Due Diligence Basics
What IRS form is used to show you met your due diligence requirements?
Form 8867 ( Paid Preparer's Due Diligence Checklist)
what age must a qualifying child be under to qualify for EITC (if not a student or disabled)
Under 19
Can a taxpayer claim both the Lifetime Learning Credit and the AOTC for the same student?
No, only one per student per year.
What filing status generally gives the lowest tax rate?
Married Filing Jointly.
How long must preparers keep due diligence documentation?
3 years.
What box on a W-2 shows how much federal income tax was withheld?
Box 2 — this amount helps determine the refund or balance due.
If Box 2 (federal withholding) is more than the total tax owed, the taxpayer gets a refund.
If it’s less, they owe money.
What month is the U.S. tax filing deadline (for most taxpayers)?
April (usually April 15, unless a weekend or holiday).
What are the four due diligence requirements preparers must meet?
Knowledge requirement, Record Retention, Completion of Form 8867, Computation of Credits (asking all required questions).
Name 3 tests a child must meet to be a qualifying child for EITC?
Relationship, Age, Residency, or Joint Return Test.
Name 2 expenses that qualifies for the Child and Dependent Care Credit.
Daycare, preschool, or summer day camp.
What test determines who can claim a child when both parents do?
The tiebreaker rules (based on residency, AGI, and relationship).
What's one red flag that may require asking additional due diligence questions?
Inconsistent income, claiming unrelated dependents, or mismatched residency info.
Where do you report self-employment income from a 1099-NEC in the tax return?
On Schedule C (Profit or Loss from Business).
1099-NEC reports nonemployee compensation; it flows to Schedule C, which also links to Schedule SE for self-employment tax.
If you win the lottery or get a cash prize, is it taxable income?
Yes.
All gambling winnings, prizes, and awards are taxable and must be reported on Form W-2G or as other income on the 1040.
A client tells you they have two dependents but provides no SSNs and says "You can just use last year's info."
The preparer must request valid SSNs or ITINs and cannot use last year's data without current verification.
A client's 18 year old son lived with them all year but earned 7,000. from a part time job.
The son still qualifies as a dependent for EITC because of age and relationship.
A taxpayer wants to claim the Child Tax Credit for their 17 year old son.
The child doesn't qualify for the CTC but may qualify for the Other Dependent Credit (ODC).
A single mother lives with her child and earns all the household income. The Childs father does not live there but helps financially.
The mother qualifies for Head of Household if she paid more than half the cost of the home.
If you realize you made a due diligence mistake after filing, what should you do?
Correct it by amending the return and documenting the correction.
What is Form 1098 used for & where does it go in the software?
Reports mortgage interest paid — goes on Schedule A if itemizing.
True or False: You can claim a pet as a dependent if you care for it full-time.
False ..only people can be dependents.
A taxpayer says they paid for childcare but can't remember the provider's name or address.
The preparer should ask for documentation or proof before claiming the Child and Dependent Care Credit.
A married couple lives apart all year but never legally separated. One spouse wants to file as HOH and claim EITC.
Not eligible: HOH requires meeting "considered unmarried" tests.
A teacher buys $400 in classroom supplies and has receipts.
They can deduct up to $300 as an above the line deduction: the rest is not deductible.
What filing status can be used if a taxpayer's spouse died last year and they still have a dependent child?
Qualifying Widow(er) with Dependent Child.
A taxpayer provides handwritten receipts for child care payments totaling $10,000, but the amounts vary and the provider's info looks incomplete.
The preparer should verify and request documentation before claiming the credit, handwritten receipts alone are not reliable.
A client asks, “What is a Homestead Credit? What would you say ?
It’s a state-level property tax credit (varies by state) that helps homeowners or renters reduce property-tax burden; claimed on state return, not federal.
A taxpayer sells their home for a profit of $200,000. Will they owe tax on the gain?
Usually no, if they’ve lived in the home 2 out of the last 5 years — up to $250,000 ($500,000 for MFJ) of gain is excluded from tax.
A client insists on Head of Household filing status but says they live alone with no dependents.
The preparer must ask clarifying questions and not file as HOH if requirements aren't met.
Can a taxpayer claim EITC if their only income is Social Security?
No. Social Security is not earned income.
Aparent's employer reimbursed their child's tuition. Can they still claim an education credit?
No. You can't claim a credit for expenses paid with tax free funds.
A college student lives on campus most of the year but returns home during summer breaks. The parent provides more than half of the support.
The student qualifies as a dependent under the residency and support tests.
You notice that a client’s dependent lived in another state for most of the year, but the taxpayer still wants to claim HOH and EITC.
This is a red flag — the preparer must verify residency and document findings.
A taxpayer owns a small cleaning business.
Their total income is $10,000, and they have $13,000 in expenses (supplies, gas, uniforms).
They can still file Schedule C showing a loss.
If the business is legitimate (profit motive), the loss can offset other income on the return.
**However, repeated losses can trigger an IRS hobby loss rule review.
What’s the difference between a credit and a deduction?
A credit reduces tax dollar-for-dollar; a deduction reduces taxable income.