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Preparer contacts IRS Agent - DD examination letter (Part I)
Preparer contacts IRS Agent - DD Exam Case Review (Part 2)
Preparer contacts IRS agent - DD Exam Close-Out (Part 3)

IRS Agent Jensen: Good morning Mr. Walker. It’s good to see you again.

I wanted to meet today to discuss the findings of our examination.

Jack Walker: Well, I hope it’s good news. I take due diligence very seriously.

But I admit, I may have forgotten a few things here and there.

IRS Agent Jensen: You might not know this, but we do have additional resources, including a free continuing education course, available on the Tax Preparer toolkit at

Jack Walker: Mmm... Ok. I didn’t know that IRS had all that on their website. I’ll check it out.

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

IRS Agent Jensen: I wish I could tell you that everything looked great.

I can see you have clients where you met all four of the Due Diligence requirements: Form 8867, Worksheets, Record Retention and Knowledge.

But, with some of your clients you didn’t meet the knowledge requirement.

You didn’t ask additional follow-up questions when your clients’ answers appeared to be incorrect, incomplete or inconsistent.

You failed the record retention requirement for some clients as well.

Jack Walker: What are you talking about? I didn’t think I was required to audit the client.

When I ask questions, some clients refuse to answer.

What am I supposed to do?

IRS Agent Jensen: I understand; but the requirements of Internal Revenue Code section 6695(g) for paid preparers are clear, and those are the guidelines you need to follow.

You need to let your clients know that this is mandated by law.

If they don’t answer your questions, you should let them know you may not be the preparer for them.

Jack Walker: Ok I understand.

Look, I don’t want to be in trouble with the IRS... So just give me the bad news.

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

Remember, Mary Smith who took her two grandchildren?

You said you knew Mary for 15 years.

You shared you did not ask questions like; Where are the parents?

How long did the children live with her?

Did she have any documentation to prove her claims?

These are things you need to ask Mary every year, because situations can change The penalty is $1,040; that’s $520 for EITC and $520 for the Child Tax Credit because you did not meet the knowledge requirement.

IRS Agent Jensen: Here’s another one, Bill, the 35-year-old man who took AOTC.

You said you reviewed his 1098-T, but you didn’t make a copy, nor did you ask him if he attended college before.

So here, you didn’t meet the record retention requirement.

When a client presents a document that you relied on to calculate the credit, then you are required to keep a copy.

Also, here, you didn’t meet the knowledge requirement.

Now, it might be Bill’s first-time attending college, but since he’s 35, there’s still a good chance Bill's going back to school.

I’ve penalized you $520.

Jack Walker: Mr. Jensen. C'mon...

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?

IRS Agent Jensen: You should always strive to prepare accurate returns. And, practice due diligence on every return you prepare.

Here’s my full report detailing the penalties proposed for each client.

Most are like the situations I’ve already described.

Jack Walker: What! $10,400!

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?

IRS Agent Jensen:You do have rights, let me explain your options…