The Earned Income Tax Credit is the largest refundable credit in the tax code, and it is also the most aggressively audited. The IRS imposes a penalty of $650 per failure per return (as of 2026, under IRC Section 6695(g), which adjusts for inflation -- verify the current amount at IRS.gov) on preparers who do not follow the four due diligence requirements. That penalty is not per preparer and not per filing season: it is per return, per failure.
This is not a hypothetical risk. The IRS audits EITC claims extensively and operates an active preparer penalty program specifically targeting high-EITC practices. A preparer who signs 100 returns with EITC claims and fails due diligence on all 100 faces $65,000 in potential preparer penalties. A practice with 300 EITC returns and systematic due diligence gaps faces $195,000. At the extreme end of noncompliance, the IRS also has injunction authority -- the ability to seek a court order barring a preparer from preparing returns at all.
This guide covers the four due diligence requirements, Form 8867 mechanics, record-keeping obligations, common errors that trigger penalties, and what proper due diligence documentation looks like in practice. This guide is informational and does not constitute legal or tax advice. For questions specific to your practice, consult a qualified tax professional or attorney. All penalty amounts and regulatory citations should be verified at IRS.gov for the current filing season.
Why EITC Due Diligence Matters More Than Most Preparers Realize
Per IRS EITC error rate estimates, approximately 25 to 30 percent of EITC claims contain errors (verify current IRS data at IRS.gov; this figure reflects historical IRS reporting and is subject to revision). That error rate is why EITC claims attract disproportionate scrutiny -- and why the IRS has built a specific program targeting the preparers behind those claims, not just the taxpayers.
The IRS preparer audit program uses return data to identify preparers with unusually high EITC claim concentrations or patterns that suggest systemic due diligence failures. A preparer does not need to have committed fraud to be flagged. A pattern of identical Form 8867 entries across many returns, or a high rate of EITC claims relative to the income levels of clients in a given zip code, can be enough to trigger a compliance visit or a records request.
The penalty math is unforgiving. Because the $650 penalty (as of 2026; verify at IRS.gov) applies per failure per return -- not as an annual cap per preparer -- a moderately sized EITC practice with consistent due diligence gaps can accumulate six-figure penalty exposure in a single filing season. And a preparer who cannot produce records to defend their due diligence faces a second layer of penalty exposure: failure to maintain required records is a separate violation.
Beyond penalties, the IRS holds injunction authority under IRC Section 7407 to seek a court order permanently barring a preparer from preparing returns. Injunctions have been obtained against preparers whose EITC practices were found to be systemically noncompliant, even when the preparer had not been charged with fraud.
The Four Due Diligence Requirements
IRC Section 6695(g) and the Treasury Regulations implementing it establish four specific requirements a paid preparer must satisfy for every return claiming EITC, Child Tax Credit or Additional Child Tax Credit (CTC/ACTC), the American Opportunity Tax Credit (AOTC), or head-of-household filing status. All four apply to every qualifying return. Satisfying three out of four is not sufficient. Verify the current regulatory requirements at IRS.gov before each filing season.
Complete and submit Form 8867
The preparer must complete Form 8867 (Paid Preparer's Earned Income Credit Checklist) and include it with every return that claims one or more of the covered credits or HOH status. The form is a structured checklist, not a formality. Each section must reflect the actual information gathered from the client -- not generic or default entries. The preparer, not the client, is responsible for completing it.
Apply the knowledge standard
The preparer must not know, and must not have reason to know, that any information used to determine eligibility for the credit is incorrect. This "know or should have known" standard is active, not passive: when information seems inconsistent, implausible, or incomplete, the preparer is required to make additional reasonable inquiries before proceeding. Ignoring obvious red flags is itself a violation of this requirement.
Keep records
The preparer must retain records documenting compliance with the due diligence requirements for each return. At minimum, this means: a copy of the completed Form 8867, a record of any questions asked and the client's responses, and copies of documents the client provided to support eligibility. Records must be retained for three years after the return's due date (or extended due date, if applicable). The IRS can request these records at any time; failure to produce them is a separate penalty violation.
Not use information known to be incorrect
The preparer must not knowingly use incorrect information to complete Form 8867 or to determine the client's eligibility for a credit. A preparer who has reason to believe a client's income figure, dependent claim, or filing status is wrong and prepares the return anyway -- without corrective inquiry or documentation -- is in violation of this requirement regardless of whether the error originated with the client.
Form 8867: What It Is and How to Complete It
Form 8867 is the IRS's Paid Preparer's Earned Income Credit Checklist. Despite the name, it covers EITC, CTC/ACTC, AOTC, and head-of-household status -- one form with separate sections for each credit or status claimed on the return. The current version of the form and its instructions are available at IRS.gov; confirm you are using the current version before each filing season, as the IRS updates the form periodically.
The form is structured as a checklist of eligibility questions. Part I addresses which credits are being claimed and the preparer's due diligence responsibilities. Subsequent parts cover qualifying child information, income questions, and head-of-household eligibility. Each section must be completed for each credit or status claimed on the return.
Submission and retention
Form 8867 must be submitted with the return (electronically, as part of the e-file transmission) and retained in the preparer's records. Both requirements apply. A preparer who submits the form but does not retain a copy fails the record-keeping requirement. A preparer who retains a copy but does not submit it fails the first due diligence requirement.
The most common Form 8867 error
The single most common due diligence error is preparing Form 8867 without actually asking the client the questions it covers. Completing the form from prior-year data, from the client's self-reported summary, or from general assumptions -- rather than from a documented inquiry conducted during return preparation -- does not satisfy the due diligence requirement even if the form is complete and correct on its face.
A second common error is allowing clients to complete Form 8867 themselves. The form is the preparer's document, not the client's. The preparer is responsible for completing it based on information gathered from the client, and for signing it. A form completed by the client and adopted without independent inquiry does not demonstrate the preparer's compliance with the knowledge standard.
Preparers who use TaxWise software have Form 8867 integrated into the return workflow. The software prompts the preparer through the required questions for each credit claimed, generates the form, and includes it in the e-file transmission automatically. Using software that handles the mechanics correctly reduces the risk of omission errors -- but it does not substitute for asking the actual questions.
The Knowledge Standard: Your Most Important Obligation
The knowledge standard is the due diligence requirement that generates the most penalties, and it is also the one most commonly misunderstood. The standard -- "know or should have known" -- means your obligation to inquire is triggered by circumstances, not just by explicit evidence of fraud. If a reasonable tax preparer would have asked a follow-up question, and you did not, you can be penalized even if you did not intend to help the client file an incorrect return.
You are not required to audit the client. You are not required to demand original documents for every return. You are required to ask reasonable follow-up questions when something about the information presented seems inconsistent, implausible, or incomplete -- and to document that you did.
Red flags that require additional inquiry
The IRS and the Tax Court have identified a range of circumstances that should trigger additional preparer inquiry. These include:
- Reported income that seems too low to support the number of dependents claimed or the household described by the client
- Claimed qualifying children whose ages are inconsistent with the stated birth years or relationship claimed
- Cash or self-employment income claims with no supporting documentation and no prior history of self-employment on the client's returns
- A client who presents entirely new circumstances (new dependents, new income sources, change in filing status) without any supporting explanation
- Family circumstances that have changed significantly from the prior year but the return reflects no corresponding changes in dependents or filing status
- A client who claims the same children year after year despite life circumstances that suggest custody or residency arrangements may have changed
- Inconsistency between the client's stated employment situation and the income reported on third-party forms (W-2s, 1099s)
When a red flag is present, the correct response is not to refuse to prepare the return. The correct response is to ask additional questions, document the client's answers, and, where the client's answers remain implausible, to advise the client of the legal requirements and document that conversation. Proceeding with a return when a reasonable inquiry would have revealed ineligibility -- and failing to make that inquiry -- is the core of a knowledge standard violation.
Documenting the inquiry
The knowledge standard is largely unenforceable without documentation. If you asked the right questions but did not write anything down, you have no defense when the IRS requests your due diligence records two years later. Best practice: maintain a written record for each return noting what questions were asked, what the client said, and any documents the client provided. A simple client interview form that you complete and retain at the time of preparation is sufficient -- and far more useful than a reconstructed narrative.
Record-Keeping Requirements
The record-keeping requirement is the third of the four due diligence requirements and a source of standalone penalty exposure. A preparer who satisfies the other three requirements but cannot produce the required records when the IRS asks for them is still subject to penalty.
Retention period
Records must be kept for three years after the later of: (1) the due date of the return (generally April 15), or (2) the date the return was actually filed if filed after the due date, including any extensions. For a return filed on April 15, 2026 with a due date of April 15, 2026, records must be retained until at least April 15, 2029. Verify current retention requirements at IRS.gov.
What the records must include
At minimum, the preparer's due diligence records for each covered return must include:
- A copy of the completed Form 8867 as submitted with the return
- Copies of any documents used to determine eligibility (Social Security cards, birth certificates, school records, custody agreements, or other documents the client provided to support qualifying child or income claims)
- A written record of the questions asked during the preparer's inquiry and the client's responses to those questions
- Notes of any additional inquiries triggered by red flags identified during the preparation process, and the client's explanations
Records can be maintained in paper or electronic format, as long as they are legible, complete, and retrievable on request. The IRS has the authority to request due diligence records; if the request is made and the records cannot be produced, the preparer faces penalty exposure separate from any underlying return error.
Adequate record-keeping is also the practical foundation of your defense in any IRS due diligence inquiry. A preparer with complete records who followed the knowledge standard can demonstrate compliance. A preparer without records cannot -- regardless of what actually happened during the preparation.
Common Due Diligence Errors That Trigger Penalties
IRS due diligence audits of preparers consistently identify the same categories of errors. The following patterns are the ones most likely to produce penalty assessments. None require intent to commit fraud; they are process failures that expose a preparer to the full weight of the per-return penalty.
Not asking follow-up questions when income or dependent claims seem inconsistent
This is the single most common and most costly error. When a client's reported income is implausibly low given the number of dependents claimed, or when a qualifying child claim involves ages or relationships that don't quite add up, the preparer's obligation to inquire is triggered. Preparing the return without inquiry -- even if the client verbally assured you everything is correct -- leaves you exposed under the knowledge standard.
Using a boilerplate Form 8867 without client-specific entries
A Form 8867 that looks the same across many different clients is a flag. The form is supposed to reflect the specific circumstances of each client and each return. Identical entries on forms for clients with materially different situations suggest the form is being completed by rote rather than from actual inquiry. IRS examiners look for this pattern.
No documentation of the knowledge inquiry
Even if you asked the right questions, you have no defense without a record. Verbal inquiries that go undocumented cannot be demonstrated to an IRS examiner. If the IRS requests your due diligence records and you cannot produce notes of your client inquiries, you face penalty exposure regardless of what actually occurred in the office.
Letting clients complete their own Form 8867
Form 8867 is the preparer's document. The preparer must complete it based on information gathered from the client during the preparation process, and the preparer must sign it. A client who fills in the form themselves and hands it to the preparer for filing is not a valid substitute for the preparer's own due diligence inquiry. If the IRS examines the return, a form completed by the client demonstrates nothing about the preparer's compliance with the knowledge standard.
Accepting implausible income claims without documentation
Self-employment income and cash income claims that have no supporting documentation, and that appear to have been calibrated to maximize EITC rather than to reflect actual earnings, are a persistent source of EITC errors across the preparer population. When a client's income claim seems structured to hit the maximum credit rather than to represent actual earnings, additional inquiry is required. Accepting the claim without asking follow-up questions is a knowledge standard violation if the claim was implausible on its face.
Rolling over prior-year data without current-year inquiry
Carrying forward dependent, income, and filing status information from the prior year without asking the client whether anything has changed fails the knowledge standard when circumstances have in fact changed. Family situations, custody arrangements, and income sources change from year to year. The due diligence requirements apply to every return, every year. Prior-year compliance does not satisfy the current year's requirement.
EITC Due Diligence Within a Broader Compliance Picture
EITC due diligence sits alongside several other federal requirements that shape the compliance obligations of paid tax preparers. Understanding how they fit together matters for any preparer whose practice includes EITC clients.
Every paid preparer must hold a current Preparer Tax Identification Number (PTIN) issued by the IRS. As of 2026, the PTIN fee is $18.75 per year ($10.00 IRS user fee plus $8.75 contractor fee) -- verify the current fee at IRS.gov before applying, as the IRS adjusts these amounts periodically. The PTIN must be renewed by December 31 each year. A preparer who signs EITC returns without a current PTIN faces separate penalty exposure independent of the due diligence requirements.
Preparers who file 10 or more federal returns per year are required to e-file those returns. The Electronic Filing Identification Number (EFIN) is the authorization that allows a preparer or firm to transmit returns electronically. EITC returns submitted on paper when the e-file mandate applies raise a separate compliance issue distinct from the due diligence requirements.
Client data gathered in connection with EITC due diligence -- including dependent information, income documents, and interview notes -- is tax return information protected under Section 7216 of the Internal Revenue Code. How you store, use, and share that information is governed by the Section 7216 disclosure rules, which apply independently of the due diligence requirements. The data security requirements under IRS Publication 4557 and the FTC Safeguards Rule also apply to this information.
Preparers who use bank products in connection with EITC returns -- such as refund anticipation checks or refund transfer products -- should review the bank products guide for the compliance and disclosure requirements specific to those products. Bank product arrangements involve their own set of consumer disclosure obligations that sit alongside, not in place of, the EITC due diligence requirements.
Preparers who are building or growing a practice that includes EITC clients should also consult the guide to starting a tax preparation business for the full sequence of IRS registration requirements, and the data security guide for Written Information Security Plan requirements. All of these obligations compound: a preparer building an EITC-heavy practice must satisfy each of them simultaneously.
The 6695(g) due diligence penalty is one piece of a wider preparer penalty structure. For how it fits alongside the unreasonable-position and understatement penalties, disclosure options, and the process for responding to an assessment, see the IRS preparer penalty framework: IRC 6694 and 6695 guide.
Frequently Asked Questions
What is the EITC due diligence penalty for tax preparers in 2026?
As of 2026, the EITC due diligence penalty under IRC Section 6695(g) is $650 per failure per return. The penalty adjusts for inflation, so verify the current amount at IRS.gov before each filing season. A preparer who fails due diligence on 100 EITC returns in a single year faces up to $65,000 in preparer penalties. The penalty applies separately for each credit on a return (EITC, CTC/ACTC, AOTC, and head-of-household), so a single return with multiple due diligence failures can generate multiple penalties.
Which credits require Form 8867?
Form 8867 must be submitted with every return that claims the Earned Income Tax Credit (EITC), the Child Tax Credit or Additional Child Tax Credit (CTC/ACTC), the American Opportunity Tax Credit (AOTC), or head-of-household filing status. The form covers all four in a single checklist with separate sections for each credit or status claimed. Confirm current requirements with the IRS Form 8867 instructions at IRS.gov before each filing season, as the IRS updates the form periodically.
What records must a tax preparer keep for EITC due diligence?
Preparers must retain: a copy of the completed Form 8867; copies of any documents used to determine eligibility (such as Social Security cards, birth certificates, or school records); a written record of questions asked and the client's responses; and any documents the client provided to support their claim. Records must be retained for three years after the return's due date (or extended due date, if applicable). The IRS can request these records, and failure to produce them is a separate penalty violation.
What does the "knowledge" standard mean for EITC due diligence?
The knowledge standard under IRC Section 6695(g) means a preparer is penalized if they knew or should have known that a claim was incorrect. You are not expected to audit the client, but you are expected to ask reasonable follow-up questions when information appears inconsistent, implausible, or incomplete. Common red flags that trigger this obligation include income that seems too low to support the household, claimed children whose ages are inconsistent with stated years, cash income claims with no documentation, and family circumstances that have changed but are not reflected in the return. Document every inquiry: write down what you asked and what the client said.
How does the IRS identify preparers who fail EITC due diligence?
The IRS operates an active preparer compliance program that uses return data to identify preparers with unusually high EITC claim rates, high error rates, or patterns suggesting due diligence failures. The IRS can request due diligence records directly from the preparer, conduct preparer audits, and seek injunctions against preparers who demonstrate systematic noncompliance. Preparers with large EITC practices are statistically more likely to face IRS scrutiny. Complete records documenting every required inquiry for every return are the best protection available.
Verify All Regulatory Information at IRS.gov
Penalty amounts, form versions, and due diligence requirements change. The $650 per-failure penalty cited throughout this guide reflects the 2026 amount under IRC Section 6695(g), which adjusts for inflation. The PTIN fee of $18.75 (2026) reflects $10.00 IRS user fee plus $8.75 contractor fee. The EITC error rate estimate of 25 to 30 percent reflects historical IRS reporting. All figures should be confirmed at IRS.gov before each filing season. This guide is informational and does not constitute legal or tax advice.