Paid Preparer Due Diligence Under Section 6695(g): The Four Requirements, Form 8867 and the Per-Failure Penalty

A paid preparer who fails the due diligence requirements for a return claiming certain credits or head of household filing status owes a penalty for each failure. Section 6695(g) sets the base amount at $500, indexed for inflation, and the IRS states $650 per failure for a return or claim filed in 2026. Four benefits are covered, and the regulation, Treas. Reg. 1.6695-2, sets four requirements for each return. This article walks through them with a penalty computation and a record checklist.

Which benefits trigger the requirements?

Section 6695(g) applies to a failure to comply with due diligence requirements in determining:

• eligibility to file as head of household under section 2(b); and
• eligibility for, or the amount of, the credit under section 24 (child tax credit), section 25A(a)(1) (American opportunity tax credit) or section 32 (earned income credit).

The IRS describes the four covered items in program terms: the earned income credit (EIC), the child tax credit, additional child tax credit and credit for other dependents (CTC/ACTC/ODC), the American opportunity tax credit (AOTC), and head of household (HOH) filing status.

The instructions for Form 8867 list one change for tax year 2025. A taxpayer claiming the CTC or ACTC must have a valid SSN. On a joint return, only one spouse needs a valid SSN, and the other may use an ITIN. Children identified only by an ITIN or ATIN can no longer be claimed for the CTC or ACTC, though they may still qualify for the ODC. The instructions add no credits beyond the four items above.

What are the four due diligence requirements?

Treas. Reg. 1.6695-2(b) sets them out. The IRS summarizes them this way:

1. Complete and submit Form 8867. Form 8867, Paid Preparer's Due Diligence Checklist, is completed truthfully and accurately, with the actions it describes done for each credit or HOH status claimed.
2. Compute the credits. Complete the worksheets in the Form 1040 or Form 8863 instructions for each credit, or your own similar worksheets, and keep records of the computations.
3. Meet the knowledge requirement. The preparer must not know, or have reason to know, that information used to claim the credit or HOH status is incorrect. The preparer interviews the taxpayer, asks adequate questions, documents the questions and answers, and reviews adequate information. When information appears incorrect, inconsistent or incomplete, additional reasonable inquiries are made and recorded.
4. Keep records for three years.

Who files Form 8867?

Only paid tax return preparers complete the form. If you were paid to prepare a return claiming any covered benefit, you must complete Form 8867. For an e-filed return, submit it electronically with the return. For a paper return, give a copy to the client. The signing preparer files the form with the return, and a nonsigning preparer gives it to the signing preparer. Multiple Forms 8867 may be needed for one return, and e-file accepts up to four.

What is the penalty, and how is it computed?

Section 6695(g) says the preparer "shall pay a penalty of $500 for each such failure." Section 6695(h) indexes the dollar amounts for returns or claims filed in calendar years after 2014. The Form 8867 instructions give the amount for a return filed in 2026 as $650 for each of the four credits, or $2,600 in total, and the IRS says the amount is adjusted each year.

Worked example: a four-benefit return

A client's 2025 return filed in 2026 claims the earned income credit, the child tax credit, the American opportunity tax credit and head of household status. The preparer never interviewed the client about who lived in the home, did not complete the worksheets, and did not file Form 8867.

Four failures at $650 each equal $2,600 on that single return. The IRS also states that a firm employing a preparer can be subject to the due diligence penalty for a return or claim prepared by its employee (Treas. Reg. 1.6695-2(c)).

What records must be kept, and for how long?

The records are:

• a copy of Form 8867;
• the applicable worksheets, or your own worksheets;
• copies of documents the taxpayer provided that you relied on;
• a record of how, when and from whom you obtained the information; and
• a record of any additional information relied on, including questions asked and the answers given.

They may be kept on paper or electronically under Rev. Proc. 97-22. The three-year period runs from the latest of these dates:

• the return's due date, excluding extensions;
• the filing date, if you are a signing preparer who e-files;
• the date the return was presented to the taxpayer for signature, if you are a signing preparer who does not e-file; or
• the date you gave your part of the return to the signing preparer, if you are a nonsigning preparer.

How should a firm build this into the season?

1. Intake flag. Mark every client whose organizer shows dependents, earned income, education expenses or head of household status, so the due diligence path starts at intake.
2. Interview script. Use a standard set of questions for each benefit, with space for the client's answers, so the knowledge requirement is documented as the interview happens.
3. Document list. Record which documents the client showed and which you relied on.
4. Follow-up log. Any inconsistent answer gets a recorded additional inquiry before the return moves to review.
5. Form 8867 control. Review checks that the form is completed, matches the return, and is transmitted with it.
6. Retention date. Compute and store the three-year end date for each file.

The workflow before transmission is described in tax season workflow for CPA firms from intake to e-file. Penalties for the return position itself are covered in section 6694 preparer penalties, which are separate from the section 6695(g) penalty. Under Circular 230 section 10.34, a practitioner may rely in good faith on client information but must make reasonable inquiries when it looks incorrect, inconsistent or incomplete, which is the same inquiry duty the knowledge requirement imposes.

CORAA prepares ready-to-review audit files for US CPA firms; see /us.

Sources

• Cornell Law School Legal Information Institute, 26 U.S.C. 6695: https://www.law.cornell.edu/uscode/text/26/6695
• Internal Revenue Service, Instructions for Form 8867: https://www.irs.gov/instructions/i8867
• Internal Revenue Service, Due diligence law, regulations and requirements: https://www.irs.gov/tax-professionals/eitc-central/due-diligence-law-regulations-and-requirements

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error