I Got an IRS Due Diligence Letter — What Do I Do Now?

You open your mailbox or pick up a call from a number you do not recognize. On the other end, someone says they are from the IRS and they want to talk about the returns you prepared last year. Your stomach drops. Your mind starts racing. You are thinking about every return you filed, every Schedule C you touched, every EITC claim you processed. And the only question running through your head is: what do I do now?

You are not alone. Right now, the IRS is actively reaching out to tax preparers across the country — through letters, phone calls, and even in-person visits — about due diligence compliance. And the penalties are not small. Tax professionals are getting hit with fines of $50,000, $80,000, even six figures for due diligence violations. Some have had their EFINs suspended. Others have lost the ability to practice altogether.

This is not something that happens to other people. If you prepare returns that claim EITC, CTC, ACTC, AOTC, or Head of Household, this could happen to you. So let me walk you through exactly what is going on, what the IRS is actually looking for, and how to make sure you are protected.

Yes, the IRS Is Calling Tax Preparers — and It’s Not a Scam

First things first. A lot of tax professionals still believe the IRS only communicates through mail. That is outdated information. The IRS has been calling preparers directly for years as part of their due diligence outreach, and it is documented right on their website. They also conduct what they call “knock-and-talks” — in-person educational visits where an agent shows up at your office.

These contacts do not always mean you are in trouble. Sometimes it is an educational call. Sometimes it is a warning. But sometimes it is the first step in a full examination of your prepared returns. The worst thing you can do is ignore it. Preparers who do not return IRS calls have had their EFINs suspended until they make contact. Do not let that be you.

The first tax office I worked at as a PTIN holder got hit with a due diligence audit. There were five of us on staff, and we were terrified. The owner had all of us scrambling to update our records and documentation that entire night before the review. We passed. But being reactive instead of proactive was one of the most stressful experiences of my career. That night taught me something I have never forgotten: get your house in order before anyone asks to see it.

What the IRS Is Actually Looking For

Here is where most of the confusion lives. Tax professionals hear “due diligence” and immediately think they need to collect a mountain of documents from every client — birth certificates, Social Security cards, utility bills, lease agreements. That is not what the IRS requires.

During a due diligence examination, the IRS uses a Penalty Preparer Sheet. On that sheet, there are two questions that carry the most weight when determining whether you met the knowledge requirement. First, did you make additional inquiries when client information appeared incorrect, incomplete, or inconsistent? Second, did you document those inquiries?

Read those again. The IRS is not asking whether you have a copy of every client’s lease. They are asking whether you asked the right questions when something did not add up — and whether you wrote down what you asked and what the client told you.

That is the core of due diligence. Ask questions. Document the conversation. If something looks off, dig deeper. If it checks out, note that it checked out and why. Every client situation is different, so what you document for each client should be different too. There is no one-size-fits-all template that will save you.

What You Need to Keep on File

Under the due diligence rules — IRC Section 6695(g) and Treasury Regulation 1.6695-2 — you are required to retain certain records for three years. Those include a completed Form 8867, the Paid Preparer’s Due Diligence Checklist. You also need the applicable worksheets for EITC, CTC, ACTC, ODC, AOTC, and Head of Household determinations. And you need records of anything you relied upon to determine eligibility and amounts — notes from client interviews, questionnaires, and any documents the client provided.

Notice the phrase “relied upon.” You are not required to collect documents for the sake of collecting them. But if a client tells you they earned $40,000 from a side business and you are claiming EITC based on that number, you had better be asking how they tracked that income, what kind of business it is, and whether they have records to support it. If the answer makes sense, document it. If it does not, ask more questions or decline the position.

This is exactly the kind of operational discipline that separates tax practices that thrive from those that write five-figure checks to the IRS. The more time you spend in the client conversation asking the right questions, the stronger your compliance position will be.

The Mistakes That Lead to Massive Fines

The preparers who get fined are not the ones who forgot to collect a document. They are the ones who ignored red flags. Here are the patterns the IRS sees over and over again.

Adding Schedule C income to returns with W-2s when there is no 1099 or evidence of actual self-employment — especially when that added income conveniently qualifies the client for maximum EITC. Claiming education credits without a 1098-T or any record of tuition expenses. Filing Head of Household when the living situation does not support it and no questions were asked. Preparing a disproportionate number of returns where clients magically hit the exact income level for maximum refundable credits.

If your client base is heavy on EITC and refundable credits, that alone puts a target on your PTIN. It does not mean you are doing anything wrong. But the IRS is watching, and they can go back as far as they need to — not just three years. Preparers have been examined on returns going back a decade when the patterns are bad enough.

How to Protect Yourself Starting Today

The good news is that protecting yourself is not complicated. It just requires consistency. Start by completing Form 8867 for every applicable return — not just checking boxes, but actually answering thoughtfully. Build a habit of writing detailed notes during or immediately after every client interaction. Document what you asked, what the client said, and how you resolved any inconsistencies. Most tax software does not give you enough space, so use a separate preparer notes form and attach it to the return.

Take the free IRS due diligence training course at apps.irs.gov. You do not need to buy an expensive course to understand what is expected. The IRS tells you exactly what they want. Take the training, follow the guidelines, and apply them to every single return.

And if you get that letter or that call — do not panic. Respond professionally, gather your documentation, and if you have been doing things the right way, you will come out fine. The preparers who get destroyed are the ones who were never doing it right in the first place, or the ones who tried to get organized after the fact.

Your PTIN and your EFIN are your livelihood. Protect them like it.