Due Diligence & Compliance

Due Diligence & Compliance

Due Diligence & Compliance

This lesson provides mandatory training on due diligence requirements, ethical responsibilities, and federal compliance standards applicable to all tax preparers. Due diligence is a legal obligation and a core condition of employment for anyone preparing or assisting with tax returns.

Completion of this lesson is required before any preparer may independently work with client files.

Purpose of This Lesson

The purpose of this lesson is to ensure that all preparers understand their legal duty to exercise reasonable care when preparing tax returns. Due diligence protects clients, the firm, and the preparer from penalties, audits, and regulatory action.

This lesson explains how due diligence applies to client interviews, document review, eligibility determinations, and tax return preparation.

What Due Diligence Means

Due diligence requires tax preparers to take reasonable steps to verify information provided by clients. Preparers may not ignore inconsistencies, rely on assumptions, or accept information that appears incomplete or incorrect.

Preparers must ask appropriate follow-up questions, request supporting documentation when required, and document the steps taken to verify client information.

Areas Requiring Enhanced Due Diligence

Due diligence requirements apply to all tax returns, with heightened scrutiny in areas including but not limited to:

• Filing status determinations

• Dependency claims

• Earned income reporting

• Tax credits and refundable credits

• Adjustments and deductions

• Advance products and refund-based financial products

Any return involving refundable credits or advance eligibility must meet enhanced documentation and verification standards.

Client Interview Responsibilities

During the client interview, preparers are required to:

• Ask complete and accurate questions

• Clarify unclear or inconsistent responses

• Review all documents provided by the client

• Compare verbal statements to written records

• Document explanations and follow-up questions

Client statements alone are not sufficient when documentation is required by law.

Documentation & Record keeping

Preparers must retain accurate records that support all entries on the tax return. Documentation must be stored in accordance with company policy and federal retention requirements.

Failure to maintain proper documentation may result in disciplinary action or termination.

Prohibited Conduct

The following actions are strictly prohibited:

• Altering information to increase refunds

• Ignoring missing or conflicting documentation

• Advising clients to omit income

• Claiming credits without eligibility verification

• Submitting returns without required disclosures

Violations may result in IRS penalties, loss of credentials, and immediate termination.

Compliance Monitoring

All tax returns prepared by the firm are subject to internal quality review and external audit. Compliance checks may occur before or after filing.

Preparers are expected to cooperate fully with compliance reviews and respond promptly to any requests for clarification.

 Completion Requirement

This lesson must be completed before a preparer may independently prepare or submit tax returns. Due diligence standards apply to every return, every client, and every filing season.

Failure to comply with due diligence requirements will result in corrective action.