I’m Darrin Mish. Tampa tax attorney, 32 years in, more than $100 million in IRS debt resolved. What follows isn’t theory – it’s what I’ve actually watched work.
The IRS has a message for anyone claiming tax credits on a return: prove it. And if you cannot prove it, prepare to pay it back – with penalties and interest.
Tax credits are powerful. The Earned Income Tax Credit alone can be worth over $7,800 for a qualifying family. The Child Tax Credit, the American Opportunity Tax Credit, the Head of Household filing status – these are real money. And because they are real money, the IRS watches them with the intensity of a hawk circling a field mouse.
Whether you are a tax professional preparing returns or a taxpayer claiming these credits yourself, understanding what due diligence actually requires is not optional. It is the difference between a legitimate tax benefit and an audit nightmare that costs you far more than the credits were ever worth.
What the IRS Means by Due Diligence
Under IRC Section 6695(g), paid tax preparers have a specific legal obligation to exercise due diligence when preparing returns that claim certain credits and filing statuses. This is not a suggestion. It is not a best practice. It is a statutory requirement with its own penalty for noncompliance.
The due diligence requirement applies to four specific areas: the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC) and Additional Child Tax Credit (ACTC), the American Opportunity Tax Credit (AOTC), and Head of Household filing status.
For each of these, the preparer must complete Form 8867, the Paid Preparer’s Due Diligence Checklist. This form requires the preparer to confirm they asked the right questions, reviewed the right documents, and verified that the client actually qualifies for what they are claiming.
The penalty for failing to meet these requirements? $560 per failure for the 2024 filing season, adjusted annually for inflation. And that is per return, per credit. A single return claiming EITC, CTC, AOTC, and Head of Household that fails due diligence could cost a preparer $2,240 in penalties – before we even talk about the client’s problems.
Why This Is Getting Worse
The IRS has dramatically increased its focus on refundable credit compliance. And there is a good reason for that. The EITC improper payment rate has historically hovered between 21% and 26%. That means roughly one in four EITC claims has some kind of error – wrong filing status, incorrect qualifying child information, overstated income, or outright fabrication.
The dollar impact runs into the billions annually. Congress has responded by giving the IRS more enforcement tools and higher preparer penalties. The IRS has responded by auditing more credit claims, sending more notices, and pursuing more preparer investigations. The Inflation Reduction Act provided additional IRS funding specifically targeted at enforcement, and refundable credits are at the top of the list.
If you are a tax professional, this is not a trend you can ignore. The days of checking a box and moving on are over. If you are a taxpayer, the credits on your return need to be backed up with documentation you can produce on demand. Not next month. On demand.
The Four Due Diligence Requirements
The IRS breaks due diligence into four specific obligations. Fail any one of them and you are exposed.
Requirement 1: Complete Form 8867. This is the checklist itself. It forces the preparer to walk through eligibility questions for each credit claimed. Did the client provide a valid Social Security number for each qualifying child? Does the child meet the age, relationship, and residency tests? Is the client’s earned income within the EITC range? These are not difficult questions, but they require actual engagement with the client’s situation – not rubber-stamping whatever the client tells you.
Requirement 2: Compute the credits. The preparer must complete the worksheets or use software that correctly computes each credit based on the client’s actual data. This sounds obvious, but the IRS has found that some preparers simply enter credit amounts without running the actual calculations. The IRS calls this “eyeballing” the credits, and it is a guaranteed way to get into trouble.
Requirement 3: Apply the knowledge requirement. This is the one that catches people. The preparer cannot ignore information they know or should know. If a client says they have two qualifying children but only brings documentation for one, you cannot just take their word for it. If the client’s income does not support their claimed household size, you need to ask follow-up questions. If the numbers do not make sense, you have an obligation to probe deeper. The standard is what a reasonable, competent preparer would do in the same situation.
Requirement 4: Keep records. You must retain Form 8867, the applicable worksheets, all documents provided by the client, and a record of how and when you obtained the information. These records must be kept for three years from the return due date or the date the return was filed, whichever is later. If the IRS comes asking two years from now, you need to produce these records quickly and completely.
What Taxpayers Need to Know
If you are claiming these credits on your own return – whether you prepare it yourself or hand it to a preparer – you need documentation. Here is what the IRS expects you to be able to produce if they come knocking.
For the EITC: Proof of earned income (W-2s, self-employment records with supporting documentation), proof of qualifying children (birth certificates, school records, medical records showing the child’s address), proof of residency (you and the qualifying child must live together for more than half the year – this is the requirement that trips up the most people), and your filing status documentation.
For the CTC and ACTC: The qualifying child’s Social Security number (an ITIN does not qualify for the CTC), proof of relationship (birth certificate, adoption decree, foster care placement documentation), age verification, and residency documentation.
For the AOTC: Form 1098-T from the educational institution, records of qualified education expenses (tuition, required fees, books and required course materials), and documentation that the student has not completed four years of post-secondary education and has not claimed the credit for more than four prior tax years.
For Head of Household: Proof that you are unmarried or considered unmarried as of the last day of the tax year, proof that you paid more than half the cost of keeping up a home for the year, and proof that a qualifying person lived with you for more than half the year.
The Real-World Consequences of Sloppy Claims
I have seen what happens when tax credit claims fall apart under IRS scrutiny. It is not pretty, and the consequences extend far beyond paying back the credit.
For taxpayers, a denied credit means repaying the full credit amount plus interest from the due date of the return. If the IRS determines the claim was due to fraud or reckless disregard of the rules, they can impose an accuracy-related penalty of 20% of the underpayment under IRC Section 6662, or a civil fraud penalty of 75% under Section 6663.
But there is a penalty that hits harder than any dollar amount. Under IRC Section 32(k), if the IRS determines an EITC claim was due to fraud, the taxpayer is banned from claiming the EITC for 10 years. For reckless or intentional disregard of the rules (not rising to the level of fraud), the ban is 2 years. That is thousands of dollars in lost credits per year, for up to a decade. For a family that depends on the EITC, a 10-year ban is devastating.
For tax preparers, the penalties compound quickly. The per-failure penalty under Section 6695(g) is just the beginning. The IRS can also pursue preparer penalties under Section 6694 ($1,000 or more per return for unreasonable positions), injunctions under Section 7407 (barring the preparer from filing returns entirely), and referrals to the Office of Professional Responsibility for enrolled agents, CPAs, and attorneys.
I have watched careers end over sloppy due diligence. A preparer who loses their ability to file returns has lost their livelihood. It is not worth cutting corners.
Building a Bulletproof Due Diligence Process
Whether you are a preparer or a taxpayer, here is what a solid due diligence process looks like in practice.
Ask the right questions before touching the return. Do not start entering data until you have confirmed the basic eligibility requirements for each credit. Who are the qualifying children? Where did they live, and for how long? What is the income? Is the client eligible for the filing status they want? Get answers to these questions first.
Document everything in writing. Verbal conversations are worthless in an audit. Get answers in writing – an intake questionnaire, signed statements, or at minimum, preparer notes documenting what was asked and what the client said. If it is not written down, it did not happen.
Collect supporting documents. Do not just ask – collect. Birth certificates, school enrollment letters, lease agreements showing addresses, bank statements showing household expenses, daycare records. The more paper you have, the stronger your position when the IRS asks questions.
Review for consistency. Does the client’s claimed income support a household of five? Does their address history match what they are telling you? Do the children’s ages and school grades align? Red flags are not automatic disqualifiers, but they require follow-up questions and additional documentation before you can responsibly claim the credits.
Keep organized files. Three years of retention is the minimum. Keep Form 8867, all worksheets, copies of client documents, and your notes in a dedicated file for each return. If the IRS comes calling two years later, you need to be able to produce everything within days, not scramble for weeks trying to reconstruct it.
Get Help Now
If you are facing an IRS audit over tax credit claims, or if you have received a notice denying credits you believe you are entitled to, do not try to handle it alone. The stakes are too high, and the rules are too specific for guesswork. Contact the Law Offices of Darrin T. Mish, P.A. at (813) 229-7100 for a free consultation.