EA preparer penalties and due diligence requirements

Classify the penalty before looking for an amount

A due-diligence penalty concerns compliance with the paid-preparer requirements. It differs from an understatement penalty, a taxpayer penalty and an OPR sanction. Dollar amounts may change by year, so use the tested period and governing source instead of memorizing an undated amount.

Due diligence requires four connected forms of work

The specific paid-preparer due-diligence requirements cover Form 8867, credit computations, knowledge and record retention. Completing the checklist is only one requirement. For an applicable return or claim, the preparer must also make the required computations, use information without known or reasonably apparent defects, make reasonable inquiries when needed and preserve the required records.

The covered benefits include EITC, CTC/ACTC/ODC, AOTC and head-of-household filing status. The rule therefore reaches a filing-status determination as well as credit amounts. If the question asks whether the preparer complied, inspect the work performed for each relevant requirement. A correct final number does not prove that the inquiries or records were adequate, just as a completed form does not prove the taxpayer was eligible.

Ask about the missing eligibility fact

A useful inquiry is tied to a legal condition. If a claimed child’s living arrangement is unclear, ask about where and for how long the child lived with the taxpayer under the relevant rule. If household costs are central to a filing-status claim, clarify who paid which costs. A general assurance that "everything qualifies" does not resolve a concrete contradiction in the information already supplied.

Record the inquiry and the client’s answer at the time of the interview. That record should explain how the preparer resolved the issue, not simply state that the client accepted responsibility. The knowledge standard does not create an obligation to audit every taxpayer, but it does require responding to information a reasonable, well-informed preparer would recognize as incorrect, inconsistent or incomplete. Match the depth of inquiry to the actual warning sign.

Keep preparer penalties separate from taxpayer penalties

Section 6695(g) addresses a paid preparer’s failure to meet the covered due-diligence requirements. That is different from an adjustment to the taxpayer’s credit or filing status, and different again from OPR discipline under Circular 230. The actor, triggering conduct and governing provision must match the answer. A client’s loss of a credit does not by itself explain which preparer requirement was breached.

Penalty amounts can be adjusted for inflation and tied to the relevant period. Do not use an undated dollar amount as a universal rule. For the SEE, use the tested-year materials and the date assumptions in the question. Firms employing preparers may also face due-diligence penalties under the conditions in the regulation; do not assume that using an employee always shields the firm or that every error automatically establishes firm liability.

Make the file show how the conclusion was reached

Retain the completed checklist, computations and the record of how, when and from whom the information was obtained. Keep copies of client documents relied on, along with the additional inquiries and answers that affected the conclusion. A scan of a signed return shows what was filed, but may not show why the preparer believed an eligibility condition was met.

Use the latest applicable regulatory trigger for the three-year period. Depending on the preparation and filing role, the relevant dates include the unextended due date, electronic filing, presentation of a paper return for signature, or delivery of a nonsigning preparer’s work to the signing preparer. The recordkeeping lesson compares this with other clocks. Here the objective is to connect the evidence to the due-diligence decision so that later review can reconstruct the work.