Paid preparer due diligence and Form 8867: EIC, CTC, AOTC and head of household

In this lesson you will

List the benefits Form 8867 covers and the four due diligence requirements
Apply the knowledge requirement to a fact pattern and document the inquiry
Determine the record retention period and how Form 8867 is submitted
Compute the 6695(g) penalty for a return filed in 2026

Scope

Form 8867, Paid Preparer's Due Diligence Checklist, covers four benefits: 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 due diligence regulation is Treas. Reg. 1.6695-2, and the penalty is IRC 6695(g). These benefits drew attention because they are often claimed in error and several are refundable.

A paid preparer who prepares a return or claim that claims any of these benefits must meet the due diligence requirements for each one.

The four requirements

The Form 8867 instructions (revised November 2025) describe four steps:

Knowledge. Interview the taxpayer, ask adequate questions, and document the questions and answers.
Complete Form 8867 truthfully and accurately, including the computation worksheets for the credits claimed (for example, the EIC and CTC worksheets, and the AOTC worksheet in the Form 8863 instructions).
Submit Form 8867 in the required manner.
Keep records for 3 years.

The knowledge standard

The instructions say you must make reasonable inquiries if a reasonable and well-informed tax return preparer, knowledgeable in the law, would conclude that the information provided appears to be incorrect, inconsistent or incomplete. You must also contemporaneously document in your files any reasonable inquiries made and the responses.

This is close to Circular 230 section 10.34(d), but stricter in one respect: the documentation must be contemporaneous. A note written after an IRS letter arrives does not count.

Typical inquiries:

EIC and CTC: Does the child live with the taxpayer more than half the year? Who else could claim the child? What documents show residency (school or medical records)?
HOH: Was the taxpayer unmarried or considered unmarried at year end? Who paid more than half the cost of keeping up the home?
AOTC: Did the student receive a Form 1098-T? Has the AOTC been claimed in four prior years? Were qualified expenses paid?
Self-employment income on EIC returns: Are the receipts and expenses supported, and do they look reasonable for the business?

Submission

A signing preparer who e-files attaches Form 8867 to the electronic return.
A signing preparer who does not e-file gives Form 8867 to the taxpayer to attach to the paper return, or mails it to the IRS with the return if the preparer mails the return after the taxpayer signs.
A non-signing preparer gives the completed Form 8867 to the signing preparer for inclusion with the return.
E-file accepts up to four Forms 8867 per return.

Records

Keep the records for 3 years from the latest of: the return's original due date (without extensions); for a signing preparer who e-files, the date the return was filed; for a signing preparer filing on paper, the date it was presented for signature; or for a non-signing preparer, the date that preparer submitted their part to the signer.

Penalty

Under 6695(g) the penalty applies per failure, per benefit. It is $650 for each failure on a return filed in 2026 (Rev. Proc. 2024-40 and the Form 8867 instructions) and $665 on a return filed in 2027 (Rev. Proc. 2025-32). A return claiming EIC, CTC, AOTC and HOH with no due diligence can draw four penalties. Under Treas. Reg. 1.6695-2(c) the employing firm can also be penalized, for example when it failed to set up reasonable compliance procedures.

The tax season workflow guide shows where the due diligence interview fits in intake.

Worked example

Four benefits on one return: Marisol Vega, filed in 2026

Marisol Vega, unmarried, files her 2025 return in February 2026. She claims HOH, the EIC and CTC for her two daughters (ages 8 and 11), and the AOTC for her 19-year-old son, a full-time student. She reports $22,000 of wages and $9,000 of Schedule C cleaning income with no expenses.

Knowledge step: the preparer asks where the girls lived (with Marisol all year, confirmed by school enrollment letters), whether their father could claim them (he lives in another state and has not claimed them), who paid household costs (Marisol, rent receipts), whether the son received a 1098-T (yes, $3,800 tuition), and whether AOTC was claimed before (once, in 2024). For the cleaning income the preparer asks for her client list and bank deposits, and asks about supplies, since zero expenses look incomplete. Marisol provides a $600 supplies receipt, which is added.

Each question and answer is written into the file on the day of the interview. Form 8867 is completed for all four benefits and attached to the e-filed return. Records are kept for 3 years from April 15, 2026, the later of the due date and the February filing date.

Exposure without the interview: 4 failures at $650 each = $2,600 for a return filed in 2026.

Conclusion: the interview cost 20 minutes and removed a $2,600 exposure.

Self-check

Answer each question before you open the answer.

Which four benefits does Form 8867 cover?
Show answer
The EIC; the CTC, ACTC and ODC; the AOTC; and head of household filing status. These are the benefits listed in 6695(g), the penalty the form supports.
What does the knowledge requirement require you to document, and when?
Show answer
The reasonable inquiries made and the taxpayer's responses, documented contemporaneously in your files. A note written after an IRS contact does not meet the requirement, because the documentation must be made at the time of the inquiry.
What is the 6695(g) penalty for a return filed in 2026 that claims the EIC and AOTC with no due diligence?
Show answer
$1,300. The penalty applies per failure for each benefit claimed, so two benefits at $650 each for a return filed in 2026.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error