Who needs to exercise due diligence?

Tax professionals preparing income tax returns must exercise due diligence to ensure that they accurately represent their clients' financial situations and comply with tax laws and regulations. This responsibility includes gathering sufficient and relevant information to validate income sources, deductions, and credits claimed on the returns they prepare.

Exercising due diligence helps prevent errors that could lead to audits, penalties, or potential legal consequences for both the tax professional and the taxpayer. Additionally, there are specific due diligence requirements outlined by the IRS, particularly concerning the Earned Income Tax Credit (EITC) and certain other tax benefits. Meeting these due diligence standards is crucial for maintaining professional integrity and ensuring that clients receive the appropriate tax treatment.

While individual taxpayers during audits certainly need to be diligent in presenting their information accurately, the requirement for professional due diligence primarily falls on those who prepare returns. Taxpayers submitting state tax returns and employers withholding tax also have obligations related to accuracy and compliance, but they do not have the same formalized standards for due diligence as tax professionals.