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Karen Brehmer: Well, 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 Audits". We're glad you're joining us today. My name is Karen Brehmer and I'm a Stakeholder Liaison with the Internal Revenue Service and I will be your moderator for today's webinar, which is slated for 100 minutes. We have a lot of participants on today's webinar. So we expect to have a lot of questions. And considering this, we anticipate we'll go a little bit longer than the 100 minutes to get to as many questions as possible. And also, before we begin, if there is anyone in the audience that is with the media, please send an e-mail to the address on the 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, the webinar will be recorded and posted to the IRS video portal in a few weeks. This portal is located at But do please note, continuing education credit or certificates of completion, are not offered if you view any version of our webinars after the live broadcast. We hope you won't experience any technology issues today. But if you do, this slide shows helpful tips and reminders. We've posted a technical help document you can download from the Materials section on the left side of your screen. It provides the minimum system requirements for viewing this webinar. And it also has some best practices and quick solutions. If you have completed and passed your system check, and you're still having problems, please try one of the following. The first option is to close the screen where you're viewing the webinar and re-launch it. And the second option is to click on Settings in 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 now by clicking on the Materials drop-down arrow on the left side of your screen as shown on this slide. Closed captioning is available for today's presentation. If you're having trouble hearing the audio through your computer speakers, please click the closed captioning drop-down arrow located on the left side of your screen. This feature will be available throughout the webinar. During the presentation, we'll take a few breaks to share knowledge-based questions with you. Now, at those times, a polling style feature will pop up on your screen with a question and multiple choice answers. 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 a moment to disable your pop-up blocker now, so you can answer the questions when the polling questions come up. If you have a topic-specific question today, please submit it by clicking the Ask Question drop-down arrow to reveal the textbox. Type your question in the text box and then click Send.

But this is really important, okay. Please do not enter any sensitive or taxpayer-specific information. Thank you for that. Now, before we start the webinar today, we want to hear from you.

We'd like you to take a minute to answer the following question. "What do you think will be your greatest challenge in preparing tax returns this year?" Enter your response in the Ask Question field, and thank you for sharing your responses. I can almost guess what many of you will say, but we'll see what you actually say once you enter your information in the Ask Question button.

Again, welcome. And thank you for joining us for today's webinar. Before we move along, let me make sure you're in the right place like the flight attendants do. Today, employees from our Wage and Investment Division will share information related to "Keys to Mastering Due Diligence Requirements and Audits". This webinar is scheduled for approximately 100 minutes, but as I mentioned earlier, we'll probably go a little longer to get as many questions answered as possible. Let me introduce today's speakers. Shanonda Scott-Ray is a Veteran Senior Program Analyst in the Refundable Credits Administration within the Wage and Investment Division of the IRS. She is responsible for coordinating with various external stakeholders to encourage eligible taxpayers to apply for the EITC, CTC and AOTC, and to help paid tax return preparers understand and meet the due diligence requirements. Courtney King began his IRS career 20 years ago, and is a Senior Program Analyst in the Refundable Credits Administration. He has more than 10 years' experience interviewing and educating paid tax return preparers, including speaking at the Annual IRS Nationwide Tax Forum. He is an expert in the due diligence requirement for the EICC, CTC, AOTC and Head of Household filing status. Christine Bass is also a longtime Senior Program Analyst in the Refundable Credits Administration. She works in close partnership with our Field and Campus Examination and Compliance Division, to administer the IRS' programs for preparer due diligence education, examination and penalties. She has been with the IRS for over 30 years with experience as a revenue agent in the Small Business/Self-Employed Division. And now, I'll turn it over to Shanonda to begin our presentation. Shanonda? Shanonda Scott-Ray: Good afternoon and thank you for joining us today for this important subject. As Karen mentioned, my name is Shanonda Scott-Ray. I am a Program Analyst in the Refundable Credit Administration Office. I am joined today by my colleague, Courtney King, and Christine Bass. Our goal today is to provide you with the knowledge and resources you need to understand and meet your due diligence requirement, review scenarios where additional inquiries should be asked and explain when documents may be needed from your client. By the end of this session, you will understand how and when we contact paid tax preparer, when there are concerns regarding their due diligence. These methods may include educational letter, educational phone call, educational knock and talk visits, and compliance due diligence examinations, which may be conducted in person or via correspondence.

We will also cover the consequences for failing to meet paid prepared due diligence requirement.

These consequences may include client audit, preparer penalty, preparer injunction, preparer referrals to the IRS Criminal Investigation Division or to the Office of Professional Responsibility or additional enforcement action. And before we conclude this webinar, we'll share information on free resources available to assist you. The Internal Revenue Code Sections, as it stands today, allows penalties to be proposed against prepares for failing to be diligent when completing tax returns or claim for refunds containing 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 the Head of Household Filing Status. I know that's a lot of acronyms, but you will hear them throughout the presentation today. Now, today, we're not explaining the rules for claiming each of these tax benefits. But later, we will touch on a few of the rules such as the relationship and residency test, as we explore due diligence requirements. Also in this presentation, we will reference CTC for all 3 forms of that credit, which includes CTC, ACTC and ODC. So let's begin with an overview of the four due diligence requirements that many of you are probably very familiar with. Now, in order to understand the IRS preparer education and compliance effort for returns or refund claims for the tax benefits we just mentioned, let's do a review, just in case you need a refresher. Section 1.6695-2 of the treasury regulation describes the four due diligence requirements that a paid tax preparer must meet when preparing a return, or claim for refund claiming certain tax benefits. These requirements include properly completing and submitting the Form 8867, which is titled Paid Preparer Due Diligence Checklist. Also, you must properly compute the credit. You must also meet the knowledge requirement and keep the required record. A paid tax return preparer can face potential consequences, including penalties for not meeting the due diligence requirements. A firm employee, a preparer can also be subject to consequences for an employee's failure to follow due diligence rule. Now, if new employee pay tax return preparer is very important to have a due diligence process in place for your office. Publication 4687 titled Paid Preparer Due Diligence is a great guy to assist you. Another resource we'll mention throughout our webinar is the online preparer toolkit located on In the toolkit, you will find link to the treasury regulations for the four due diligence requirements. So you may be wondering, exactly where does the IRS's authority to assess due diligence penalties come from? Well, it is under section 6695(g) of the Internal Revenue Code, which states a paid tax return preparer completing a return or claim for refund who fails to comply with the four due diligence requirements in the treasury regulations, when determining eligibility to file as head of household or eligibility for or the amount of the EITC, CTC or AOTC, they'll pay a penalty of $500 for each such failure. And this amount of the penalty may be adjusted for inflation, or return spouse in 2021, the penalty is $540 per failure, per return. It can apply to each tax benefit claims on a return. So that means, if you are a paid - if you are paid, I'm sorry, that means that you are paid to prepare a return, claiming all three of those credits and the head of household filing status and you fail to meet your due diligence for all four tax benefits. The IRS may assess a penalty of $540 against you per failure, or a total of $2,160 per return. Again, we encourage you to visit the prepared toolkit on In the toolkit, you will find more guidance and resources to help you and also you will find links to the Internal Revenue Code for the due diligence penalties under 6695(g) not being diligent can also be costly to your clients. Taxpayers, who seek assistance from a professional tax return preparer, expect the preparer to know the tax law and prepare an accurate return. Now, if we examine your client's return, and disallow the head of household filing status, or EITC, CTC or AOTC, your client must pay back any amount refunded in error, plus any additional amount assessed with interest. And they may be banned from claiming the applicable credit or credits for 2 years in the case of reckless or intentional disregard of the rule, or 10 years, in the case of fraud. Now, let's review the very first due diligence requirement, complete and submit the Form 8867. Form 8867 can serve as a reminder to ask all relevant questions to ensure the information your client provide is accurate and complete. But it is not a substitute for your due diligence. So what goes into properly preparing the Form 8867, you may be wondering? Well, you must address a number of items. We'll recap them for you. Part I contains questions to ensure prepared adhere and perform due diligence for the benefits included on the return or claim for refund. Some of those questions include that you complete the returns based on information from your clients, or information you reasonably obtained, or knew. Did you compute the credit and complete all applicable credit worksheet, form and schedule? Did you interview the client? Make a record of your questions and the clients responses? And review information to determine eligibility for each credit or head of household filing status and the amount of each credit for information that appeared incorrect, inconsistent or incomplete. Did you make a record of your reasonably additional inquiry, the responses received and the impact of the information on the credit or the head of household filing status? Did you keep copies of required items and lists any documents you relied on? Did you ask whether your client has or can get records to prove eligibility whether any credit was disallowed in a prior year, and if applicable, whether the income and deductions on Schedule C are correct? Now, Part II, III, IV and V includes specific eligibility questions for EITC, CTC and the head of household filing status in addition to documentation questions for AOTC. And then lastly, Part VI is the preparer certification that your answers are true, correct and complete. Remember, you may visit the online preparer toolkit for guidance on using the form and also a number of tips and other helpful information about the Form 8867. Now, here is what the regulation specifically says about the Form 8867. Based on information obtained from your client, or information you otherwise reasonably obtain or know, you must complete the Form 8867 and electronically submit the completed form to the IRS with the e-file return or claim or a return not e-filed provide a copy of the completed form to your client for inclusion was the filed return or claim. Or if you are the non-signing preparer, provide a completed electronic or paper copy of the form to the signing preparer for inclusion with the file, return or claim. If you provide your client with a paper tax return or claim for refund to send to the IRS, stress the importance of your client including the Form 8867 with the return sent to the IRS. The form doesn't address all of the eligibility requirements for each tax benefit. The IRS has developed tools, publications and forms to help you. They can all be found on the preparer kit. Now, if you submit a return or a claim for refund without the Form 8867 as required, do not send us the form separately. Doing so has no effect on a potential penalty assessment. You make it an alert with your e-file acknowledgement or a warning letter during the filing season as a reminder to include the form with future returns submitted with the benefit. Now, Karen is going to help us out. We are going to check your understanding with a polling question. Karen, are you ready? Karen Brehmer: I am. I am. Okay, sounds good to me. Let's do our first polling question. When preparing your return, you can meet the Form 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 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 D, all of the above. So take a moment and click on the radio button that you believe best answers the question. And I'll give you a few more seconds of lovely silence for you to give you some time to make your selection. Okay, we hope you've all had enough time to answer it. And we're going to stop the polling now. And let's share the correct answer on the next slide. And the correct response is D, all of the above. So let's take a look at what percentage of people got this one correct. Ooh, 96%. That is fabulous. Even though that is a fabulous correct response rate, Shanonda, I'm going to ask you if you can quickly go over this point with our audience.

Shanonda Scott-Ray: Yes, I can, Karen. So just as a reminder, the requirement is met if the preparer e-files the form with the returns, includes it with a paper return or provides it to the signing preparer. Great job, everyone. The second due diligence requirement relates to computing the applicable credit, based on information obtained from your client or information you otherwise reasonably obtain or know, you must complete the appropriate worksheets to compute each applicable credit, such as those found in the instructions for Form 1040 or the Form 8863 for education credit, or complete the computations using your own similar worksheet and make sure to keep records showing what information you use and how you made the computation. Now, not only do you have these options, you also have the benefit of having these worksheets included with most professional tax preparation software. Now, at this time, my colleague, Courtney King will explain the third due diligence requirement. Courtney, are you ready? Courtney King: I am ready.

Thank you so much, Shanonda. Now, as Shanonda just mentioned, we've now arrived at the third due diligence requirement. As part of performing due diligence, you must rely on your clients' statements as well as your knowledge, your experience, and your interview expertise to determine whether the client is eligible for the applicable credit or head of household filing status. 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 responses, as well as your client's responses. We'll cover that a little bit more later. It's a great practice to develop your own interview process and apply it to every client and every return filed every time. In a few minutes, we're going to demonstrate each aspect of the knowledge requirement. To meet the requirement, you must not know or have reason to know that any information you used to claim the credits or head of household filing status is incorrect. You cannot ignore the implications of any information given to you or known to you. 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 is incorrect, inconsistent or incomplete. At the time you interview your client, make and keep a record of these inquiries as well as your client's answers. So in other words, know the law and use that knowledge of the law to ensure that you are asking your client the right questions to get all relevant information. The Treasury regulation gives a number of examples of meeting this knowledge requirement. So today, let's take a look at several of those examples pulled right out of the regulations, showing how to address situations when information may seem incorrect, inconsistent or incomplete. To repeat for you, the standard in the regulations is whether a reasonable and well-informed preparer, knowledgeable in the law, would conclude the information furnished appears incorrect, inconsistent or incomplete. If so, you must make those additional reasonable inquiries and keep a record of them. We'll start with a simple scenario involving our client Andrea. In 2020, Andrea pays a preparer to complete her 2019 return. Andrea fills out the preparer's standard intake questionnaire, stating that she's 22-years-old, has never been married, and has 2 sons, ages 10 and 11. Based on the intake form and other information, Andrea shows that the boys live with her all year in 2019. And the preparer believes Andrea may be eligible to claim each boy for the EITC and CTC. However, Andrea provides no information to the preparer. And the preparer does not have any information from other sources to show that the relationship between Andrea and the boys. Is there an apparent inconsistency between Andrea's age and the ages of the boys?

Absolutely, there is. Even without being knowledgeable in the law, a reasonable person might be scratching their head. The information so far seems incorrect, inconsistent or incomplete. So in that case, how can the preparer resolve the apparent inconsistency to meet the knowledge requirement here? The preparer must make reasonable inquiries to verify Andrea's relationship to the boys and document these inquiries and the responses contemporaneously. That is at the time the return is prepared. So if we assume the preparer made the required inquiries, what do you think happens next with Andrea and the boys? Well, consider this. As it turned out, Andrea's 2019 return, for her 2019 return, the preparer made sufficient reasonable inquiries to verify that Andrea had legally adopted both children and he made a record of those inquiries. Does that resolve the apparent age inconsistency for 2019? Absolutely, it does. So what happens when Andrea goes back to the preparer to file her 2020 return? Again, for tax year 2020, the preparer believes Andrea may be eligible to claim the EITC and CTC once again for the boys. For her 2020 return, is there an apparent inconsistency between Andrea's age and the ages of her son? No, there isn't. The preparer resolved that when completing her prior year return. Therefore, when completing Andrea's 2020 return, the preparer is not required to make additional inquiries to resolve any apparent inconsistency between Andrea's age and the ages of her son. Good job, everyone. Next, let's consider, Taira. Now, in the year 2021, Taira pays a preparer to complete her 2020 return. Taira fills out the preparer's standard intake questionnaire, stating that she has never been married, and her niece and nephew lived with her for a part of 2020. Based on the intake form and other information, the preparer believes Taira may be eligible to file as head of household and claim her niece and nephew for the EITC and CTC. Remember our standard with a reasonable and well-informed tax preparer knowledgeable in the law, conclude that the information furnished so far appears incorrect, inconsistent, or incomplete. I'd say, yes, it is incomplete so far. So how can the preparer resolve the incomplete information? Well, the preparer must make reasonable inquiries to determine whether Taira can claim EITC, CTC, and head of household filing status. This includes reasonable inquiries about relationship and residency, the children's income and the sources of their support, and Taira's contribution to the household upkeep costs.

The preparer must document or make notes of these inquiries and Taira's responses at the time the preparer completes the return. Taira has a number of questions to answer for the preparer to know whether the children meet the test to be claimed for the EITC or CTC and whether she can file as head of household status. Good job, everyone. So now at this point in time, let's take a quick second to just breathe and stretch out. As we are now going to see what happens when Michael goes to get his return preparer. Now, as they used to say in school, you want to remember this next example as you might see it in a polling question. But make a note. Our client Michael here is a 32-year old taxpayer and he has never been married. He pays a preparer to file his return. After he fills out the preparer standard intake questionnaire, Michael shows the preparer a copy of the Form 1098-T, titled Tuition Statement, which he received from State University. The form verifies that the university received $4,000 for qualified tuition and related expenses for his attendance and that he was at least a half time undergraduate students.

The preparer believes he may be eligible for the AOTC. Now just based on what the preparer knows so far, does the information furnished up to here incorrect, inconsistent or incomplete? If you said, yes, I would agree. Yes, Michael's information is incomplete so far. The preparer must make reasonable inquiries to determine whether Michael is eligible for the AOTC, because Form 1098-T does not contain all of the information needed to determine eligibility for the AOTC. For example, is Michael pursuing a degree or other post-secondary credential? Has the credit already been claimed on behalf of Michael's for four tax years? Was any of the tuition paid by scholarship or grant? Has Michael been convicted of a drug felony? The preparer must document their inquiries, and Michael's responses at the time the return is prepared. Well done everyone.

We are almost done with these examples from the treasury regulation, but we have one more for you to consider. Our last example from the regs involves David. So David goes to a preparer to pay to have his return completed. During the preparer standard intake interview, David states that he is 50 years old, has never been married, and has no children. He further states that he was self-employed, earned $10,000 from his business, and had no business expenses or other income.

The preparer believes David may be eligible for the EITC or self-only. To meet the knowledge requirement, the preparer must make reasonable inquiries to determine whether David is eligible for the EITC, including reasonable inquiries to determine whether his business income and expenses are correct. And the preparer must make a contemporaneous record of these inquiries and David's responses under or over reporting business income and expenses to claim more EITC than is allowed, is one of the common errors we see when self-employed taxpayers claim the EITC. You must ask additional questions, if the information your client is giving you appears to be incorrect, inconsistent, or incomplete. For example, based on the type of business, is it reasonable for David to have no business expenses? Is the business income he describes the 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. From your day-to-day experience in the community, consider what you know about employers and industries in 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 the client, their personal and business circumstances, as well as their past filed returns. Does it all make sense? Go ahead and ask those follow-up questions as needed. Even if you think you already know the answer. Life changes daily, so to do ask. Keep in mind, most software cannot be relied on 100% to ask every question that may be needed in every situation. There are times when you will need to ask those additional questions.

Well, hopefully these examples straight from the regulations will help you. There are other examples in the regs if you'd like to see more. And as a reminder, you can link to the due diligence regs from the preparer toolkit. I really do get a sense that you all are getting the hang up is right now. So we're going to go ahead and check your poll, with your knowledge and understanding with a polling question. Are you ready, Karen? Karen Brehmer: I am ready. Thank you, Courtney. Audience before we do this polling question, I want to quickly mention something to address some of the questions that are coming in. People are asking how they can find the tax preparer toolkit, and what terms you should use in the search box. I used EITC toolkit, I used EITC toolkit on Google and I found it right away. And I used EITC toolkit on and I found it right away. So I hope that helps you find it. So now we will continue with our polling question and this is our second one. In determining Carmen's eligibility to claim EITC and CTC/ACTC, she tells you that she and her niece, Sofia, lived alone together all year. Based on your interview with Sofia's parents when you completed their return, you know Sofia lived with her parents all year. In preparing Carmen's return, can you ignore what you know about Sofia's residency? A, yes, only information from your client is considered; B, no you cannot ignore the implications of what you know; C, no, a reasonable and well-informed tax return preparer would conclude Carmen's information is incomplete or incorrect. I switched up those 2 words. Sorry about that. D, both B and C. We'll take a moment, look at the question again, look at the answers. And click on the radio button that best answers the question. That was a long one to read and figure out, so we'll give you a few more seconds to make your selection and it'll be quiet for a few seconds here. Okay, we're going to stop the polling now. And I'll share the correct answer on the next slide. And the correct response is D, both B and C. So let's take a look at how many responded correctly. Ooh, 95%. Well done, people, well done. So I think you've got that one. So, Courtney, it's back to you. Courtney King: Thank you so much, Karen, and great job, everyone. Now, some paid preparers shared with us that they're uncomfortable asking those probing and sometimes sensitive questions that may be necessary to meet the due diligence knowledge requirement. In this case, what steps can a preparer take? Well, one option you can consider is reviewing with your client, the forms IRS uses to request documentation during the correspondence audit. Also, tell your clients here's what they will need to support their claim if they're audited by the IRS. Ask them, "Do you have these documents or can you get them?" Most of the forms are available in both English and Spanish. For example, you could use Form 886-H-EIC titled, "Documents You Need to Send to Claim the Earned Income Credit on the Basis of a Qualifying Child or Children." Review the document with your client. Show the client the legal requirements a qualifying child must meet. Then confirm with your client, whether they have or can get the supporting document. If you review a document and rely on the information to prepare a return, be sure to keep an electronic or paper copy of that document. Remember, you can find other Forms 886-H for the other tax benefits and resources in the online tax return preparer toolkit. Karen, I know we just completed a polling question, but I'd like to take a pause here for another one, if that's okay. Karen Brehmer: That is okay. Then it keeps me and everybody else on our toes by having this polling question come up so quickly. So you really shared some important information, especially that 886-H Forms, that's a great series. So we can see how well the audience was paying attention now. So, audience, here is our third polling question. To meet the due diligence knowledge requirements should you request documentation when preparing a return for a client claiming the EITC for her grandchild? A, yes, documentation is always required; B, no, if responses to probing questions are recorded and appear correct, consistent and complete; C, no, grandparents are never required to provide supporting documents; or D, no, a grandchild is not eligible to be claimed for the EITC. So, again, read that question again, read over the answers again, select that radio button that best answers the question. I'll give you a few more seconds and it'll be quiet while you answer. Okay, we're going to stop the polling now. We will share the correct answer on the next slide. And the correct answer is B, no, if responses to probing questions are recorded and appear correct, consistent and complete. So let's see what - ooh, that was a tough one, 38%. That must have been a very confusing question. And I think it should be explained or reinforced a little bit. So, Courtney, would you do that? Courtney King: I would be glad to. So let's talk about it for a second. Now, to my audience, 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. But in those cases where you're uncomfortable asking the probing and sometimes sensitive questions that might be needed to satisfy your due diligence, as I mentioned before, we suggest incorporating forms, such as the Form 886-H-EIC, which again is the form the IRS uses to request documentation during an actual taxpayer correspondence audit. Here's the bottom line here, would a reasonable and well-informed tax return preparer knowledgeable in the law conclude that the information furnished to you by your client appears to be correct, consistent and complete. If not, and your client has not provided adequate responses to your probing questions, then requesting client document can be helpful to meet the due diligence requirement. Well, so far, we have covered the first three due diligence requirements in the regulation. So at this point in time, my colleague Shanonda is going to discuss the fourth requirement. Shanonda? Shanonda Scott-Ray: Thank you, Courtney. And as Courtney has mentioned, we are at number four, which is last, but equally important. And the final requirement is record keeping. You must keep the required records. So be sure to keep copies of the Form 8867 and the applicable credit worksheet, along with a record of how, when, and from whom you obtained the information used to prepare them. Also, keep a record of all additional inquiries made to comply with the knowledge requirement, along with your client's responses, and copies of any client-provided documents you relied on to determine eligibility for the tax benefit or to compute the amount of the credit. Remember, keep these records for 3 years from the latest date of the following that apply: either the due date of the return, that's without considering extensions of time to file; or the date the return or refund claim was e-filed; or if you're giving a paper return to your client for them send in, the date you gave it to your client for signature; or if you didn't sign the return, the date you gave the signing tax return preparer the part of the return that you were responsible for. Now, remember to keep these records in a secure place in either paper or electronic format. Now, due diligence is important to us all. So let's recap with, I think you guessed it, another polling question.

Karen, do you have the question ready? Karen Brehmer: Why, it just so happens that I do. Thank you, Shanonda. Audience our fourth polling question is when preparing a return or claim for refunds claiming the AOTC, what documents must you keep? A, student grade report; B, Form 1098-T Tuition Statement; C, any documents you relied on to complete Form 8867 or the computation worksheet; or D, both B and C? So we'll take a minute and look at that answer, the question rather and those answers again. And click on the radio button that you think best answers the question. We'll give you a few more seconds to make your selection. Okay, we're going to stop the polling now. And let's share the correct answer on the next slide. And the correct response is D, both B and C. Let's take another look here and see how you did on this one. Ooh, ooh, you redeemed yourself after that last tuff one that we had. You got 92% on this question. So good job, everybody. And that response is great. So we can continue. So, Shanonda, it looks like it's back to you. Shanonda Scott-Ray: Well, thank you, Karen, and great job, everyone. I think we can all agree that's enough about the due diligence rules for now. And now we've covered a lot. So let's take a little time to stretch, maybe grab a drink of water or coffee or whatever your beverage of choice may be. And stay with us for a while as we reviewed the way that we contact and monitor paid preparers to provide due diligence, education, and enforcement. Now, you may not believe it, but we share the same goal. We want to ensure every taxpayer receives the credit and filing status that they are entitled to. And we want you as pay prepares to be successful in preparing accurate returns claiming the appropriate benefits that your clients are entitled to.

So, what are the various methods we use to help preparer comply with due diligence? Well, I tell you, one of the most effective ways we contact you is through educational letter. We sent a letter based on potential errors we observed. Another way is through educational phone calls. And yes, we do make phone calls to paid preparers. We also make educational visits called Knock and Talk visit referred to as KTV to discuss current due diligence laws, address potential due diligence error and how to comply in the future. During these visits, an IRS agent will review a sample of your client returns to help to preparer avoid a potential due diligence examination in the future. Some errors can be caused by not knowing the law or misinterpreting the law or even accepting questionable client provided information at face value. Other times, errors can be due to reckless or intentional disregard of the law for fraud. Now, if we contact you using any of our methods, we will continue to monitor the returns you prepare, if we have sent letters, made phone calls, or conducted a Knock and Talk visit, and there still seems to be some issues with your due diligence, we may conduct a due diligence examination either via mail or in your business office to review your client return. This examination may result in penalty. Now in order to remove some of the mystery surrounding this process, I'll begin by reviewing the content of our letter and explaining their purposes. The first letter is our Letter 5025. This letter is mailed in the fall. It is sent to paid preparers to preparer tax returns claiming one or more of the benefits for their clients and our review of these returns indicate that the preparer may not have adequate due diligence procedures in place. The letter is educational, but it includes a compliance message that outlines what could happen if due diligence compliance is not met. The letter is sent during what we refer to as the pre-filing season for the upcoming year. And it is based on the previous filing season returns that you have prepared. It will not include specific client information. So in short, this letter is a cautionary educational letter that does not identify specific tax returns filed by the preparer. To be clear, the tax benefits that are referenced in the letter that paid preparers must comply with to satisfy due diligence are EITC, CTC, AOTC and the head of household filing status. Now the next letter is Letter 4858. This letter is sent early in the filing season, to prepares when their filing appears to be incorrect. This letter can be sent to both new and experienced preparers who found highly questionable returns claiming the credits or the head of household filing status. This letter reminds preparers of their due diligence requirements, and that those requirements may not have been met on the returns filed so far. And that under Internal Revenue Code section 6695(g), failure to be diligent can result in penalties as a result of an exam. The suspension or termination of their e-filing privileges, or a referral to the IRS's Criminal Investigation Division. Now, like the Letter 5025, this letter will not provide any information on specific returns that may be questionable. That brings us to our final letter, Letter 5364. It is sent to paid preparers to remind them of the requirements to submit the Form 8867 titled Paid Preparer Due Diligence Checklist. It is sent when we observe multiple paper returns missing the Form 8867.

The letter reminds preparers that the form is due when any of the benefits subject to due diligence are claimed. This is especially significant for preparers who in the past didn't need to file the Form 8867, because their clients did not qualify for the credit, but must now do so, because of the inclusion of the head of household filing status or the new ODC credit as a part of Tax Cuts and Jobs Act. Now failure to include the form may result in a penalty of $540 per failure with a maximum penalty of $2,160 per return. So, if you receive one of our letters in the mail, what do you do? Panic; ignore it. No, don't do either. If you get one of these letters from us, the best reaction is to read it and take corrective action. As I mentioned, we send letters to help preparers complete correct returns in the future by following the due diligence requirement. We do not propose any penalties against preparers when we send any of these letters.

But if the returns filed continues to meet our selection review criteria, we may follow-up with a phone call and additional letter, a client audit and educational visit or even a due diligence exam. So what can I prepare do to improve their due diligence compliance or returns prepared and issued from his or her office? Well, 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 is a good idea to revisit your procedure review, rules applying to the credit and implement any additional steps to ensure accuracy. Now, as I mentioned earlier, we also reach out to tax preparers over the phone. Now, let me take a minute to discuss those educational phone calls. First off, I understand there can be some confusion about when a call to your office is legitimate. All of us have heard about this telephone scam, where fraudsters are calling taxpayers claiming their outstanding taxes are due and demanding money. This is not the IRS. And calls to preparers are different. Calls to preparers are exempt from directives about IRS not calling taxpayer. IRS can and we do call preparers. For example, during the pre-filing season and the filing season, we make phone calls to preparers who received prior treatment and continue to appear to submit returns not meeting their due diligence requirement. Now, these calls are educational, but also deliver a compliance message. We call to help you avoid errors in preparing your clients' returns as well as avoiding potential due diligence penalty. Remember, that these are to help get due diligence right. When we make calls, we will try several times with all of the available contact numbers. The IRS employee may mention a previous IRS contact and that this is a follow-up call. They will also act to confirm the preparer's identity in order not to make an unauthorized disclosure and confirm information such as the business address or PTIN. No specific information about clients is provided nor will we ask the preparer to disclose client information. Instead, the IRS employee will explain to the preparer that the return submitted to the IRS are being monitored and reviewed and a pattern of questionable tax returns being filed continued. There will also be a review of due diligence rules with the preparer and a discussion on possible consequences if questionable returns continue to be received. Information on due diligence education products and training will be offered as a part of the call as well. We may also provide education through an office visit. Now, Karen, let's take some time out for another polling question. Karen Brehmer: Okay, sounds good. I just happened to have another one. Audience, here's our fifth polling question. 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, requests clients records? So take a look at the question again. Take a look at the answers again and click on that radio button that you believe best answers the question. And I'll give you a few more seconds of silence to make your selection. Okay. We're going to stop the polling now. And we'll share the correct answer on the next slide. And the correct response is, A, help preparers meet due diligence requirements and avoid penalties. Let's take a look at another this one here and see how you did. Woo-hoo, good job people. You got 96%. That is great.

And so, that's enough with that. So, Shanonda, I think I will turn it back over to you. Shanonda Scott-Ray: Well, thank you, Karen, and great job. All right. So I have one more type of educational activity that I want to discuss. Known to us at the IRS as a knock-and-talk visit or a KTV, IRS examiners are accompanied by a criminal investigation agent for KTV. Now, we also have KTV light. While this activity is just like a regular KTV, the KTV light are conducted by examiners alone. These educational visits are made in person to preparers who appears to not be meeting their due diligence responsibility, when preparing their client's tax return. The face-to-face visits are conducted in the fall. Afterwards, these preparers' filing behavior will be monitored. If it doesn't appear there is an improvement in meeting the requirement, then a due diligence exam may be conducted. These visits focus on returns being filed by the preparer. So what if we determine is necessary to conduct a due diligence exam? Most of you may be wondering how a due diligence exam is undertaken. What is the process? Well, let's take a look at an example of how we notify tax preparers that they'll be subject to an exam. Courtney, do you want to set up a scenario that we'll be using for today? Courtney King: Absolutely, I would be glad to, Shanonda. Thank you. So, today, we're going to follow the experiences of Mr. Jack Walker, who's a paid preparer, who's been chosen for an in-person due diligence examination of returns that he filed in the year 2020. Mr. Walker received an IRS letter that notified him of the examination as part of the paid preparer due diligence program. And the letter asked him to call IRS agent Jensen to set up an interview. You can probably imagine that Mr. Walker is not happy about the audit. But he just wants to go ahead and get it over with. He calls agent Jensen to set up a time for a face-to-face appointment. Agent Jensen then advises Mr. Walker that they should meet at Mr. Walker's office, or wherever the tax preparation records are kept. He sends a letter to Mr. Walker that confirms the appointment and outlines what Mr. Walker needs to have available for the visit. So here's what he'll need to have. He'll need all Forms 1040 for the previous filing season that claimed the EITC, AOTC, CTC or head of household filing status, along with all Forms 8867 as well as credit computation worksheets, and any additional documentation that he relied on to conclude that his client was eligible for the tax benefits, and to determine the correct amount of the credit. In addition, the preparer software setup will also be reviewed. So suppose our preparer had not made that phone call, well, if we don't hear from the preparer to schedule the appointment, we will try to call them. But if we don't get a response, we may propose penalties under IRC 6695(g). Keep in mind, if you're selected for a due diligence exam, it's perfectly acceptable to have someone represent you during the exam. If you do decide that you want representation, you will need to complete Form 2848, which is titled Power of Attorney and Declaration of Representative, before the agent can discuss any of your tax matters without you being there. The completed form must be provided by the time of the appointment. Now, with that said, so with that said, the time has arrived for us to check in with our return preparer for the examination interview. For this meeting, at Mr. Walker's office, I'm going to ask my colleague, Christine, to join me in a roleplay exercise, so that we can illustrate to you what a typical due diligence examination interview might look like. So for this demonstration, we're going to have a little fun here. But in all seriousness, we know that not meeting due diligence requirement is a very serious matter, and it can be very costly. So I'm going to play the part of agent Jensen. And at this time, Christine, could you help us all out today and play the role of Mr. Jack Walker? Or I should say Miss Jackie Walker, who's going to be our preparer? Christine Bass: Well, of course, Courtney, I mean, Agent Jensen, I'd be happy to. Mr. Jensen. I've made a little space for you to work here. Is that okay? Courtney King: Oh, yes, this is fine. Thank you.

Christine Bass: I got to tell you. I'm a little bit nervous about this. So can we just get started please? Courtney King: Sure, there's no need to be nervous. Why don't we begin with you just telling me about yourself and your business? Christine Bass: Okay. My business here is a one woman show. I started it four years ago after working for 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. Courtney King: Okay. I got you. Can you tell me a little bit more about your software and walk me through what happens when a client comes in to have their return preparer? Christine Bass: Well, I use Big Money software. It's an awesome product. When a client comes to my office, I have an intake sheet that they fill out in the office or take home and bring back. Here it is, check it out. Courtney King: Okay, okay. So do you use this for both new and returning clients? Do you routinely ask clients to provide supporting documents to help you determine what credits and filing status they're eligible for?

Christine Bass: Well, everyone that comes to my office must fill out my intake sheet. Based on that I asked questions about their situation, and then I'll 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 asked for social security cards, W-2s, 1099s and 1098-T, but sometimes I don't get them. Courtney King: Okay. All right. Well, what specific due diligence training have you received? Christine Bass: Well, honestly, Mr. Jensen, I really don't have time or money to take a lot of training courses, stay current on due diligence or tax law changes. So what the software covers? That's what I use as my guide. Courtney King: Okay, I see. Well, what steps do you take when you think there are questionable issues involving a client return that claims tax credits or head of household as a filing status, especially if any of the information they give you appears to be incorrect, incomplete or inconsistent? Christine Bass: Well, I do have additional questions that I asked in those specific situations. Courtney King: Okay, I see. And how and where do you document any additional inquiries you make and the clients' answers? Christine Bass: Based on this list here, you can keep a copy. I draft the answers on my legal pad and keep it with my copy of the final return. Courtney King: Okay, thank you. Well, let's go ahead and start looking at some cases. We can go ahead and walk through a couple together, and then I'll just go ahead and continue on my own. I see here, your client, Mary Smith, she claimed her grandchildren for EITC. Did you document any questions you asked her? And if so, how did you record and keep her responses?

Christine Bass: Mr. Jensen, I've known Mary for 15 years. So I didn't ask her any questions, trust me. Mary would not claim anything she's not entitled to. Courtney King: I see. Thank you.

Well, let's take a look at Bill Green's file here. Bill is a 35-year old taxpayer and claimed the American Opportunity Tax Credit. Did you ask him if this was his first time for attending college? And if he had Form 1098-T, I don't see that information here. Christine Bass: Well, I did ask for the 1098-T. He brought it in and I looked at it briefly, but I didn't make a copy.

And I didn't ask if he attended college before. Courtney King: Okay, thanks. I'll go ahead and review the rest of the cases on my own. And I'll schedule another meeting with you to discuss my findings. Okay, audience, this is me speaking to you as Courtney, I'm taking off my agent Jensen hat for just a minute. I'm putting my presenter hat back on. Wow. So what we had was Miss Jackie Walker, and she really thought she was ready. But as we saw through the course of our interview, there were still some mistakes being made. Now there are eight general areas covered in a due diligence exam. And they are PTIN and preparer personal and business tax compliance information, general information, preparer training and education, credit and filing status due diligence, general procedures, Form 8867 compliance, credit worksheets, knowledge and retention of records.

Now, our scenario just reflects a few of the questions the examiner asked. More details may be required in order to get a full picture. Generally, the initial appointment can last up to 8 hours. During the initial interview, the examiner will review a selected number of returns and the accompanying schedules and documentation. A follow-up visit may be necessary if the revenue agent is unable to conclude the review of the files during that initial visit. When the exam is completed, the agent may propose penalties or there may be no change at all. Now, there's a little bit more that I want to share about the exam closing conference. So we're going to go ahead and continue on with our role play scenario with Christine reviving, and bringing back her role as Miss Walker and me once again as Agent Jensen to illustrate. Nice to see you again, Miss Walker, I wanted to meet today to discuss the findings of our examination. Christine Bass: Gosh, I hope, it's good news. I do take due diligence very seriously. But I admit I may have forgotten a few things here and there. Courtney King: Well, you might not know this, but we do have additional resources for paid preparers, including a free online continuing education course, available on the tax return preparer toolkit at Christine Bass: Really, I didn't know the IRS had all that on their website. I'm definitely going to check that out. But now I'm afraid to ask, what's the damage? Courtney King: Well, I really wish I could tell you that everything looked great. I can see that you have clients where you met all four of the due diligence requirements, the 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 appear to be incorrect, incomplete or inconsistent. And unfortunately, you failed the record retention requirement for some clients as well. Christine Bass: What are you talking about? I didn't think I was supposed to audit the client. When I ask questions, some clients refuse to answer. So what am I supposed to do? Courtney King: Well, that happens, I understand. But the requirements and the regulation or paid preparers are clear. And those are the guidelines you must 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 that you may not be the preparer for them. Christine Bass: Okay, I understand. Look, I don't want to be in trouble with the IRS. So give me the bad news. Courtney King: Okay. Well, I am proposing penalties. And here are examples, why? Remember, Mary Smith, who claimed her 2 grandchildren? You said you knew Mary for 15 years. You also shared that you did not ask questions like where are the parents or 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. Since we're examining returns you filed in 2020, penalty is $1,060. That is $530 for the EITC and $530 for the Child Tax Credit, because you did not meet the knowledge requirement. Christine Bass: Okay. Courtney King: Yeah. And 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 in this case, you didn't meet the record retention requirement. When a client presents a document that you relied on to figure 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 years old, there is a good chance that Bill is going back to school. AOTC is only available when attending the first 4 years of post-secondary education, unfortunately, the penalty is $530. Christine Bass: Mr. Jensen, come on, I always try to prepare accurate returns. I can't believe I'm getting cited for these errors. Don't tell me there's more.

Courtney King: Well, you should always strive to prepare accurate returns, and practice due diligence on every return you prepare. Well, here's my full report detailing the penalties proposed for each client. Most are like the situations I've already described. Christine Bass: What $10,600, you can't be serious. I wasn't expecting this. So what are my options? If I agree with the penalty, but don't have money, what can I do? Or what if I don't agree? Courtney King: Well, you do have rights. And I'll be happy to go ahead and explain those to you. Okay, audience so once again, this is me speaking as Courtney, I'm taking off my agent Jensen hat, and stepping back into my role as presenter. I'd like to thank my colleague, Christine, for being such a good sport today, I'll be sure to submit her name to the academy for her nomination. Christine Bass: Oh, thanks. You're welcome, Courtney. But ouch, that was a really expensive 10 minutes. Courtney King: I would agree. And I think we can all agree that the examination report and proposed penalties were a pretty big blow for Miss Walker. Now, keep in mind that to get to the point of a due diligence exam, Miss Walker would have had previous contacts from the IRS and opportunities to improve, what here she is. She has some options to consider in responding to the report given to her by Agent Jensen. Letter 1125 titled Transmittal of Exam Report outlines to preparer's next steps and options. So let's take a look at what Miss Walker's options are? If the preparer agrees with the penalties, they'll sign Form 5816, which is titled Report of Tax Return Preparer Penalty Case and pay the whole amount or make a partial payment and request that the IRS send a bill for the rest. The preparer can also request an installment agreement. But if there's not an agreement, the preparer has appeal rights. The Letter 1125 advises preparers that they have 30 days to file an appeal protest, which will be forwarded to the IRS Appeals Office. The letter outlines what should be included in the written appeals request. If we do not receive a response within the 30-day period, the case will be closed and the penalty on Form 5816 will be assessed.

There are other possible consequences that can occur when failing to meet preparer due diligence.

There may be cases where an injunction can be ordered. The Justice Department Tax Division and the Internal Revenue Service under this civil injunction program 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 our Criminal Investigation Division, or to the Office of Professional Responsibility.

Okay, so we've covered all of the enforcement consequences, and so that's enough about that. But before we change gears Shanonda will share with you another IRS method that we may use to examine a preparers due diligence compliance. Shanonda? Shanonda Scott-Ray: Thank you, Courtney, and thank you, Christine, as well. A new you two were dramatic, but you really helped us understand the due diligence audit interview process. Now, in addition to those face-to-face interviews, we can conduct correspondence examinations on tax preparers in areas where there are not enough Revenue Agents available to conduct exams, or where there are no Revenue Agents in a geographic area. We expect that there will be an expansion of the number of correspondence examinations conducted in the future. So don't get too comfortable if you don't live near one of our offices.

Now that we've shared some of our educational programs and compliance actions, Karen, I think we have time for one last polling question. Karen Brehmer: Yes, we do. So audience here is our final polling question. The penalty amount under Internal Revenue Code section 6695(g) for one return, or claim for refund filed in 2021, can be up to: A, $540; B, $2,160; C, 20% of the credit amount; or D, $500. Take a moment and question again, the answers and clicking the radio button that best answers the questions. And I'll give you a few more seconds of less of silence to make your selection. Okay, we're going to stop the polling now. And we'll share the correct answer on the next slide. And the correct response is: B, $2,160. And let's see what percent, ooh, 55%. That's kind of low. So, Shanonda, I think I'm going to ask you to clarify why the correct response is B, $2,160. Shanonda Scott-Ray: Not a problem. Now remember, its due diligence requirements are not met on a return or claim for each of the credits and/or the head of household filing status.

That's four different tax benefits. The penalty can be $540 for each of the four failures, up to a total of $2,160. All right, now let's recap and wrap-up today with some helpful, free online resources we have available for you, the tax return preparer toolkit. The landing page, as shown here on, was designed specifically for paid preparers, filing returns and claims for refund, claiming the EITC, CTC, AOTC, and the head of household filing status. So find it from, you can enter the search term toolkit. Or if you are using another search engine such as Google or Bing, you can enter IRS toolkit. Our goal is to help you get returns done right and avoid IRS compliance actions all together. So what does the online site offer you may be wondering, one of the resources is our hot topics page, where we can alert you to recent changes, update messages or highlights impacting preparers and your clients? For example, early in January, we posted a hot topic alerting preparers to the new EITC and ACTC relief, allowing taxpayers to use their 2019 earned income if higher to compute the EITC or ACTC. Everything we discussed today, and so much more can be found there, such as the rules for all the tax benefits subject to due diligence, linked to the treasury regulations for due diligence, including the examples we discussed in the seminar today. And there are others, it also has linked to the Internal Revenue Code section for due diligence with helpful information. Also explanations of our educational letters, phone calls and Knock and Talk visit. There's also guidance on reconstructing business income and expenses when needed. And then also we actually have the real videotape interview segment with our fictional preparer Mr. Jack Walker, and you can judge for yourself whether Courtney and Christine outperformed the video actors today. Now many preparers take advantage of our free online due diligence training module that can be completed for one continuing education credit. The 2021 module is now available in both English and Spanish. And remember, the training is free, and it can be taken any time from the comfort of your home, office or other location. In addition, check-in on the toolkit periodically to learn more about upcoming due diligence webinars and other online resources desk for just paid tax return preparers. Well, that brings us to the end of our presentation. Thank you so much for attending, Keys to Mastering Due Diligence Requirements and Audits. Karen, can you tell us what's up next?

Karen Brehmer: I sure can, Shanonda. So hello again, everyone. It's me, Karen Brehmer, and I'll be moderating the Q&A session. And before we start the Q&A session, let me add my thanks to everyone for attending today's presentation, Keys to Mastering Due Diligence Requirements and Audits. Earlier I mentioned that we want to know what questions you have for our presenters and here is your opportunity. If you haven't input your question, there's still time, go ahead and click on the drop-down arrow next to the ask question field, type in your question and click send. Courtney and Shanonda are staying with us, and Christine will be answering your questions.

One thing before we start, we may not have time to answer all the questions submitted. And as a reminder, we'll probably go a little bit beyond the 100 minutes to try to get to as many questions as possible. If you're participating to earn a certificate or related continuing education credit, you'll qualify for one credit by participating for at least 50 minutes from the official start time of the webinar. And you'll qualify for 2 credits by participating for at least 100 minutes from the official start time of the webinar, which means that the first few minutes that we did have chatting before the top of the hour does not count towards the 50 or 100 minutes. So let's get started with, so we can answer as many questions as possible. We've got some great ones in here. So Christine, here's our first one. "Why is the IRS putting so much responsibility on the preparer to do their job?" Christine Bass: Well, it's really not the IRS, due diligence is mandated by the tax laws, specifically section 6695(g), and the IRS is just enforcing what Congress has put in place in that code section. So, it's not the IRS that's doing it. I mean, we have to do it, because, that's our job is enforcing the tax laws, but Congress is the one that puts those tax laws in place. Karen Brehmer: We've all been explained that to our partners all these years as family, so that's a very helpful explanation. Thank you, Christine.

Christine Bass: Sure. Karen Brehmer: Next question. Have clients who have recently had a child and are unable to get a social security card due to COVID issues. What should we do? Christine Bass: Well, in this situation, if somebody had a baby, they can - you can ask if they have a birth certificate for that child. Again, you don't have to see that the regulations don't require that you see any documents, but if you do, you must keep a copy. So you can ask them and document that situation that they were unable to receive a social security card, but as long as they have a social security number, you can ask them if they have a birth certificate for the baby. And you'd be fine. Karen Brehmer: Okay. Very good. The next question is a lot of tax preparers are working from home and so their businesses might want to move to paperless records.

Can you give them some suggestions on how records can be kept by either paperless or electronic means to meet due diligence requirements? And then the last thing is our paper records required?

Christine Bass: Sure, absolutely. Paper records are not required. In fact, we'd probably prefer that you kept them paperless. So if you're not meeting with your clients in person, you're probably getting e-mails or scanned documents from them via e-mail. And that's perfectly acceptable for you to keep those scanned documents whether they come via e-mail, text, via fax machine, I don't know if anybody's even using fax machines anymore. But e-fax is still - again, it's actually preferable that you keep them that way. And again, make sure your system is set up.

So you have like that you back it up. So in case anything happens to your system for keeping these records electronically. You have a backup in case that happens. So yeah, we like that you keep them electronically. It's helpful to us and it saves some trees as well. Karen Brehmer: Very good. Okay, thank you, Christine. The next question, our taxpayers who file their own tax returns held to the same due diligence standards as tax preparers? Do they face the same potential penalties as tax preparers? Christine Bass: Unfortunately, they are not. Section 6695(g) only mandates due diligence for paid tax return preparers, it does not mandate it for individuals preparing their own tax returns. Therefore, there is no penalty applicable if it's a self-prepared return. Karen Brehmer: Okay, thank you. This was kind of highlighted during the presentation today, but this question came in. Do you have to continue to ask repeat claims for the same information for dependents, now that they continue to claim the same dependent?

Christine Bass: Well, as we went over in our little role play, Mary Smith, was a repeat client of Miss Walker, and situations changed. So part of earned income credit is the fact of residence and relationship. So although that relationship may not, it doesn't change. Once the granddaughter always a granddaughter or grandchild, that residency may change. It depends, where the parents were, if the parents were away for a certain period of time, and that grandparent was taking care of the children, they may be back. So again, you just have to ask those additional questions, did your grandchild live with you for the entire year again, where were the grandchild parents, again, if they were deceased, or something like that, that's something you can just note, in the prior year, I've asked if the - I verified that, that the parent's child was deceased. And, so this year, the same situation obviously exists. So, again, the relationship part doesn't change, but the residency might, and that's why you have to ask those additional questions, even if you've known them. Karen Brehmer: Okay. This question is very similar to what we just covered. So if you have anything more to add, please do. This person says, "If I know the client personally, we attend the same church, we're neighbors, do I still have to rely on documentation? And do I have to keep copies of everything I relied on?" Christine Bass: Well, again, you know, we discussed. You don't ever have to ask for documentation or see it. Is it a best practice to do that, especially if you don't know the client personally?

Sure. It is. But again, it's not required by the regulation. If you know someone personally, it couldn't hurt to just ask them a couple questions, make sure that things are the same as they were the year before. Again, you don't know what's happening in their household. You may be neighbors, but you don't know exactly. You may not know exactly. So just cover yourself, ask them a couple of questions. Note that note the answers, and you'll be fine. Again, documentation is not required, unless you feel that it would be a best practice, for your practice to request that and keep that. Karen Brehmer: Okay, very good. Thank you for that, Christine. The tax preparer asks, "I'm retiring in a few years, how along do I need to keep this information and in what format?" Christine Bass: All right, that's a great question. And as Shanonda I think it was pointed out during the presentation, you have to keep the information for 3 years from the time the return was filed. Again, you can keep it in paper or electronically, so 3 years from the time the return was filed, either via paper or electronically. Karen Brehmer: Okay, great. Thank you for that. Next question is what documents should a tax preparer review or request for the 8867? I think sometimes, people have also - asking us in here too. Sometimes tax pros ask me, "How do I go about proving a negative?" Someone didn't live with someone, how do you prove they didn't? I don't know. You take whatever part of that question you want to take. Christine Bass: Well, again, the most important part of due diligence or one of the four parts, but one of the ones we consider the most important part is that knowledge requirement. So, again, asking questions contemporaneously, writing down those questions and documenting your clients' answers are what's most important. If you require or need or feel you want to see additional documentation to show that, to help you feel better about it, that's up to you. But if you do see that documentation, then you have to keep a copy in your file that, it will be because it was something you relied on to calculate that credit. So again, you don't have to ask for any documentation. Again, it's a best practice, especially, if you don't know the client very well, but it's not required by the law. So that's up to each individual tax preparer, how they want to handle that. So that's the answer to that one. Karen Brehmer: Okay, great. Thank you. The next one is, "When preparing Form 8867 for a prior client, does it have to be in person or can it be by phone?" Christine Bass: Well, as we know, COVID is affecting a lot of people this year. So as I mentioned, that knowledge requirement is important. So you can ask your clients those questions over the phone, absolutely. You can ask them the questions from the 8867. But just keep in mind that 8867 does not - is not a substitute for you doing your due diligence. If additional questions come up, because something was incomplete, incorrect or inconsistent, then you still need to ask those additional questions, even if they're not listed on that 8867. And you can absolutely do them over the phone, that's fine, as long as they are asked contemporaneously and documented contemporaneously. Karen Brehmer: Okay, that's helpful. Thank you, Christine. "Do all tax returns prepared require the Form 8867 to be submitted or only those that include EITC, ACTC, ODC, AOTC, head of household only?" Christine Bass: Well, the 8867 in due diligence is only required for certain tax benefits. And those certain tax benefits are the ones that you just read off, Karen, the EITC, CTC, ACTC, ODC, AOTC and the head of household filing status. I don't know how many have you guys have been are - you people have been around for years. But before it was just for refundable credit, but now we say it's for certain tax benefits, because obviously, the head of household filing status is not refundable credit, nor is that credit for other dependents that ODC. But if you don't - if your client doesn't have any of those on the return, then you don't have to complete the 8867. Karen Brehmer: Okay, very good. Thank you. This one's kind of similar to what we had a bit ago. "My clients had a baby a couple of years ago. I filed an 8867 that year. Do I have to file an 8867 every year for the next 15 years, if they take the child tax credit?" Christine Bass: Absolutely. If they have any of those credits or tax benefits on the return, you still have to complete an 8867 for that tax return for as long as the credits or tax benefits are shown on your client's tax return. Karen Brehmer: Okay. Again, kind of similar to something we heard earlier, but this is for returning clients. "Do you really need to keep a copy of the birth certificate every single year for that new child?" Christine Bass: If you have a copy of a birth certificate for a child that was born 4 years ago, no, you don't need to take another copy this year when you're preparing the return. Again, if it's now a niece or a nephew or a grandchild, something like that, again, they've already proven their relationship status. But you'll have to ask additional questions again for that residency status. Obviously, if it's a natural born child of a couple, that residency status is pretty much set. But if it's a different situation, a brother/sister or something like that, like I said a niece or nephew, when you have that birth certificate from 4 years ago, they've already established that relationship. But you still should then ask questions about the residency of that child, where the parents are, things like that. Karen Brehmer: Okay, very good. Thank you. Another one here, "What happens if the Form 8867 is provided to the client for a paper return and the client doesn't send it in with their tax return?" Christine Bass: In that situation, again, we would probably send you that Letter 5364, alerting you that you have filed a tax return with your name on it, has been filed without an 8867. I would, tell you to tell your clients to make sure that they don't take off anything that you've attached to the return that they've sent it, that they send it to the IRS intact. Don't get any - like I said, don't take anything off. Or if you're very concerned, have them sign it in your office, and you can mail it off as well. So again, that would trigger that Letter 5364, saying, we've received returns without that 8867. Again, make sure you tell your clients to please don't take anything off that's attached to the return. Karen Brehmer: How about 10 staples, I'm sure the people at the campus would really appreciate that, right? Christine Bass: Right. Karen Brehmer: We're just kidding. Don't do 10 staples. One or two will be fine. "If a practice is 100% virtual, where preparers do not meet the clients face-to-face, are questionnaires sufficient to make reasonable inquiries?" Christine Bass: Again, that's going to be happening a lot this year. Is a questionnaire sufficient? No, because, again, there may be follow-up questions that you need to ask. So maybe if you have a questionnaire in front of you, that you're asking your client going through a phone interview, that would be sufficient, as long as you follow up on anything that appears to be incorrect, incomplete or inconsistent. So if that question, that follow-up question is not something on your questionnaire, you can write it in contemporaneously, and write down what your client's response is. Again, questionnaires cannot be a one-size-fits-all thing, because as we know, clients are in many different situations. So, one question may bring you to another question, which may bring you to another question that is something that you don't have to ask every client, but you only have to ask this client, because their situation is unique. So as long as you're asking those questions contemporaneously, and then asking follow-up questions, again, when anything appears to be incorrect, incomplete, or inconsistent, and documenting those, then that questionnaire would be fine. Karen Brehmer: Okay, Christine, that - and, audience, that's all the time we have for questions. I wish we could go longer, because, Christine, your answers are so fabulous and so helpful. But that is all the time we have for questions. And I want to thank you, Christine, for sharing your knowledge and your expertise and for answering those questions. Christine Bass: You're welcome. Karen Brehmer: So, before we close the Q&A session - thank you, Christine. Before we close the Q&A session, Courtney, what key points do you want the audience, attendees to remember from today's webinar? Courtney King: Thank you, Karen. And thank you, Christine, as well. Well, everyone, once again, we are so glad that you joined us here this afternoon. We did cover a lot of ground, but I'm going to go over a few key takeaways that we'd like to leave with you today. Use the tax return preparer toolkit at as a resource. Complete Form 8867, when filing a return or claim for the EITC, CTC, AOTC or head of household filing status.

Consider whether client records may be helpful, if any information furnished seems to be incorrect, inconsistent, or incomplete. Review and if needed update your procedures to ensure you comply with the four due diligence requirements under the Treasury regulation. Avoid due diligence letters, calls, visits and enforcement actions by ensuring you comply with the four requirements. Avoid costly penalties. The IRS can assess penalties against a preparer of up to $2,160 per return for not meeting the four requirements on returns or claims filed in 2021. And again, on behalf of my colleagues, Shanonda Scott-Ray and Christine Bass, and myself, Courtney King, we have enjoyed speaking with you today. We sincerely wish each of you a safe and successful filing season. And we thank you once again for attending today's webinar. Karen, I'm going to hand it back over to you to close us out. Karen Brehmer: Very good. Thanks, Courtney.

Audience, we're planning additional webinars throughout the year. To register for an upcoming webinar, please visit and use the keyword search webinars. And then look for Webinars for Tax Practitioners or Webinars for Small Businesses. And when it's appropriate, we will be offering certificates and CE credit for upcoming webinars. I mentioned this before the top of the hour. I'd like to mention it once more. The IRS is planning several Hearing All Voices listening sessions. And these sessions are for small business owners and the organizations and associations to do business with them. You'll get to hear from IRS personnel about estimated taxes, examination and collection processes, employment taxes, and appeals. You'll have an opportunity to input - provide input on how the IRS can improve service to small business owners.

And you can interact with employees from our Small Business/Self-Employed Division. We have sessions scheduled in different cities across United States beginning this month, and going through June 2021. You go to and search for webinars for small businesses to register for the Hearing All Voices listening sessions. And we invite you to visit our video portal at And there you can view archived versions of our webinars. Please note, continuing education credit or certificates of completion are not offered if you view any version of our webinars after the live broadcast. Again, a big thank you to our speakers: Courtney, Shanonda and Christine; for a great webinar and for sharing their expertise and for staying on to answer your questions. You can tell how much they know by how well they presented this material and answered all of those questions. I also want to thank you, our attendees for attending today's webinar, "Keys to Mastering Due Diligence Requirements and Audits." If you attended today's webinar for at least 100 minutes after the official start time, you will receive a certificate of completion that you can use with your credentialing organization for 2 possible CPE credits. If you stay down for at least 50 minutes from the official start time of the webinar, you'll qualify for 1 possible CPE credit. And again, the time that we spent chatting before the webinar started doesn't count towards the 50 or 100 minutes. If you're eligible for continuing education from the IRS and you've registered with your valid PTIN, your credits will be posted in your PTIN account. If you're eligible for continuing education from the California Tax Education Council, your credit will be posted to your CTEC account as well. If you registered through the Florida Institute of CPAs, your participation information will be provided directly to them. If you qualify and have not received your certificate or your credit by February 25, please e-mail us at And that e-mail address is shown on Slide too. If you're interested in finding out who your local stakeholder liaison is, you may send us an e-mail using the address shown on the slide. And we'll send you that information. And we would appreciate it if you would take a few minutes to complete a short evaluation before you exit. If you'd like to have more sessions like this one, let us know. If you have thoughts on how we can make them better, please let us know that as well. If you have requests for future webinar topics or pertinent information that you'd like to see in an IRS Factsheet, Tax Tip or FAQ on, then please include your suggestions in the comments section of the survey. Click the Survey button on your screen to begin. If it doesn't come up, check to make sure you disabled your pop-up blocker. It has been a pleasure to be here with you. And on behalf of the Internal Revenue Service and our presenters, we would like to thank you for attending today's webinar.

It's important for the IRS to stay connected with the tax professional community, individual taxpayers, industry associations, along with federal, state and local government organizations.

You make our job a lot easier by sharing information that allows for proper tax reporting. Thanks again for your time and attendance. We wish you much success in your business or practice. You may exit the webinar at this time.