IRS Publication 4687 – Paid Preparer Due Diligence – In the world of tax preparation, accuracy and compliance are paramount. For paid tax preparers, IRS Publication 4687 serves as a critical resource outlining due diligence requirements when handling claims for specific tax benefits. This guide breaks down the publication’s key elements, helping preparers avoid penalties while ensuring clients receive the credits they’re entitled to. Whether you’re a seasoned tax professional or new to the field, understanding these rules is essential for maintaining trust and compliance.
What is IRS Publication 4687?
IRS Publication 4687, titled “Paid Preparer Due Diligence,” is a comprehensive document designed to inform paid tax return preparers about their responsibilities under the law. Revised in February 2025, it emphasizes that due diligence goes beyond simply checking boxes on forms. The publication focuses on requirements for preparing returns or refund claims involving the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), Credit for Other Dependents (ODC), American Opportunity Tax Credit (AOTC), or Head of Household (HOH) filing status.
These rules stem from Treasury Regulation §1.6695-2 and Internal Revenue Code §6695(g), which mandate preparers to thoroughly verify client eligibility and compute credits accurately. Failing to adhere can lead to significant penalties, making this publication a must-read for anyone in the tax preparation industry.
Key Due Diligence Requirements for Paid Preparers
The core of IRS Publication 4687 revolves around four main due diligence requirements that paid preparers must follow. These ensure that claims are based on accurate, complete information:
1. Knowledge Requirement
Preparers must have a deep understanding of the tax laws for EITC, CTC/ACTC/ODC, AOTC, and HOH. This includes evaluating each client’s unique situation. If any information appears incorrect, inconsistent, or incomplete, additional inquiries are mandatory. A “reasonableness standard” applies—meaning a well-informed preparer would question dubious details. Document all questions and responses contemporaneously.
2. Computation of Credits
Credits must be calculated based on verified facts using applicable worksheets (from IRS forms or equivalent in tax software). This step prevents errors in determining eligibility and amounts.
3. Completion and Submission of Form 8867
Form 8867, Paid Preparer’s Due Diligence Checklist, must be completed and submitted with every relevant return or claim. The preparer personally certifies eligibility in Part VI, ensuring all questions are answered based on client data.
4. Recordkeeping
Retain records for three years from the filing due date or submission date (whichever is later). This includes Form 8867, worksheets, notes on information sources, and any relied-upon client documents. Electronic or paper formats are acceptable, with secure backups recommended.
These requirements apply per credit or status claimed, and non-compliance can trigger audits or penalties.
Specific Due Diligence for Each Tax Benefit
IRS Publication 4687 provides tailored guidance for each benefit to help preparers navigate complex eligibility rules.
Earned Income Tax Credit (EITC)
Focus on qualifying child tests (relationship, age, residency, joint return), income limits, and marital status. For self-employed clients, verify business legitimacy and expenses. Always probe inconsistencies, like claiming a relative without residency details.
Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), and Credit for Other Dependents (ODC)
Verify age, valid SSN (issued before return due date), U.S. residency, and dependency. Use tie-breaker rules for multiple potential claimants. Question claims involving non-U.S. residents or incomplete relationship info.
American Opportunity Tax Credit (AOTC)
Ensure the student hasn’t claimed the credit for more than four years, is enrolled at least half-time in a degree program at an eligible institution, and that expenses (tuition, fees, materials) are qualifying and paid by the taxpayer.
Head of Household (HOH) Filing Status
Confirm the taxpayer paid over half the home upkeep costs, a qualifying person lived with them for more than half the year, and they meet unmarried criteria. Inquire about household composition, custody, and expenses in shared or divorced situations.
Common Scenarios and Mistakes to Avoid
Publication 4687 highlights real-world scenarios to illustrate due diligence in action. Common issues include:
- Claiming Relatives for EITC/CTC: Always ask about parents’ ability to claim and residency proof.
- Young Parents with Children: Apply tie-breakers if the parent could be a qualifying child of grandparents.
- Self-Employed with No Expenses: Scrutinize for inflated income or fictitious businesses.
- Multiple HOH Claims in One Household: Determine who truly paid over 50% of costs.
- Divorced or Separated Clients: Verify custody agreements and support details.
Over 90% of due diligence penalties stem from knowledge requirement failures, often due to not making additional inquiries. Avoiding these pitfalls saves time and reduces error risks.
Penalties for Non-Compliance
Non-compliance isn’t taken lightly. The IRS imposes a $500 penalty (inflation-adjusted; $635 in 2025) per failure, potentially up to $2,540 per return if all four benefits are mishandled. Employers can face penalties if they lack proper procedures or ignore violations. Clients may incur accuracy-related penalties or bans from claiming credits for 2-10 years if fraud is involved.
The IRS uses tools like educational letters, phone calls, and compliance visits to enforce rules. Staying compliant protects your practice and clients.
Resources for Tax Preparers
IRS Publication 4687 directs preparers to valuable tools:
- EITC.IRS.gov Tax Return Preparer Toolkit: Offers continuing education, interview tips, FAQs, video scenarios, and updates.
- Publication 501: Details on dependents, HOH, and filing status.
- Form 8867 Instructions: Guidance on completion.
- Due Diligence Training: Online modules for CE credits.
Additional publications like 3524 (EITC Eligibility Questionnaire) and 4717 (Help Your Preparer Get It Right) aid client education.
Conclusion
IRS Publication 4687 is an indispensable tool for paid tax preparers aiming to uphold due diligence standards. By mastering these requirements, you not only comply with the law but also build credibility with clients. Stay updated via IRS resources, document thoroughly, and always prioritize accuracy. For the latest version, visit IRS.gov and search for Publication 4687. Proper due diligence ensures everyone benefits from a smooth tax season.