IRS Issues Letter 5025 to Preparers Who May Not Have met Due Diligence Requirements

The IRS announced on Friday that they will soon be sending letters to tax preparers who have submitted returns with questionable claims for the Earned Income Tax Credit, Child Tax Credit/Additional Child Tax Credit and the American Opportunity Tax Credit. Letter 5025 is intended to inform tax preparers that they may not have met their due diligence requirements on 2017 tax returns they filed and reminds them of the $520 per failure penalty that could be assessed for 2018 returns filed in the same manner. The letter will contain a list of the primary issues that were identified on the tax returns in question and will also provide a detailed list of 2018 due diligence tax law changes as well as tips on preparing accurate returns and additional information concerning due diligence requirements for tax preparers.

It is important to know the requirements and the penalty for non-compliance. Paid tax preparers must:

  • Complete Form 8867, Paid Preparer’s Due Diligence Checklist, and submit it with every return you prepare
    claiming one or more of the benefits listed above.
  • Complete all worksheets, or equivalents, showing how you computed the credits, including the EITC
    Worksheet for the EITC, Schedule 8812, if applicable, for the CTC or ACTC, and Form 8863, Education
    Credits, for the AOTC, if the credits listed above are claimed on a return or amended return.
  • Question the client if any information appears to be incorrect, inconsistent, or incomplete. As you question
    the client, document your questions and the client’s responses. Failure to adequately question the client and
    document the responses is the most common reason we assess penalties.
  • Keep all required records, including copies of any documents you relied on to determine eligibility for the
    credits listed above and/or HoH filing status, or to compute the amount of the credits. Obtain a copy of your
    client’s Form 1098-T, Tuition Statement, for the AOTC.

The penalty imposed on preparers who fail to adequately comply with these requirements for one or more of the tax credits claimed is increasing to $520 per credit, per return. This means that if the IRS determines a that preparer fails to meet the four requirements for all 3 tax credits, the penalty would be $1,560 per return.

In addition to sending letters to raise awareness, the IRS provides several resources to assist preparers in educating themselves on due diligence requirements. Preparers are encouraged to review Publication 4687, Refundable Credits Due Diligence and to visit The website contains a wealth of information pertaining to due diligence for tax preparers, and includes training modules, videos, guides and charts to ensure preparers are protecting themselves and their clients going in to the 2018 filing season.