The information that follows is taken from this article provided by the IRS:
Auditing for Due Diligence Compliance
Audits for compliance with EITC due diligence requirements are another tier of our EITC Preparer Compliance Program. We look at returns with a high chance of errors completed by the same preparer and use that information to select preparers for audits. We may have contacted the preparer using one of the other tiers of our Preparer Compliance Program but we don’t use all of them for every preparer. See EITC Preparer Compliance – Focused and Tiered for information on the other tiers).
Before the filing season begins, IRS employees conduct due diligence audits based on the prior year EITC returns. We schedule an appointment in advance for these pre-filing season audits and we expect preparers to schedule the audit within 15 days.
During the filing season, we conduct due diligence audits without advance notice. We previously sent the preparers a letter (see Reaching Out to Preparers for examples of the letters).
We may also audit the preparer’s clients returns.
What Happens During the Audit?
During these audits, the IRS employee provides official IRS identification. The examiner interviews you about your business practices. If you are an employee of a tax preparation firm, the examiner also contacts your employer for an interview. The examiner is looking for compliance with all four due diligence requirements.
The examiner reviews at least 25 EITC returns reviewing the following documents:
- the preparer’s due diligence records,
- the probing questions asked and the client’s responses,
- all questionnaires, checklists, worksheets and
- copies of any client provided documents relied on to determine eligibility for EITC or to compute the amount of EITC.
If the examiner identifies failures to meet due diligence on any of the returns, they may expand the audit to more returns.
During the audit, the examiner looks for evidence showing the preparer met the knowledge standard. To meet the knowledge standard, a preparer must:
- Know the law
- Ask the right questions, especially when the client gives information that appears incorrect, inconsistent or incomplete
- Document the questions asked and the responses given by your client
- Get all the facts to make sure your client truly qualifies for EITC
While auditing for due diligence, we also ensure that the preparer is in compliance with the PTIN, Preparer Tax Identification Number requirements and his or her personal tax return filing requirements.
What Happens if My Records Don’t Show I Met my EITC Due Diligence Requirements?
We assess penalties when we find the preparer did not comply with EITC Due Diligence requirements. We continuously improve our audit selection process to find those preparers with a high likelihood of filing returns with EITC errors. Using this process, we penalized over ninety percent of the preparers we selected for audit.
We assess most penalties against preparers who did not meet the knowledge standard. The penalty for not meeting your EITC due diligence is $500 per return. Other return-related preparer penalties can be as much as 5,000. Read more about Consequences of Not Meeting your Due Diligence here.
What if I Don’t Agree with the Penalties?
Are You a Certified Acceptance Agent?
To reduce the burden on preparers, IRS combines the due diligence audits with certified acceptance agent visits as needed.
- EITC Preparer Information on irs.gov
- Consequences of Not Meeting Your Due Diligence Requirements
- EITC Preparer Compliance – Focused and Tiered