taxpayer is eligible to claim certain credits or deductions. Some of those credits or deductions include the child tax credit, the credit for other dependents, and the education credits.

And lastly, we have the IRS's Document Upload Tool, and this allows you to securely upload documents to the IRS in response to specific notices, letters, and due diligence audit correspondence. The tool also will provide confirmation that the IRS received your documents.

Next, let's look at some additional online resources to assist you, the tax professional community. Throughout the year, the IRS hosts webinars on tax related topics, and many of the webinars offer continuing education credits. And if you'd like to find the current webinar offerings, just visit IRS.gov and type webinars into the search box.

The IRS also has a vast video library available for reference on YouTube. The IRS videos channel on YouTube contains video presentations on topics of interest to small businesses as well as individuals and tax professionals like yourself, and you'll find video clips of tax topics and archived versions of webinars. And if you'd like to locate the IRS videos channel on YouTube, simply go to YouTube and type IRS into the search box.

Additionally, the Tax Preparer Toolkit, which I've mentioned a few times in the presentation today, is an excellent resource to meet your due diligence responsibilities. It provides information on due diligence requirements. It has articles. It has publications. It has examples of various letters, and it has up to the minute compliance messaging, which we call Hot Topics. In addition, the IRS offers a free online due diligence training tool called the due diligence training module, and you can earn two continuing education credits if you complete the training module and pass the test. Again, our goal is to help you file error free returns and avoid receiving any educational or compliance letters from the IRS.

Well, everyone, we'd like to thank you for attending today's webinar Law and Audit - the Due Diligence Process. If you have any questions following today's session, you can email us at eitc.program@IRS.gov. And remember, please visit IRS.gov for additional information about the refundable credits. Thank you again, everyone, for attending today's webinar.

Hello again. We've made it to the fun part, our live Q&A. I'll be moderating this session. But before we start, I want to thank everyone for attending and staying engaged during today's presentation, Law and Audit - The Due Diligence Process.

Earlier, I mentioned we want to know what questions you have for our presenters. Here is your opportunity. If you have not input your questions, there's still time. Go ahead and click on the drop down arrow next to the ask question field, type in your question, and click send. Kyle and Courtney are staying on with us and will be answering your questions.

One thing before we start, we may not have time to answer all the questions submitted, but we'll answer as many as time allows.

With that being said, let's get started so we can get to as many questions as possible. And the first question here is, we do not need to request documentation? I always thought we were required to ask for documentation.

Yes. Okay. Well, you heard that correctly. So the regulations do not require that a preparer request documentation. However, if your client did bring in any documentation that you would have relied on to complete the credit or the head of household status, you must keep a copy. Additionally, it may be a best practice to ask for documentation if you are sure, but it is not required.

Okay. Thank you. Next question here is, if I get a letter offering the pre-filing season phone call and I do not respond, will that cause me to be audited?

I'll take this question. In short, the answer is no. Not necessarily. But what will happen is that we will continue to monitor the returns that you're filing. And if those returns do not appear to be any better or they appear to still have due diligence issues, then you may be subject to additional treatments up to and including a due diligence audit.

Okay. Next question here. Are all preparers required to take due diligence education annually, and is there a mandatory requirement for the due diligence education?

Okay. I'll answer that one. And in short, no and no. So there is no requirement to take yearly due diligence classes, so it certainly is not mandatory. However, it's always a great idea. There are free courses and the Tax Preparer Toolkit on IRS.gov that will give you one hour of continuing education credits when you do take that class.

Okay. Next question I have here is I have gotten pushback from some clients about inquiries I made to satisfy my due diligence requirements. Do you have any suggestions on how to ask the client in a professional way about these sensitive topics?

I'll take this one. Very interesting question, and I've heard this same sentiment expressed from many other preparers. You can print out and show your clients the actual code and regulations for Section 6695(g) and explain that you have to abide by these regulations as a paid tax preparer.

And also remind your client that you're not auditing them, but you have to ask questions and you have to document their answers based on the code so that you don't get into any issues with the internal revenue service related to due diligence. Good question.

Thank you. And I see this question pop up multiple times, so let's ask this one. So who is covered by due diligence? Is it just paid tax preparers, do-it-yourselfers, volunteers? Who's covered in this case?

Okay. That is a great question. So Section 6695(g) applies to paid tax return preparers. So volunteers, they should not sign a return as a paid preparer if they were not actually paid. Additionally, someone like a do-it-yourselfer does not qualify as a paid preparer.

Okay. Another common question here is, if I have a returning client from the prior year and I asked due diligence questions last year and the situation has not changed, should I still ask my client the same questions again this year?

I will take this one, and I'm glad this question was asked because this is a very common question, and it also is an issue that we want to underscore. Yes. You still need to perform due diligence. As I stated on the presentation, relationships generally don't change from year-to-year. However, residency might change from one year to the next. So, you still need to ask the questions for due diligence, and you need to contemporaneously document the questions you've asked and the answers that the client gives you at the interview. Great question once again.

Okay. Thank you. Thank you for that answer. Question. What should a preparer do if they discover after filing that a client lied and the client refuses to amend the return?

Okay. Well, for this one, I would start with document everything. You want to keep a record of what you've learned, when you learned it, how did you learn it. And, also, you want to input something that the client refused to amend. Of course, you do not want to file an amended return without your client's consent. You may also want to think about disengaging from that client going forward. You also may want to refuse future services depending upon the situation.

Always keep all of your due diligence documentation because this will protect you if the IRS does audit your work. This is exactly what the IRS expects. You are responsible for due diligence, not for policing that taxpayer.

Great question. And can a customer bring in more documents after filing to add to their profile just in case of an audit?

I will take this one, Kenji. Yes. You can keep additional documents in your files. But remember, you can't change the return unless the client consents and agrees to that. Also, you want to make sure that you clearly label the documents as being received after filing. You can make a capsule on the documents. And you also should not backdate or alter your original due diligence notes. And doing these actions will help to protect you if the IRS questions that return down the road.

Okay. And can records be kept electronically, or is a hard copy required?

Okay. So electronic records, as we said earlier in the presentation are fully acceptable. You would want to keep something like scanned documents, PDFs, photos, electronic notes, digital worksheets. So the IRS requires that these records be kept to make sure they're accurate, legible, and, of course, accessible for three years. They do not need to be hard copies.

Great. Thank you for that answer. And let's see here. When documenting interviews, do we need the exact questions and exact answers or just a summary?

I'll jump in on this one. In short, a summary is acceptable. But just remember that that summary will have to be clear, it needs to be accurate, and it needs to be detailed enough so that you can show to the IRS or to member that you exercise due diligence. And an example of some acceptable documentation that you may include in your interview notes is you may say that you asked the taxpayer how the child's residency was established, and the taxpayer stated that the child lived with her or him for the full-year, and school records listed the same address. And the father or other parent did not live in the home. So exact quotes aren't required, but vague notes, like ask questions or something of that sort. That's not acceptable. It's not detailed enough.

Thank you for that answer. So, audience, that is all the time that we have for questions. I want to thank Kyle and Courtney for answering your questions and sharing their knowledge and expertise. But before we close the Q&A session, Courtney, what key points do you want the attendees to remember from today's webinar?

Yes. We've had a great presentation today, but I do want to leave you all with some key points. The first one is due diligence is more than just going over a checklist. Keep in mind, if the information that's provided by your client doesn't seem correct, consistent, and complete, then you must ask more questions to clarify and record the answers to those questions.

And although it is not required, as we mentioned, documentation can be requested, but you must retain a copy of all documentation that you rely on. Some more key points that we want to leave you with. The IRS can reach out to tax professionals in a variety of ways, so please do not ignore these contacts. Take the requested action within the requested time frame. And these interactions can be educational, so do take advantage of that opportunity if offered.

Well, everyone, again, that's our time for today. Thank you for attending and thank you for your participation. And, Kenji, I will hand it back over to you at this point.

Thank you, Courtney. Audience, we are planning webinars throughout 2026. As a courtesy reminder, to register for any upcoming webinar, please visit the IRS website and key search for webinars and select the webinars for tax practitioners or webinars for small businesses. When appropriate, we will offer certificates and CE credit for upcoming webinars.

Currently, we do have webinars scheduled for Thursday, January 15th at 01:00 p.m. Eastern Standard Time and Wednesday, January 21st at 02:00 p.m. Eastern Standard Time. We also invite you to visit the IRS YouTube page. There, you can view available recorded versions of our webinars and other key video messaging once posted. Again, continuing education credits or certificates of completion are not offered if you view an archived version of our webinars.

Another big thank you to our presenters for a great webinar. I would also like to thank you our attendees for attending today's webinar, Law and Audit - The Due Diligence Process. Remember, if you attended today's webinar for at least 50 minutes after the official start time and answered at least three polling questions during the live broadcast, you will receive a certificate of completion for one IRS CE credit.

Remember that the polling question example will count towards the minimum question response requirement. Certificate of completion will be emailed to the registration email address of qualifying participants as a PDF attachment. The email will come from an email address seen on this slide, so please add this email to your contact to ensure you receive the email with the certificates attached.

If you qualify for IRS CE credit for this webinar and registered with your valid first name, last name, and PTIN as it appears in your IRS PTIN account, your CE credit will be posted to your IRS PTIN account. If you are eligible for continuing education from the California Tax Education Council, your credit will be posted to your CTEC account as well. If you qualify and have not received your certificate and/or credit by January 28th, please email us at the email address on this slide. If you're interested in finding out who your local stakeholder liaison is, you can also visit us at IRS.gov or send an email to the address shown on this slide as well.

We would appreciate if you could take a few minutes to complete a short evaluation for the stakeholder liaison before you exit. If you'd like to have more sessions like this, please let us know. If you have any requests for future webinar topics or pertinent information that you'd like to see in an IRS fact sheet, tax tip, or FAQ on IRS.gov, then please include your suggestions in the comment section of the survey. Click the survey button on the right side of the screen to begin. And if it does not come up, check to make sure you've disabled your pop-up blocker.

It has been a pleasure to be here with you. And on behalf of the Internal Revenue Service and our presenters, we would like to thank you for attending today's webinar. Thanks again for your time and attendance. We hope you found this information helpful. You may exit the webinar at this time.