Due diligence in taxes is a crucial process that both taxpayers and tax professionals must follow to ensure the accuracy and integrity of tax returns. It means carefully verifying all relevant information before filing to avoid errors, fraud, or penalties imposed by the IRS. This responsibility is particularly critical when claiming tax credits and deductions that require specific eligibility criteria, such as the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and American Opportunity Credit (AOC).
The IRS enforces due diligence requirements especially on paid tax preparers, who must follow strict guidelines to verify a taxpayer’s eligibility for certain credits. These rules emerged as part of the IRS’s efforts to reduce improper claims and fraud, protecting both taxpayers and the government’s revenue.
In practical terms, due diligence includes asking detailed questions about income sources, dependents, and eligibility criteria; diligently reviewing and retaining supporting documentation like W-2s, receipts, and identification; and double-checking all calculations for accuracy. Tax preparers and taxpayers alike must avoid assumptions and verify every key fact. For example, claiming the EITC requires confirming that the taxpayer’s income falls within the allowed limits and that qualifying children meet the IRS’s specific requirements.
Who must follow due diligence? Paid tax preparers are legally obligated to comply with IRS due diligence standards and face penalties, including fines up to $570 per failure (as of 2025), suspension, or revocation of their Preparer Tax Identification Number (PTIN) if they fail to meet these standards. Taxpayers also share responsibility to provide truthful and accurate information, as intentional misrepresentation can lead to penalties.
To meet due diligence requirements effectively, it is important to maintain organized records, seek and keep copies of relevant documents, stay informed about IRS updates, and use IRS-provided forms and worksheets. When uncertainty arises, consulting a tax professional can prevent costly mistakes.
Common mistakes include assuming a dependent qualifies without proper proof, neglecting to keep copies of key documents, rushing through tax forms without review, and misunderstanding that due diligence is exclusively for preparers—taxpayers must also be diligent in their filings.
FAQs related to due diligence highlight that noncompliance by tax preparers can result in significant penalties or bans from preparing certain returns, while taxpayers can be penalized for knowingly providing false information. Proper documentation, such as interview notes and verification worksheets, is essential to demonstrate due diligence if audited.
The following table summarizes key aspects of due diligence in tax filing:
| Aspect | What to Do | Why It Matters |
|---|---|---|
| Verify Eligibility | Confirm income, relationship, residency | Avoid claiming improper credits |
| Keep Documentation | Maintain copies of W-2s, receipts, IDs | Provide proof if IRS requests |
| Ask Questions | Confirm facts, don’t assume | Catch errors early |
| Review Math Carefully | Double-check calculations | Prevent simple errors |
| Stay Up to Date | Follow IRS rule changes | Ensure compliance |
Adhering to due diligence standards protects taxpayers and tax professionals from unnecessary IRS scrutiny and penalties. By investing the time to verify information thoroughly, you reduce the risk of audits and ensure your tax filing is accurate and compliant.
For additional IRS guidance, see the IRS’s official page on Due Diligence Requirements for Tax Preparers.
