Form 8867, the Paid Preparer's Due Diligence Checklist, is required on any return claiming the Earned Income Credit, the Child Tax Credit family, the American Opportunity Tax Credit, or Head of Household filing status. Under IRC §6695(g), the penalty for failing to meet due diligence is assessed per credit, per return — so a single return claiming EIC, CTC, AOTC, and HOH carries four separate penalties.
At roughly $600 per failure, that is about $2,400 on one return. The math is why due diligence deserves a workflow rather than a checkbox at the end of preparation.
Which benefits trigger due diligence
| Benefit | Abbreviation |
|---|---|
| Earned Income Credit | EIC / EITC |
| Child Tax Credit, Additional Child Tax Credit, Credit for Other Dependents | CTC / ACTC / ODC |
| American Opportunity Tax Credit | AOTC |
| Head of Household filing status | HOH |
Head of Household is the one preparers forget. It is a filing status rather than a credit, and it was added to §6695(g) later than the others — but it carries the same penalty exposure.
What the penalty actually costs
The §6695(g) penalty is indexed annually for inflation. It has been in the neighborhood of $600 per failure for recent filing seasons. Confirm the exact current-year figure on irs.gov before relying on a number, because it moves.
The structure matters more than the amount:
- Per failure, per benefit, per return. Four qualifying items on one return means up to four penalties.
- The firm can be penalized too. Where a firm's management lacked appropriate compliance procedures, or knew of a pattern of failures and did not correct it, the penalty can attach at the firm level in addition to the individual preparer.
- Penalties are not the only exposure. The IRS can also suspend or revoke your EFIN, refer you for disciplinary action under Circular 230, or seek an injunction barring you from preparing returns. For a firm that e-files, EFIN loss is the outcome that ends the business.
The IRS actively audits this. Due diligence visits, correspondence audits, and knock-and-talk visits during filing season are routine, and Form 8867 is the first thing examined.
The four due diligence requirements
Filing the form is only one of four obligations. All four must be met for each applicable benefit.
1. Complete and submit Form 8867
The checklist must be completed based on information you obtained from the taxpayer or otherwise reasonably obtained, and it must be filed with the return — not merely kept in the file. An 8867 sitting in your workpapers but missing from the submission is a failure.
2. Compute the credits
You must complete the applicable worksheets, or your own equivalent documentation showing the computation, and keep them.
3. Meet the knowledge requirement
This is where most examinations are lost. You must not know, or have reason to know, that any information used is incorrect, inconsistent, or incomplete. In practice that means:
- Applying a reasonable, well-informed, knowledgeable-preparer standard to what the client tells you
- Making reasonable inquiries when information appears incorrect, inconsistent, or incomplete
- Contemporaneously documenting those inquiries and the answers you received
"The client said so" is not a defense when the claim was implausible on its face. A self-employed client reporting exactly the income that maximizes EIC, with no records, is the classic example — the return may be right, but you must show you asked.
4. Keep records for three years
Retain Form 8867, the computation worksheets, a record of how and when you obtained the information and from whom, copies of any documents you relied on, and a record of the additional questions you asked and the answers given.
The retention period runs three years from the latest of: the return due date without extensions; the date the return was electronically filed; or, for a non-signing preparer, the date you submitted your portion to the signing preparer.
What "reasonable inquiries" looks like in practice
The regulation does not supply a script, and the right questions depend on the facts. Common situations that call for documented inquiry:
| Situation | What to ask and record |
|---|---|
| Schedule C with no records, income at the EIC sweet spot | How income and expenses were tracked; whether any records exist; the nature of the business |
| Claimed child does not share the taxpayer's surname or address history | The relationship, and where the child lived for more than half the year |
| HOH claimed by a taxpayer who appears to be married | Marital status during the year, living arrangements, who paid household costs |
| AOTC claimed for a fourth or later year | Prior years the credit was claimed; enrollment status; whether Form 1098-T exists |
| Two clients claiming the same dependent | Tie-breaker facts, and which parent the child lived with longer |
Record the question, the answer, and the date — in the file, at the time. Reconstructing inquiries after an examination notice arrives is not contemporaneous documentation.
Building due diligence into the workflow
- Screen at intake, not at review. Flag returns that may claim EIC, CTC, AOTC, or HOH as soon as the client's situation is known, so the questions happen while you still have the client's attention.
- Standardize the question set per benefit, and make answers a required field rather than an optional note.
- Capture supporting documents through a channel that timestamps them. An email thread is weak evidence of when you received something; a system with an audit trail is strong evidence.
- Store the packet with the return — 8867, worksheets, inquiry log, and any documents relied on, together.
- Review a sample internally each season. Firm-level penalties turn on whether management had procedures; a documented internal review is that evidence.
- Do not let staff share logins. You need to know who asked which question.
Frequently asked questions
Do I need Form 8867 if the client is only claiming Head of Household?
Yes. HOH filing status is covered by §6695(g), and due diligence applies even where no covered credit is claimed.
Does Form 8867 get filed with the return or kept in the file?
Filed with the return. You also keep a copy along with the supporting records for three years. Retaining it without filing it is itself a due diligence failure.
What if the client lies to me?
Due diligence does not require you to audit your client. It requires that you not know or have reason to know the information is wrong, that you make reasonable inquiries when something appears incorrect, inconsistent, or incomplete, and that you document those inquiries. A well-documented inquiry is what protects you when a client's answer later proves false.
Am I required to collect birth certificates and school records?
No. There is no document checklist. If you do rely on documents, you must keep copies. The obligation is to ask reasonable questions and record the answers, not to demand a specific evidence package.
Can my firm be penalized, or only me personally?
Both are possible. The penalty applies to the preparer, and it can also apply at the firm level where management did not establish appropriate compliance procedures or disregarded them.
How long do I keep the records?
Three years, measured from the latest of the return due date without extensions, the electronic filing date, or the date a non-signing preparer submitted their portion to the signing preparer. Electronic retention is acceptable.
Where XyloDocs fits
Due diligence is a documentation problem before it is a tax problem. XyloDocs is an AI tax workflow platform for tax firms: client documents arrive by SMS, WhatsApp, email, or secure portal, get organized by client and tax year with timestamps and a complete audit trail, and export to your tax software as a clean package.
That gives you a defensible record of what you received and when — useful when an examiner asks how you obtained the information behind an 8867. It does not answer the knowledge-requirement questions for you; those are professional judgment, and no software substitutes for them. See how document intake and organization work, or read our related guides to WISP requirements for tax firms and IRC §7216 client data rules.
Last verified: August 9, 2026 This article is general information about paid preparer due diligence, not legal or tax advice. Penalty amounts are indexed annually — verify the current figure and requirements against IRS guidance and the Form 8867 instructions.
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