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Evette Davis: Okay, folks, I see it's the top of the hour. For those of you just joining welcome to today's webinar, "Keys to Mastering Due Diligence Requirements and What to Expect During a Due Diligence Audit". We're so glad you're joining us today. My name is Evette Davis, and I am a Stakeholder Liaison with the Internal Revenue Service. And I will be your moderator for today's webinar, which is slated for 75 minutes. Before we begin, if there's anyone in the audience that is with the media, please send an e-mail to the address on this slide. Be sure to include your contact information and the news publication you're with. Our Media Relations and Stakeholder Liaison staff will assist you and answer any questions you may have. As a reminder, this webinar will be recorded and posted to the IRS video portal in just a few weeks. This portal is located at Please note that continuing education or certificates of completion are not offered if you view any version of our webinars after the live broadcast. Now, we hope you won't experience any issues during the webinar. But if you experience technology issues, this slide shows helpful tips and reminders. We've posted a technical help document that you can download from the materials section. And that's on the left side of your screen. It provides minimum system requirements for viewing this webinar, along with some best practices and quick solutions.

Due to compatibility issues, we encourage you to use a browser other than the Internet Explorer, you may experience frozen screens and other technology issues if you use Internet Explorer. If you're using anything other than Internet Explorer, and you're still having problems, try one of the following. First, close the screen where you're viewing the webinar and re-launch it. Second, click on settings on your browser viewing screen and select HLS. You should have received today's PowerPoint in a reminder e-mail. But if not, no worries, you can download it by clicking on the materials dropdown arrow on the left side of your screen as shown on this slide. Folks captioning is available for today's presentation. If you're having trouble hearing the audio through your computer speakers, please click the closed captioning dropdown arrow which is located on the left side of your screen. This feature will be available throughout the webinar, the closed captioner will use HLS. Those using closed captioning should also use HLS, this is a maximized synchronization with the video stream. If you have a topic specific question today, please submit it by clicking the ask questions dropdown arrow to reveal the textbox then type your question in the textbox and click Send. Now, this is very important folks, please do not enter any sensitive or taxpayer specific information. During the presentation, we'll take a few breaks to share knowledge-based questions with you. At those times, a polling style feature, excuse me will pop up on your screen with a question and multiple choice answers. Simply select the response you believe is correct by clicking on the radio button next to your selection and then clicking Submit. Now, some people may not get the polling question. And this may be because you have your pop-up blocker on. So please take just a moment to disable your pop-up blocker now, so you can answer the questions. Again, welcome, we are so glad you joined us for today's webinar. But before we move any further in this session, let me make sure you're in the right place to today's webinar is "Keys to Mastering Due Diligence Requirements and What to Expect During a Due Diligence Audit". And this webinar is scheduled for approximately 75 minutes. Now, let me introduce today's speakers. I'm so excited to have with us, Courtney King. He began his career with the IRS over 20 years ago, and is currently a Senior Program Analyst in the Refundable Credits Administration. He has more than 10 years experience folks interviewing and educating paid tax return preparers through conducting examination and participating in the annual IRS Nationwide Tax Forums. So you've probably heard him before. He is an expert in the due diligence requirements, or the EITC, CTC, ACTC and Head of Household filing status. And Mrs.

Christine Bass is a longtime Senior Program Analyst in the Refundable Credits Administration. She works in close partnership with our Field and Campus Compliance Division, to administer the IRS program. And this is for preparer due diligence education, examinations and penalties. She has been with the IRS for over 30 years with experience as a Revenue Agent, prior to joining the Wage and Investment division in 2016. Okay, folks, you got some great speakers on deck for you.

So I'm going to turn it over to Christine to begin the presentation. Christine is over to you?

Christine Bass: Perfect. Good afternoon or good morning to everyone on the West Coast. And thank you for joining us today for this important subject. As Evette said, my name is Christine Bass.

And I am joined today by another subject matter expert, my colleague, Courtney King. Our goal today is to provide you the knowledge and resources you need to understand and meet the due diligence requirements for the tax benefits subject to due diligence penalties, and to walk you through scenarios where additional inquiries must be made of your clients and to discuss situations when documents from your clients may be helpful. By the end of this session, you will understand how and when we contact paid tax preparers, when there are concerns regarding their due diligence. These contact methods may be to educate prepares or take compliance action. And we share information about free online resources we have available to assist you. You'll hear us mention the Online Tax Return Preparer Toolkit today. There among other resources and information. You'll find links to the treasury regulation for the four due diligence requirements. Whenever you have a few minutes in your web browser, just type in or on enter the search term Toolkit. If you prefer to use a commercial search engine, such as Google or Firefox, for example, you can find the toolkit using search terms such as Tax preparer toolkit, Tax toolkit, or Preparer toolkit. Another good resource for preparers is Publication 4687. Again, Publication 4687 titled Paid Preparer Due Diligence. So now let's get started. Paid preparers must satisfy specific due diligence requirements when completing tax returns or claims for refund containing any one of these four tax benefits. And they are: the EITC, the Earned Income Tax Credit; the Child Tax Credits, CTC; Additional Child Tax Credit, ACTC; Credit For Other Dependents, ODC; the American Opportunity Tax Credit, and that's AOTC; or the Head of Household Filing Status, HOH. Today, when we refer to CTC you can assume we mean all three forms of the credit, the CTC, ACTC and ODC. Before we go any further, we want to briefly mention the tax law changes under the American Rescue Plan Act of 2021. Today, we are not covering changes to the EITC or CTC under the act. Just to clarify for you, the act did not change the due diligence rules and it did not change the tax benefits, which are subject to specific due diligence requirements that we're covering today. The requirements still apply only to return and refund claims for the EITC, CTC, AOTC and HOH. Section 1.6695-2 of the treasury regulations describes the four due diligence requirements a paid tax return preparer must meet when preparing a return or claim for refund, claiming any of the four tax benefits shown on the previous slide. Now, I hate to be the bearer of bad news, but here's the heavy part, a paid tax return preparer can face potential penalties for not meeting the due diligence requirements A firm employing a preparer can also be subject to penalties for an employee's failure to follow due diligence rules. So where does the IRS's authority to assess due diligence penalties against paid preparers come from? Well, I'm glad you ask. Section 6695(g) of the Internal Revenue Code provides that paid preparers who fail to comply with the due diligence requirements in the regs, they'll pay a penalty of $500 for each failure to properly determine a client's eligibility to file as head of household or their eligibility for or the amount, or eligibility for the amount of the EITC, CTC or AOTC. So that's a total of four different tax benefits. The penalty amount adjusted for inflation is $545 per failure for returns and claims filed in 2022.

So we need to be very clear here, in 2022, f you prepare a return, claiming all four of the applicable tax benefits, and you fail to meet the due diligence requirements for all four of them, the IRS may assess a penalty against you for $545 per failure, or $2,180 per return.

Here's some good news though. The regulations as well as Publication 4687, and the online preparer toolkit all provide guidance on how to meet due diligence requirements and avoid costly penalties. So let's review the four requirements in the regs as a refresher for any of you who might not have them memorized. And we'll start with Form 8867, the Paid Preparers Due Diligence Checklist. Based on information obtained from your client, or information you otherwise reasonably obtain or know, you must complete the form and do one of these three things either electronically submitted it to the IRS with the e-file return or claim or for return not e-filed, provide a copy of it to your client, or if you are the non-signing preparer, provide an electronic or paper copy of it to the signing preparer for inclusion with the filed return or claim. If you provide a paper Form 8867 to your clients, stress to them the importance of including the form with the return package sent to the IRS. If you submit a return or claim for refund without Form 8867 as required, do not send us the form separately. Doing so has no effect on a potential preparer penalty assessment. Form 8867 can serve as a reminder to ask all relevant questions to ensure the information your client provides is accurate and complete. But it is not a substitute for your due diligence. So you may be wondering what goes into properly preparing the form? Well, you must answer specific questions that directly relate to meeting the other three due diligence requirements we'll cover shortly. Just to give you a few highlights. You must address whether you made a record of your interview with the client and reviewed information to determine eligibility for each tax benefits and the amount of each applicable credit. Did you ask follow-up questions when needed, properly record those additional questions and answers, and carefully consider the impact of the additional information? Did you keep copies of any client documents you relied on? And at the end, did you certify that your answers on the form are true, correct and complete. Now here's something new, we provide for you, as you prepare 2021 tax return. If your client received an advance payment of Child Tax Credit in 2021, the due diligence requirement to submit Form 8867 may apply due to the 2021 return even if no Child Tax Credit amount is claimed on the Form 1040 itself. So if there's an amount on Line 12 of Schedule 8812, titled Credits for Qualifying Children and Other Dependents, then Form 8867 is correct. And here's a tip, the online preparer toolkit has guidance and helpful information about using Form 8867. So now, let's check your understanding with our first poll question. Evette, can you help us with that? Evette Davis: I certainly can, Christine, thank you so very much. Okay, audience it is time for our first polling question and it is as follows. When preparing a return, you can meet the 8867 requirements by properly completing the form and, A, submitting it to the IRS with an e-filed return; B, providing it to your client to submit to the IRS with the return if return is not e-filed; C, submitting it to the signing preparer, if you are not the signing preparer; or is it D, all of the above. Think about what you just heard Christine say, think about what you already know coming into this. Take a moment, click the radio button that best answers the question. Just want to give you a few more seconds to make your selection. Again, when preparing a return, you can meet the Form 8867 requirements by properly completing the form and A, B, C or D. Okay, we're going to stop the polling now. And let's share the correct answer on the next slide. Alright, folks, the correct response is, D, all of the above. All right, now let's check our percentage just to see how well you all did with this question. Ooh-Ooh, we are at 95%. Yes, Christine, they are on top of things. I think everything is going well so far. What do you think, Christine? Christine Bass: I think that's awesome, and well done, everyone. And with that, we will get on with our webinar. Sounds great. Thank you all. Evette Davis: Let's go to computing the credits. All right. Christine Bass: Great, thanks. The second due diligence requirements relates to computing the applicable credits, using the appropriate sheets or your own similar worksheet. You must do this based on information obtained from your clients, or information you otherwise reasonably obtain or know. These worksheets are included with most professional tax preparation software. And at this time, my colleague Courtney will explain the third due diligence requirements. Courtney? Courtney King: Thank you, Christine. And thanks once again to everyone for joining us today and also Happy New Year to everyone. Now, as part of performing due diligence, you must rely on your client statements as well as your knowledge of the law, your experience, and your interview expertise to determine whether your client is eligible for the applicable tax benefits. It's a great practice to develop your own interview process and apply it to every client and every return filed every time. Now, in a few moments, we're going to demonstrate how to meet the knowledge requirement. But first, here are some basics. First, you must not know or have reason to know that any information you use to claim the credits or head of household filing status is incorrect. Next, you cannot ignore the implications of any information given to you or known to you. Now, here's the standard you must apply, you must make additional reasonable inquiries. If a reasonable and well informed tax return preparer who's knowledgeable in the law would conclude the information furnished appears incorrect, inconsistent, or incomplete. At the time, you interview your client, make and keep a record of these inquiries and your client's answers. So in other words, know the law and use that knowledge to ensure that you ask the right questions to get all of the relevant information. And if the information your client is giving you appears to be incorrect, inconsistent or incomplete, you must continue to explore by asking additional questions until you're comfortable with the information they provide. In other words, apply what we call a common sense standard to make sufficient inquiries to clarify any questionable information and record those questions as well as your client's responses. The treasury regulation gives us a number of examples for meeting the dollars requirement. So next, we want to take a look at several of those examples. First up, let's consider our taxpayer Andrea. So, in 2021, Andrea pays a preparer to complete her 2020 return. Andrea fills out the preparer's standard intake questionnaire, stating that she's 22-years-old. She's never been married, and she has two sons, ages 10 and 11. Based on the intake form and other information, Andrea shows that the boys live with her all year in 2020. And the preparer believes that Andrea may be eligible to claim each boy for the EITC and the CTC.

However, Andrea provides no information to the preparer. And the preparer does not have any information from other sources to show the relationship between Andrea and the boys. Now, does it look like there's an inconsistency between Andrea's age and the ages of the boys? I'd say, yes, there definitely is. So in this situation, the preparer must make reasonable inquiries to verify Andrea's relationship to the boys and document these inquiries and her responses contemporaneously. That is at the time the return is prepared. So did we assume the preparer made the required inquiries. What do you think happened next with Andrea and the boys? Well, as it turned out, for Andrea's 2020 return, the preparer made the sufficient reasonable inquiries to verify that Andrea had legally adopted both children. And he made a record of those inquiries. Though, does that resolve the apparent age inconsistency for 2020? You are correct. It certainly does.

So what happens when Andrea goes back to the preparer to file her 2021 return? Again, for tax year 2021, the preparer believes Andrea may be eligible to claim the EITC and CTC for the boys.

For 2021, is there an apparent inconsistency between Andrea's age and the age of her sons? No, there isn't. That's because the preparer resolved that when completing Andrea's prior year return. Therefore, when completing the 2021 return, the preparer is not required to make additional inquiries to resolve any apparent inconsistency between Andrea's age and the age of her son's. Good job, everyone, I feel you are following along with me. So next, let's consider, Tara. On the paid preparer's standard intake questionnaire Tara states that she had never been married and her niece and nephew lived with her for part of 2021. Based on the intake form and other information, the preparer believes that Tara may be eligible to file as head of household and claim her niece and nephew for the EITC and CTC. Now, remember our standard that we mentioned a second ago, would a reasonable and well informed tax return preparer who's knowledgeable in the law include that the information furnished so far up here incorrect, inconsistent or incomplete?

Yes, I say it's incomplete so far. So how can the preparer resolve this? Well, the preparer must make reasonable inquiries about the children's relationship and residency, as well as their income and sources of better support along with Tara's contribution to the household upkeep costs. The preparer must make notes of these inquiries and Tara's responses at the time the preparer completes the return. All right. Good work, everyone. We've been talking for a moment.

So let's take a deep breath. And we take stretch for a little bit but we can't go anywhere, because next we're going to see what happens when another taxpayer Michael goes to get his return preparer. So our next client Michael is 32 years old and has never been married. He fills out the paid preparer's standard intake questionnaire and shows the preparer Form 1098-T, Tuition Statement that he received from State University. The form verifies the university received $4,000 for qualified tuition and related expenses for his attendance, and that he was at least a half time undergraduate student. The preparer believes that he may be eligible for the AOTC. So just based on what the preparer knows so far, does the information furnished appear to be incorrect, inconsistent or incomplete? I'll say, yes. And if you said that you're right, the preparer must make reasonable inquiries because Form 1098-T does not contain all of the information needed. For example, is Michael pursuing a degree or other post secondary credentials? Has the credit already been claimed on behalf of Michael for four tax years? The preparer must document their inquiries and Michael's responses at the time the return is prepared. All right. Well done everyone. So we're almost done with these examples from the regulations. But we have just one more that we want you to consider and it involves a taxpayer named David. So David comes in and states that he is 50 years old. He has never been married and he has no children. He further states that he earned $10,000 from self-employment, and had no business expenses or other income. Preparer believes David may be eligible for the EITC self-only. The preparer must make reasonable inquiries to determine whether David's business income and expenses are correct. And the preparer must make contemporaneous record of those inquiries and David's responses. One of the common EITC errors we see is under or over reporting self-employment income and expenses to claim more EITC than is allowed. You must ask additional questions if the information your client is giving you appears to be incorrect, inconsistent or incomplete. Now, for example, based on the type of business, is it reasonable for David to have no business expenses? Is the business income he describes sufficient to support a standard of living? What would it look like to use that common sense approach we mentioned earlier? Well, here are a few ideas. Firstly, consider what you know about employers and industries and your client's area of business operation, and weigh that against what the client shares with you. Compare that information against what you know about your client, what you know about their personal and business circumstances as well as about their past five returns. Does it all make sense? But we had to ask those follow-up questions as needed, even if you don't think you already know the answer or even if you think you already know the answer. Life changes daily. So do ask. Now, there are other examples in the regulations if you'd like to see more. And as a reminder, you can link to the due diligence regulations directly from the online preparer toolkit that we discussed earlier. Now, some preparers tell us that they're uncomfortable asking those probing and sometimes sensitive questions that may be necessary to meet the knowledge requirement. In this case, what steps can a prepare take? Well, one option you have is reviewing with your client, the forms that IRS uses to request documentation from taxpayers during the correspondence audits, such as our Form 886-H or EITC, or Form 14815, or CTC and ODC. Most of the forms are available in both English and Spanish. And you can link to them from the online preparer toolkit. For example, one of the Forms 886-H shows the EITC rules, you can use the form to discuss the rules for the credit with your client, and show them the kinds of documents that can help them determine whether they're eligible to claim the credit. Just to be clear, in general, due diligence rules do not require you to request specific documentation from your client. And my colleague Christine is going to go over the record keeping in a minute, but as a preview, here's a simple rule. If you do see a client's record, and you rely on it, you must keep a copy of it. Based on feedback that we received from you, we recently added a page to the toolkit titled due diligence requirements for knowledge and record keeping. It has several client interview scenarios showing how preparers can meet due diligence requirements. So please be sure to check that out for more guidance. And again, that page is called Due diligence requirements for knowledge and record keeping. I do believe that you all are getting the hang up this now. So we'd like to check your understanding with a poll question. Evette, are you ready? Evette Davis: I am Courtney. Thank you so much. Okay, audience I hope you're ready to. So now for our second polling question. When preparing a return or claim for refund claiming the AOTC, what documents must you keep? A, student grade report; B, Form 1098-T, the Tuition Statement; C, any documents you relied on to complete Form 8867 or the computation worksheet; or is it D, both B and C? All right, think about what you just heard Courtney tell you, again, rely on your knowledge, think about what you already know. And take a moment, click on the radio button that best answers the question. I'll give you a few more seconds to make your selection. When preparing a return or claim for refund claiming the AOTC?

What documents must you keep, A, B, C or is it D, both B and C? All right. You folks are on fire today. So I'm hoping for 100%. Let's go ahead and close the polling now. And let's get the correct answer on the next slide. All right, and the correct response is, D, both B and C.

All right. Let's see what percentage of you answered that correctly? 90%, not bad, not bad. I think I'll take that. A little bit less than 100%. But I'll take that, Courtney. I think they're still here with us. Okay, so we're going to now go to, I think you said record keeping with Ms.

Christine, is that right? Courtney King: Well, we are going to go to record keeping, but I just like to leave a little piece of information with everyone. We do know that Form 1098-T alone does not provide all the information that a preparer needs to determine a client's eligibility for or the amount AOTC. So that means that you've got to inquire further and make a record of those inquiries. And if you review and rely on the information on the 1098-T and any other documents, you must keep copies. Evette Davis: Document, document, document. I love that. Courtney King: Document, document, document. Absolutely. Well, so far, we've covered the first three due diligence requirements in the regulations. And as Evette stated, at this time, Christine is going to cover the fourth requirement. Christine, are you ready? Christine Bass: Yes, sir. I certainly am. Thank you, Courtney. And thank you, Evette. So the last of the four requirements is record keeping, you must keep the required records. So what does that mean? Well, it means to keep copies of Form 8867 and the applicable credit worksheets along with a record of how, when and from whom you obtain the information used to prepare them. Also, keep a record of all additional inquiries you made to comply with the knowledge requirements along with your client's responses. And, as Courtney mentioned, copies of any client provided documents you relied on to determine eligibility for the tax benefits, or compute the amount of credit. Courtney King: Hey, Christine, before we move on, can I interrupt for just a second? Christine Bass: Sure. Courtney King: Okay, we've been getting several questions from participants about asking clients for documentation. So I think maybe an example will help to illustrate this year. Let's say your new client comes and wants to claim the ODC for a biological child. And you learned that the child was born in Mexico and is not a U.S. citizen. So you go to the toolkit, and you find the Form 14815 that covers the ODC rules, you show it to your client, that a non-citizen child must have a green card, or be present in the United States. So the client says that the child is living in the United States now and has been for several years, and you don't see anything in your client's explanation that seems incorrect, inconsistent or incomplete. So in this case, due diligence rules do not require you to ask for, or keep a copy of the child's green card or proof of U.S.

residency. It may be your practice to ask for clients records here, but it is not a due diligence requirement. So I hope that helps. Christine Bass: Great. Thank you so much, Courtney, for that clarification. Remember, to keep these records for three years from the latest date of the following that applies either the date, the due date of the return; or the date, the return or claim for refund was e-filed; or if you're giving a paper return to your client, the date you gave it to your client for signature; or if you did not sign the return the date you gave the signing tax return prepare the part of the return that you were responsible for. To keep those records secure in either a paper or an electronic format. So let's check your understanding with you guessed it, another polling question. Evette, over to you? Evette Davis: Thanks, Christine.

Okay. Okay, folks, here we go with our third polling question? All right. To meet the due diligence knowledge requirement should you request documentation when preparing a return for a client claiming the EITC for her grandchild? Is the answer, A, yes, documentation is always required; B, no, if responses to probing questions are recorded and appear correct, consistent and complete; or C, no, grandparents are never required to provide supporting documents; or is it D, no, a grandchild is not eligible to be claimed for the EITC. Now, you heard Courtney's detailed explanation. You heard Christine go into it and explain it, with that great example from Courtney. Take a moment, click on the radio button that best answers the question. All right.

Take a few moments look at the question again to meet the due diligence knowledge requirement.

Did you request documentation when preparing a return for a client claiming the EITC for her grandchild? Is the answer A, B, C, or D? Okay, folks, hopefully you've had enough time to look at the question and choose your answer. Make sure you click the radio button that best answers the question. All right, folks, we're going to go ahead and stop the polling now. Let's share the correct answer on the next slide. And the correct response is, B, no, if responses to probing questions are recorded and appear correct, consistent and complete. The answer is B. Now let's see what percentage of you answered that correctly. Okay, Christine. Okay, Courtney. We have a 50% ratio here of those who answered correctly. Can you give us an explanation as to why the response is B? Christine Bass: Sure. And again, you do not have to request documentation from the grandparent if his or her responses to your probing questions appear to be correct, consistent and complete. As the preparer, all you are required to do is document the questions you ask and the client's responses. So now, I think we can all agree that's enough about due diligence rules for now. Time for another big stretch, maybe a sip of water, but stay with us, while we review the ways we reach out to paid preparers to provide education about and enforce compliance with the due diligence rules. We share the same goals. We want to ensure every taxpayer receives the credits and filing status they are entitled to. And we want you to be successful in preparing accurate returns, claiming the appropriate benefits that your clients are entitled to. With that said, what are the methods we use to help preparers comply with due diligence rules? Well, one of our most effective ways to contact you is through educational letters and phone calls. And, yes, we do make phone calls to paid preparers. We also make in person educational visits to preparers to discuss due diligence laws and to address potential due diligence errors and how to comply in the future. If we contact a preparer using any one of these methods, we will continue to monitor the returns that they prepare and we may conduct a due diligence examination which may result in penalties against the preparer. So in order to remove some of the mystery, I'll review our contact methods with you. Let's start with Letter 5025. This letter is may, mailed to paid preparers in the fall for client returns prepared in the previous filing season. And our review indicates that they may not have adequate due diligence procedures in place. It's an educational letter, but includes a cautionary compliance message that outlines what could happen if due diligence compliance is not met. The letter will not include client specific information. Next is, Letter 4858. This letter is sent early in the filing season to preparers who have filed highly questionable returns. It reminds preparers that failure to be diligent and results in an examination, penalties, suspension or termination of e-filing privileges or a referral to the IRS' Criminal Investigation Division. Like Letter 5025, this letter will not provide any information on specific returns that may be questionable. Finally, Letter 5364 is sent to paid preparers when we observe multiple paper returns missing the Form 8867. The letter reminds the preparer that the form is due when any of the benefits subject to due diligence are claimed. As a reminder, for your clients who received advanced CTC in 2021, the form may be required if there is an amount on Schedule 8812, Line 12, even if there is no CTC claimed on Form 1040. So if you receive one of our letters in the mail, what should you do? Panic, ignore it. Well, I don't think it's a good idea to do either of those. If you get one of these letters from us, the best reaction is to read it and take corrective action. So what can a preparer do to improve their due diligence compliance? Each preparer should review their office procedures on a regular basis to make sure all four due diligence requirements are truly being met. Even if you feel you've got a good process in place. It's a good idea to revisit your procedures and the eligibility rules for the tax benefits to ensure returns are accurate. Now, as I mentioned earlier, we also reach out to paid preparers over the phone. We make educational phone calls to prepares who receive prior educational contacts from us and still their due diligence compliance has not improved. Remember, these calls are to help preparers get due diligence right and avoid due diligence penalties. The IRS employee will confirm the preparer's identity and other information, such as the business address or PTIN. No specific client information is provided and we will not ask the preparer to disclose any client information. There will be a review of the due diligence rules and a discussion of possible consequences if questionable returns continue to be received.

Information on due diligence educational products and training, remember that online toolkit will be offered as part of the call as well. So we're going to pause here and ask, Evette to go over the next polling question. Evette, what do you have for us? Evette Davis: I think I've got a good one this time, Christine. Okay, audience, this is our fourth polling question. Which really is a complete the sentence. Okay. The IRS makes that due diligence educational phone calls to preparers to, A, help preparers meet due diligence requirements and avoid penalty; B, review specific client return information; C, demand payment; or D, request client records. I'm looking for 100% on this one, Christine. Folks, if you would take a moment and click on the radio button that best answers this question, I'm going to give you some time to look at that again so that we can make sure we get everybody in, The IRS makes due diligence educational phone calls to preparers to; A, help preparers meet due diligence requirements and avoid penalties; B, review specific client return information; C, demand payment; or D, request client records. Christine just talked to us about those phone calls. Take a moment. Again, click that radio button that best answers the question. Hopefully we will see 100%, because I'm going to stop the polling now.

And let's share the correct answer on the next slide. And the correct response is, A, help preparers meet due diligence requirements and avoid penalties. All right, Christine, let's get a drum roll here. Okay. 94%. Christine Bass: I know they have this. Evette Davis: Okay. Yeah, 94%.

Okay. This is awesome, awesome, awesome. All right, Christine. I think next is going to be back to you to cover educational office visits, is that right? Christine Bass: Yes, it is. And thank you very much. All right. So I have one more type of educational activity I want to discuss. And that's known to us at the IRS as Knock and Talk visits. These pre-scheduled in-person visits to a preparer's business location are conducted by IRS Small Business/Self-Employed personnel, who are sometimes accompanied by a Criminal Investigation agent. Afterwards, a due diligence examination of the preparer may be conducted, if it doesn't appear, compliance has improved. So you may be wondering what happens when we conduct a due diligence examination? What's the process? Courtney, can you explain the steps in a due diligence examination? Courtney King: Yes, I can. Thank you, Christine. But we have a little bit of a treat. We have some videos that I are going to help to illustrate what we want to explain here. So in these two short videos that we're about to show will follow the case of a paid preparer who has been chosen for an in-person due diligence examination. The preparer, whose name is Mr. Walker, receives an IRS letter notifying him of the audit and calls IRS agent Jensen to schedule a face to face appointment. The two of them will meet at Mr. Walker's office or wherever the tax preparation records are kept. An appointment confirmation letter will outline the items Mr. Walker must have available for the visits such as all Forms 1040 from the previous filing season, claiming the due diligence tax benefits along with records showing due diligence requirements were met for each return and the preparer's personal and business tax returns. Keep in mind it's perfectly acceptable to have someone represent you in a due diligence audit to do so you just need to complete Form 2848 titled Power of Attorney and Declaration of Representative. Now, with that stage set for you, it's time to look in on Mr. Walker and Agent Jensen for an examination interview. So let's see that video. Okay.

IRS Agent Jensen: Why don’t we begin with you telling me about yourself and your business?

Jack Walker: OK, my business here is a one man show. I started it 4 years ago after working for a preparer in another firm. That’s where I got my hands-on training.

Now, I rely heavily on software and several newsletters that I subscribe to for tax law updates and training.

IRS Agent Jensen: I got you. Can you tell me more about your software and walk me through what happens when a client comes in to have their return prepared? Jack Walker: Well, I use BigMoney software.

It’s an awesome product! When a client comes to my office, I give them my intake sheet to fill out in the office or take home & bring it back later. Here it is, check it out. IRS Agent Jensen: OK, do you use this for both new and returning clients? What documents do you routinely ask them to provide to help you determine what credits and filing status they’re eligible for? Jack Walker: Everyone that comes to my office must fill out my intake sheet.

Based on that, I ask them questions about their situations and prepare the return But, it gets very busy here so sometimes I don’t ask if the client has all the documentation to verify what they’re telling me. I just rely on my intake sheet and questions in the software. I ask for Social Security cards, W-2’s/1099’s and 1098-T’s, but sometimes they don’t get them. IRS Agent Jensen: Alright. What specific due diligence training have you received?

Jack Walker: Honestly, Mr. Jensen, I really don’t have time or money to take a lot of training courses to stay current on due diligence or tax law changes. So, what the software covers, that’s what I use as my guide.

IRS Agent Jensen: I see. What steps do you take when you think there are questionable issues involving a client return claiming credits or Head of Household as a filing status?Especially if any information they give you appears to be incorrect, or incomplete or inconsistent. Jack Walker: I have additional questions I ask in those situations. IRS Agent Jensen: I see. May I keep this? Thank you How and where do you document any additional inquiries you make and the clients’ answers? Jack Walker: Based on those questions on that list I jot the answers on my legal pad and keep it with my copy of the final return.IRS Agent Jensen: Okay, thank you.

Let’s start looking at the cases. We can walk through a couple together. Then I’ll continue on my own.

Evette Davis: Okay, Courtney, back to you. I think the video is done. Go ahead, Courtney.

Courtney King: All right. Thank you, Evette. Hope you all enjoyed that. Thank you, again. So now our scenario reflects just a few of the questions that the examiner asked. And, of course, more details may be required for the agent to get a full picture. So when the exam is completed, the agent may propose penalties or there may be no changes at all. So now, let's watch another video and this is the closing conference. Can we please play that video?

So, now I’m afraid to ask, what’s the damage?

IRS Agent Jensen: I wish I could tell you that everything looked great. I can see you have clients where you met all four of the Due Diligence requirements: Form 8867, Worksheets, Record Retention and Knowledge. But, with some of your clients you didn’t meet the knowledge requirement.

You didn’t ask additional follow-up questions when your clients’ answers appeared to be incorrect, incomplete or inconsistent. You failed the record retention requirement for some clients as well. Jack Walker: What are you talking about? I didn’t think I was required to audit the client. When I ask questions, some clients refuse to answer.

What am I supposed to do? IRS Agent Jensen: I understand; but the requirements of Internal Revenue Code section 6695(g) for paid preparers are clear, and those are the guidelines you need to follow. You need to let your clients know that this is mandated by law. If they don’t answer your questions, you should let them know you may not be the preparer for them. Jack Walker: Ok I understand. Look, I don’t want to be in trouble with the IRS. So just give me the bad news.

IRS Agent Jensen: I am proposing penalties and here are examples why.

Remember, Mary Smith who took her two grandchildren? You said you knew Mary for 15 years.

You shared you did not ask questions like; Where are the parents? How long did the children live with her? Did she have any documentation to prove her claims? These are things you need to ask Mary every year, because situations can change The penalty is $1,040; that’s $520 for EITC and $520 for the Child Tax Credit because you did not meet the knowledge requirement.

IRS Agent Jensen: Here’s another one, Bill, the 35-year-old man who took AOTC. You said you reviewed his 1098-T, but you didn’t make a copy, nor did you ask him if he attended college before. So here, you didn’t meet the record retention requirement. When a client presents a document that you relied on to calculate the credit, then you are required to keep a copy. Also, here, you didn’t meet the knowledge requirement. Now, it might be Bill’s first-time attending college, but since he’s 35, there’s still a good chance Bill's going back to school. I’ve penalized you $520.

IRS Agent Jensen: Here’s my full report detailing the penalties proposed for each client. Most are like the situations I’ve already described.

All right. Well, I think we can all agree that the examination report and the proposed penalties were a pretty big blow and a big surprise to Mr. Walker. Now, keep in mind that to get to this point, Mr. Walker would have had previous contacts from the IRS and opportunities to improve. But here he is. So let's take a look at what Mr. Walker's options are. He can agree and sign the Form 5816, which is Report of Tax Return Preparer Penalty Case and make arrangements to pay. Or he can protest the assessment within 30 days, and the protest will be forwarded to the IRS Appeals Office. If he does neither of those things, the case will be closed and the penalty on Form 5816 will be assessed. There are other possible consequences for failing to meet due diligence requirements. The Justice Department's Tax Division and the Internal Revenue Service may seek a court order called an injunction that bars a person or business from preparing tax returns for others. Injunctions are an important part of our effort to assure honest taxpayers and return preparers that those who cheat will not get away with it. Finally, preparers, willfully filing fraudulent returns may be referred to the Office of Professional Responsibility or to our Criminal Investigation Division. Okay, so that's enough about those additional enforcement consequences. But before we change gears, I'll tell you one other way we carry out due diligence audits. In addition to those face to face interviews, we can conduct correspondence due diligence examinations of tax return preparers. We expect that there will be an expansion in the number of correspondence examinations conducted in the future. So, now that we've shared some of our educational programs and compliance actions, I think we have time for one last poll question. Evette, are you ready? Evette Davis: I certainly am, Courtney. Thank you so very much, sir. Audience, it sounds for our fifth and final polling question. And it is as follows, the penalty amount under Internal Revenue Code Section 6695(g) for one return or claim for refund filed in 2022 can be up to how much? A, $545; B, $2,180; C, 20% of the credit amount; or D, $500.

Think about the numbers. Think about the information that Christine shared a few minutes ago.

Think about what you already know. Think about the question and take a moment, click the radio button that best answers this question. A penalty amount under IRC section 6695(g) for one return or claim for refund filed in 2022 can be up to how much? $545, $2,180, 20% of the credit amount or $500. Okay, just want to make sure you all have a chance to read the question and give your answer, click that radio button, right? Just trying to give you a few more seconds to make your selection, because I really, really want to hit 100%. Before we stop, all right, so we're going to close the polling now. Let's go ahead and share the correct answer on the next slide. And the correct response is, B, $2,180. Now let's see what percentage of you answered that correctly.

Okay, looks like we've got 52%. Okay, Courtney or Christine, can you give us an explanation as to why, B, is the correct response? Courtney? Christine? Courtney King: Sure, I'll be happy to take that, Evette, and give some more information. Just remember everyone that there are four different tax benefits subject to due diligence. And the penalty can be $545 for each failure. So that total would be $2,180 on one return or refund claim. Okay. Right. So… Evette Davis: Well.

Very good. Okay, Courtney, thanks for that explanation. Yeah, I thought about that information that you gave us a few minutes ago. And this can be a little bit tricky if you're not paying attention. So thanks for that explanation. So I'm going to take it send it back to you, Courtney.

I think you've got some online resources that you can share with our audience members. Courtney King: I do actually and we are going to wrap-up today with some helpful free online resources that we have available for you. So the online Tax Return Preparer Toolkit, and you see the landing page shown here on was designed specifically for paid preparers, filing returns and claims for refund, claiming the EITC, CTC, AOTC, and Head of Household filing status. One toolkit resource many preparers take advantage of is our free online due diligence training module in both English and Spanish, and that can be completed for one continuing education credit. Again, that training is free and can be taken any time from the comfort of your home, office or other location. Another resource is our hot topics page, where we can alert you to recent updates or highlights. Preparers tell us that the page titled Child Related Tax Benefit Comparison is one of their favorites. So I encourage you to explore all of the information there. And everything we discussed today and so much more can be found on the toolkits such as the rules for all the tax benefits subject to due diligence, and guidance on reconstructing business income and expenses when needed. But just a word of caution, the toolkit is not going to be a primary resource for information about the Advanced Child Tax Credit. Your best way to find resources for CTC Advance Payments is from to search using the term Advance CTC that will take you to pages where the IRS features the most up to date information about those advance payments. There you will also find frequently asked questions, the online Advanced Child Tax Credit Eligibility Assistant, the Child Tax Credit Update Portal and non-filer sign-up tool.

Well, that brings us to the end of our presentation. We thank you so much for attending today.

And Evette, can you tell us what is next? Evette Davis: I certainly can, Courtney. Okay, folks, this is one of the most exciting parts of our webinars. This is our Q&A session. Hello, again, it's me, Evette Davis, and I will be moderating our Q&A session. And why boy do we have a lot of questions for our presenters. But before we start, I want to thank everyone for attending today's presentation, "Keys to Mastering Due Diligence Requirements and What to Expect During a Due Diligence Audit". Now, earlier I mentioned, we want to know what questions you have for our presenters. And here's your opportunity. So if you haven't input your questions, there's still time, just click the dropdown arrow next to the ask question field and type in your question, then click Send. Courtney and Christine are staying on with us. And we'll be answering your questions. I would like you to know that we may not have time to answer all the questions submitted. However, let me assure you we will answer as many as time allows. All right, so let me go over to the questions section. And so we can go ahead and get started and answer as many of your questions as possible. Okay, here we go. Looking at the question, so the first one here?

Not sure it? Let's see which one you're going, who's going to go for this one, let's see. Well, I still struggling to get a really good one here, so a lot of new here folks. Would a Q&A worksheet that I developed to be filled out over the phone due to COVID issues, be unacceptable records of the taxpayer's responses and answers to questions for due diligence purposes? That is a great and timely question. Who wants to take that one? Christine? Courtney? Christine Bass: Yeah, I can take that one. I think that's a great thing to do would be a Q&A worksheet that you can fill out over the phone with your clients. But read just remember, it can't cover everything that may come up. So if you are going over a Q&A with your client, and more questions come up, add those questions to it because no form, no intake sheet can cover every possible situation that your clients can incur, right? The clients have so many different situations between children and parents and living situations and all that. So, again, that's a great start. And also remember that you should and add any follow-up questions when their answers appear to be incorrect, incomplete and inconsistent. And you should contemporaneously document what those follow-up questions are and what your client's answers are as well. Evette Davis: That's good stuff. Christine. Again, I said this a little earlier. Documentation is key document, document, document, and this is awesome that they've built this Q&A worksheet. Okay. All right. This is another question I see. If we personally know the taxpayer and have been doing their taxes for years, do we need to ask the same questions every year? Another good question. Who's going to take that one? Christine Bass: I can do that one as well. Or you can take it Courtney, go ahead.

Courtney King: Well, you might guess, Christie, I'll take the next. Evette Davis: They're fighting of your questions folks, they want to, Christine Bass: Sure. Well, we all know most of you or many of you do know your clients from year to year, right? So as in one of our example, I believe it was the 22 year old, who have the two children. They did not have to ask any additional questions the next year about the two children, because it was verified the year before that they were adopted. However, if there's a grandparent that is taking their grandchild, well, in a prior year, you've established that, yes, that is their actual grandchild. But you don't know and you don't live with them. You don't know what those children that child's living situation is for the tax year, right? So with regard to questions about relationship, you don't have to ask about relationship again, you've already established it. But if you do have to ask questions about residency, again, where are the child's parents? Maybe they were working in Europe that year. Did they come back you know and left the child with the grandparents. Did they come back in the tax year? So again, with regard to relationship, no; but residency, yes, you would have to ask questions regarding that child's residency. Evette Davis: That's good. That's good. That's good. Okay, great questions in here. I'm sifting through, and I see a lot of great ones. So let's go to this one in particular, it says if information seems to be incorrect, inconsistent, or incomplete, and more questions do not change the preparers concern, should the EIC be used and Form 8867 used to show that the information seems questionable. How would they document that? Courtney King: Well, I'll take that question. That's a great question. That is a great question. So if the preparer is not comfortable with the answers that were given to the tax, that the taxpayer has provided to them during the course of the interview, they can utilize the other resources that we mentioned earlier just in terms of the documentation. And that could be a way to kind of lead the taxpayer to provide some of the additional information that is needed to determine eligibility for the credit. So looking at the documents that the IRS would ask for, if we were conducting an audit. And if the taxpayer realizes that they don't have these types of documentation or that they don't meet the rules, as outlined on the IRS information on the Form 886-H-EIC for the form for the CTC, then the preparer should advise the client that they don't meet the requirements under the law to claim those particular credits. So that is the way that they can kind of lead the taxpayer to the answer of determining whether or not they're eligible for one of those tax benefits. If they're not comfortable with the answers that they're being given, utilize the IRS resources that we have the documentation that we have to help kind of guide that part of the interview. Evette Davis: Love that, love that in giving that explanation to that client to love that. Okay. That's good. That's good. All right. So let's move to the next one. And this kind of piggybacks on another, a previous question. This person says, just to clarify, if they answer probing questions, but do not have supporting documents to support their answer, as a preparer, I can still prepare the tax return in the manner the taxpayer is asking, but just document the answers. Another little twist. Christine Bass: I would say, yes. Again, your job as a paid preparer is to ask questions and document the answers for due diligence. You might want to tell your clients that they may want to look into getting some of those documents, right, because if they're audited, it's going to be up to the client to ultimately prove to the IRS that they're eligible for the credit, right? So as far as due diligence wise, yes, if you've asked questions, and feel comfortable and cleared up anything that was incomplete, incorrect or inconsistent. Sure, you can go ahead and prepare that return with that credit, but just let your client know that the IRS may come calling during an audit, and they're going to need that documentation then, though. Evette Davis: Yeah, I understand. This prepares concern because they want to make sure they're protecting themselves as well, because again, they are being held to a standard as a paid preparer. So protect yourself folks. Think about that. All right. Thanks, Christine. Okay, this one says it is my understanding that VITA preparers are not subject to the same due diligence requirements paid preparers are, is this true? If so, why not? And I'm so sorry. This is going to be our last question. Who wants to take that one? Christine Bass: Sure.

I'll take that one again. So, yes, that is correct. VITA preparers are not subject to the same due diligence requirements, because they are not paid preparers. So again, 6695(g) is only for paid tax return preparers, which VITA people are volunteers, and they're preparing those returns for free. Now, do they ask questions? Should they do their best to verify that, those people that come in are qualified for the credits and the filing status that they want? Absolutely, and we want every client and taxpayer to get the full benefits that they're entitled to. So should that VITA preparer ask. Sure. Are they going to be held to a due diligence standard? No, again, because the Section 6695(g) only applies to paid preparers. Evette Davis: Okay. All right, folks.

So audience, like I said, that was all the time we had for questions. I do want to thank our speakers for sharing their great knowledge and expertise. And thank them for answering your questions. But before we close out the session, Courtney, what key points do you want the attendees to remember from today's webinar? Courtney King: Thank you, Evette. So I know we covered a lot of ground today, but there are a few takeaways that we'd like to leave you with today. The first is use the Tax Return Preparer Toolkit as a resource. Keep up with your procedures, and keep them up to date to ensure that you comply with the four due diligence requirements under the treasury regulation, and complete that Form 8867 when it's required. Keep the required records including copies of any client documents that you saw and relied on and records of your additional inquiries when applicable. Avoid due diligence letters and calls and visits and business enforcement actions by ensuring that you comply with the four requirements and be aware of the consequences for failing to meet due diligence rules. All right, everyone, on behalf of my colleague, Christine Bass and myself, we've really enjoyed speaking with you today.

And we look forward to seeing you all again next year. And also we can't leave out Evette, thank you so much for your help throughout the presentation today. Evette Davis: Thanks, Courtney.

Thanks, Christine. Okay, audience we are planning additional webinars throughout the year. So to register for upcoming webinars, please visit and use the keyword search Webinars and select Webinars for Tax Practitioners or Webinars for Small Businesses. And when appropriate, we will be offering certificates of completion for upcoming webinars. We invite you to visit our portal at to view archived versions of our webinars give us approximately three weeks to have this particular webinar posted. Remember, anything that you view, that's an archived version of this, we are not offering certificates of completion. Thanks to our speakers for a great webinar, and for answering our questions. If you attended today's webinar for at least 50 minutes after the official start time, you're going to receive a certificate of completion that you can use with your credentialing organization for one possible CE credit.

Again, the time we spent chatting before the webinar started does not count towards that 50 minutes. If you're interested in finding your local Stakeholder Liaison, you may send us an e-mail by using the address on this slide. Before we move on February 17 is the date that you should look out for to receive your certificate. If you don't receive it, please e-mail us at the address listed on this slide. We would appreciate that you take a few minutes to complete a short evaluation before you exit. Make sure you if you have any requests for future webinars or topics, please let us know that complete the survey, complete the comments section of the survey so that we'll know that information. Click the survey button on the right side of your screen to begin that if it doesn't come up, just to make sure you disable your pop-up blocker. It has been a pleasure to be with you here today. Thank you on behalf of the IRS and our presenters. Thank you for taking time out of your busy schedules to attend our webinar today. Thanks so much for your time and attendance. It's so important that you that we connect with you all we wish you much success in your business or practice. You may exit the webinar at this time.