Auditing for Due Diligence Compliance

Audits for compliance with EITC due diligence requirements are another tier of our EITC Preparer Compliance Program. We look at returns with a high chance of errors completed by the same preparer. We use that information to select preparers for audits. We may have contacted the preparer using one of the other tiers of our Preparer Compliance Program but we don't use all of them for every preparer. See EITC Preparer Compliance - Targeted, Tailored and Tiered for information on the other tiers).

What Happens During the Audit?

During these audits, we review at least 25 EITC returns. We look at the return and the following for each return:

• the preparer's due diligence records,
• the probing questions asked and the client's responses, and
• all questionnaires, checklists, and worksheets.

We specifically look for evidence the preparer met the knowledge standard. To meet the knowledge standard preparers must:

• Know the law;
• Ask the right questions, especially when the client gives information that appears incorrect, inconsistent, or incomplete; 
• Document the questions asked and the responses given by the client; and

• Get all the facts to make sure your client truly qualifies for EITC.

What Happens if My Records Don't Show I Met my EITC Due Diligence Requirements? 

We do charge penalties when we find the preparer did not comply with EITC Due Diligence requirements. We have greatly improved our audit selection process to find a high potential for a preparer to be filing returns with EITC errors. Using this new process, we penalized over ninety percent of the preparers audited.

We charge most of the penalties to preparers who did not meet the knowledge standard. The penalties range from $100 to $5,000 per incident so can be substantial. Read more about penalties and the consequences of filing EITC returns incorrectly here.

What if I Don't Agree with the Penalties?

If we propose or charge penalties and you don't agree, you have the right to request:

• An informal managerial hearing,
• Request abatement of the penalties,
• Appeal the assessments, or
• File Form 6118, Claim for Refund of Income Tax Return Preparer and Promoter Penalties, within three years from the date the penalties are paid.

Are You a Certified Acceptance Agent?

To reduce the burden on preparers, IRS combines the due diligence audits with certified acceptance agent visits as needed.

Additional Resources Links (click on any topic listed below for additional information on the subject):

• EITC Preparer Information on irs.gov
• Consequences of Filing EITC Returns Incorrectly
• EITC Preparer Compliance - Targeted, Tailored and Tiered
  • Reaching Out to New and Experienced Preparers
  • Visiting Preparers Filing Highly Questionable Returns
  • Barring Non-Compliant EITC Preparers from Filing Tax Returns
  • Additional Forceful Actions Taken Against Fraudulent Return Preparers

Last updated: 10/12/2011