Form 8867 compliance guide: The due diligence rules every paid preparer must follow

You prepare tax returns for clients who qualify for refundable credits. The Earned Income Tax Credit alone can be worth over $7,000 to a qualifying family. The Child Tax Credit, American Opportunity Tax Credit, and Head of Household filing status provide additional benefits that make a real difference in your clients' finances.

But these credits come with compliance obligations for you, the preparer. The IRS requires paid preparers to meet specific due diligence requirements when claiming these credits and when filing for these statuses. Failure to comply triggers 8867 penalties of $635 per failure for 2024 returns. A single return with EITC, Child Tax Credit, and Head of Household filing status represents three separate due diligence obligations. Miss them all, and you face nearly $2,000 in penalties on one return.

Understanding the Form 8867 instructions and building due diligence into your workflow protects your practice and ensures your clients receive only the credits they legitimately qualify for.

Specific credits and filing status trigger the requirements

The paid preparer due diligence requirements apply when you prepare a return claiming any of four specific items.

1. Earned Income Tax Credit (EITC). The most scrutinized credit on the list. EITC provides refundable tax credits to low- and moderate-income workers, with amounts varying by income, filing status, and the number of qualifying children. The potential for error and fraud has made EITC the focus of extensive IRS compliance efforts.

2. Child Tax Credit (CTC) and Additional Child Tax Credit (ACTC). Credits for taxpayers with qualifying children under age 17. The refundable portion (ACTC) requires the same due diligence as EITC because it generates refunds beyond tax liability.

3. American Opportunity Tax Credit (AOTC). The education credit for qualified tuition and expenses during the first four years of higher education. Up to $1,000 of this credit is refundable, triggering the due diligence requirement.

4. Head of Household filing status. Not a credit, but a filing status that provides more favorable tax rates and a higher standard deduction than single filing. Because it requires maintaining a household for a qualifying person, it is subject to due diligence requirements.

5. Each item is a separate obligation. If a return claims EITC and Child Tax Credit while using Head of Household status, you have three separate due diligence requirements to satisfy. The EITC due diligence checklist is one of the obligations. CTC is another. Head of Household is a third. Penalties apply per failure, per item.

The four due diligence requirements

The IRS specifies four requirements that preparers must satisfy for each applicable credit or filing status. These are not suggestions. They are mandatory compliance elements.

Requirement 1: Complete the eligibility checklist. Form 8867 is the checklist. You must complete it for each return claiming covered credits or filing status. The form asks specific eligibility questions: Does the taxpayer have a qualifying child? Does the child meet age, relationship, and residency tests? Does the taxpayer meet income thresholds?

You cannot simply check boxes without a basis. Each answer must reflect information you actually obtained from the taxpayer. If you marked that a child lived with the taxpayer for more than half the year, you must have asked the question and received that answer.

Requirement 2: Compute the credit based on the information obtained. You must make reasonable inquiries when information appears incomplete, inconsistent, or incorrect. If a taxpayer claims three qualifying children but only provides documentation for two, you cannot simply compute the credit for three. You must ask questions and resolve the discrepancy.

The standard is reasonableness. You are not required to audit your client or verify every statement independently. But you cannot ignore red flags or accept information that does not make sense on its face.

Requirement 3: Document the basis for your determinations. Keep records showing what information you relied on and how you determined eligibility. If you concluded a child met the residency test, what did the taxpayer tell you? If you determined the taxpayer maintained a household, what facts supported that conclusion?

This documentation protects you during IRS inquiries. When the IRS questions a credit you prepared, your records demonstrate that you followed the due diligence requirements. Without documentation, you cannot prove compliance.

Requirement 4: Maintain knowledge of the law. You must know and understand the rules for the credits you prepare. This is not a passive requirement. The IRS expects preparers to stay current on eligibility rules, income limits, phase-outs, and other provisions that affect these credits.

This requirement connects to continuing education obligations for enrolled agents and other credentialed preparers, but applies to all paid preparers regardless of credential status.

Completing Form 8867 correctly

The Form 8867 instructions walk through each section, but understanding the structure helps you complete it efficiently.

Part I identifies which credits apply. Check the boxes for EITC, CTC/ACTC/ODC, AOTC, and Head of Household as applicable to the return you are preparing. Each checked box triggers the corresponding due diligence section.

Parts II through V cover credit-specific questions. Each section asks eligibility questions for the corresponding credit or filing status. For EITC, questions address qualifying children, earned income, and investment income limits. For CTC, questions address the child's age, relationship, and support. For the Head of Household, questions address marital status and household maintenance.

Answer every applicable question. "Unknown" or blank answers suggest you did not make reasonable inquiries. If you genuinely could not determine an answer despite reasonable effort, document why in your records.

Part VI addresses preparer due diligence. This section asks whether you met the knowledge requirement, whether you asked the necessary questions, and whether you documented your file. These are the compliance questions that demonstrate you followed the requirements.

Retain the completed form. Form 8867 does not get filed with the return. You keep it in your files as documentation that you completed the due diligence requirements. The retention period is 3 years from the later of the return due date or the date the return was filed.

Penalties for non-compliance are substantial

The preparer penalty avoidance strategy starts with understanding what triggers penalties.

$635 per failure for 2024 returns. This amount adjusts annually for inflation. Each credit or filing status is a separate potential failure. A return claiming EITC, CTC, AOTC, and Head of Household could generate up to $2,540 in penalties if you failed due diligence on all four.

Penalties apply even if the credit was correct. The due diligence requirement is about process, not outcome. If your client legitimately qualified for EITC but you did not complete Form 8867 properly, you can still be penalized. The IRS examines whether you followed the requirements, not just whether the credit was accurate.

Reasonable cause defense exists, but is narrow. You can avoid penalties if you demonstrate reasonable cause and good faith. But simply being busy, understaffed, or unfamiliar with the requirements does not qualify. The IRS expects paid preparers to know and follow due diligence rules.

Pattern of non-compliance invites broader scrutiny. Repeated due diligence failures can trigger preparer audits, PTIN revocation proceedings, and other enforcement actions. The IRS tracks preparer compliance and targets preparers with high error rates.

Building due diligence into your workflow

The requirements feel burdensome until you systematize them. Preparers who struggle with due diligence typically treat it as an afterthought rather than an integrated part of their process.

Use intake questionnaires that address eligibility. Before you start the return, gather the information you need for due diligence. Questions about qualifying children, residency, household maintenance, and education expenses should be part of your standard client interview.

Complete Form 8867 as you prepare the return. Do not wait until the return is finished to fill out the checklist. Answer the due diligence questions as you work through each credit, while the information is fresh and inconsistencies are visible.

Document conversations. When you ask clarifying questions, note the answers. A brief file memo showing that you asked about residency and the client confirmed the child lived with them for the full year is powerful documentation if the credit is later questioned.

Review before filing. A quick check that Form 8867 is complete and consistent with the return catches errors before they become compliance failures.

The due diligence requirements are not obstacles to serving your clients. They are the process for serving them correctly while protecting your practice from penalties that can quickly erode your profitability.