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Due Diligence in a Pandemic World

William R. Stromsem, CPA, J.D. and Assistant Professor, George Washington University School of Business               

Tax professionals have been through one busy season with COVID and it’s hard to tell the direction of the pandemic, but at least early in the upcoming tax season we will likely still be preparing most returns remotely. In general, we have been able to set up protective procedures for ourselves and our clients while working remotely; these include safety from the virus and maintaining privacy of client tax information. We have implemented processes for virtual client meetings, document drop offs or electronic transmission of documents. We have also added extra safeguards such as passwords for virtual platforms, and encryption or VPN protection for electronically transmitted documents and for securing mail. However, some due diligence provisions in the tax law may require us to have increased personal contact with the client.

In addition to avoiding negligence penalties, the tax law provides a separate penalty for failing to apply “due diligence” for returns claiming certain benefits, including the child tax credit, additional child tax credit, the American opportunity credit, the earned income credit, and since the Tax Cuts and Jobs Act, the head of household filing status. For returns with these claims, preparers must complete Form 8867, the Paid Preparer's Due Diligence Checklist. You might review the form to refresh your knowledge of what is required. If your records do not support your compliance with the due diligence requirements, the penalty is $530 per credit for 2020 returns.

For current clients, you should have sufficient information in your files from prior due diligence inquiries (remember the three-year document retention requisite), but for new clients you may need to set up additional intake procedures and may be required to have greater interaction with the taxpayer. Many firms require that new clients show government-issued proof of identity and a Social Security card or ITIN to determine eligibility for the dependent-based benefits. Copies of these may be retained by the preparer as support for satisfying the due diligence requirements reported on Form 8867.

In a remote preparation environment, due diligence poses some particular problems. There is likely some leeway in accepting scanned or faxed copies of documents to avoid contact, but some clients may not have this technology. This may require mailing and returning original documents by certified mail – although mail has its own problems – so possibly the preparer could have the client drop off and pick up the required documents. Telephone and video conferences with clients to discuss specific issues should be documented to support positions taken in the return that require due diligence.

The preparer must be satisfied (and be prepared to satisfy the IRS) that the due diligence requirements of the various provisions have been met. Preparers should establish procedures for taking in new clients and should review Form 8867 to ensure compliance in all situations where taxpayers are seeking tax benefits with specific due diligence requirements.

We understand that the IRS is working on some new guidance on how preparers can show diligence in a pandemic world. These are expected later in October or early November to help us plan for the upcoming busy season. We will keep you informed.


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