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Treasury Regulation Section 1.6695-2 of the Regulations describes the four due diligence requirements a paid tax return preparer must meet when preparing a return or claim for refund claiming the EITC, CTC/ACTC/ODC, AOTC or HOH filing status.
Due diligence documents are the research and analysis of a company or organization done in preparation for a business transaction (such as a corporate merger or purchase of securities). Due diligence documents typically include the following categories; legal, financial, sales and marketing, and human resources.
For a return or claim for refund filed in 2022, the penalty that can be assessed against you is $545 per failure. Therefore, if due diligence requirements are not met on a return or claim for refund claiming the EITC, CTC/ACTC/ODC, AOTC and HOH filing status, the penalty can be up to $2,180 per return or claim.
By law, you must meet four specific due diligence requirements if you are paid to prepare a tax return or claim for refund claiming any of these tax benefits. Failing to meet the four due diligence requirements can result in penalties assessed against you under Internal Revenue Code 6695(g).
To meet the record retention requirement, you must keep a copy of your documentation referenced in question 4b, a copy of this Form 8867, a copy of any applicable worksheet(s), a record of how, when, and from whom the information used to prepare Form 8867 and any applicable worksheet(s) was obtained, and a copy of any
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What is due diligence? Basically, the IRS requires that a tax preparer who prepares a return for a client that claims any of these credits or head-of-household status thoroughly interview and question the taxpayer and collect documentation to show that the taxpayer is qualified for the tax advantage.
Four Requirements for Due Diligence Complete Form 8867, Paid Preparers Due Diligence Checklist, and submit it with the return. Make sure any claimed benefit is based on facts. Ask the taxpayer the right questions. Keep records for three years.
The due diligence requirement on Form 8867, Paid Preparers Due Diligence Checklist, for the child tax credit may apply to 2021 tax returns claiming qualifying children for the child tax credit even if the return claims no child tax credit after reconciling advance child tax credit payments made in 2021.
About Form 8867, Paid Preparers Due Diligence Checklist | Internal Revenue Service.
The due diligence process allows an acquirer to identify and assess risks, liabilities and business problems in the target company before finalizing the transaction, potentially avoiding losses and bad press later on.

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