Due Diligence Audits & Penalties

If you are a tax professional, you know that IRS Due Diligence Audits are not routin, they are high-stakes reviews that can lead to severe financial penalties, loss of your EFIN/PTIN, and even criminal referrals.

The IRS conducts Due Diligence Audits to determine whether tax preparers are following the strict compliance rules when claiming refundable credits, including:

• Earned Income Tax Credit (EITC)
• Child Tax Credit (CTC/ACTC/ODC)
• Head of Household Filing Status
• American Opportunity Tax Credit (AOTC)
   

Failure to meet the IRS’s standards even for one client can result in penalties of $650 per failure, per return (IRC §6695(g)). With multiple clients, penalties can quickly reach tens of thousands of dollars. Worse, repeated or willful violations can lead to:

• Suspension or expulsion from IRS e-file (EFIN loss)
• PTIN suspension or revocation
• Referral to the IRS Office of Professional Responsibility (OPR)
• Criminal Investigation (IRS CI)
   

The IRS views preparers as the gatekeepers of the tax system. If they believe you “should have known” about false information, they can hold you responsible even if your client provided incorrect details. 

This makes Due Diligence Audits uniquely dangerous for tax professionals, because the IRS often assumes negligence or fraud.

At The Walton Firm, we defend tax professionals nationwide in Due Diligence Audits and Penalty cases. Our strategies include:

1. Audit Representation – Handling all communications with the IRS so you don’t risk making statements that harm your case.
2. Penalty Defense – Arguing against §6695(g) penalties by showing you met the due diligence standard or that the IRS misapplied the law.
3. Abatement Requests – Seeking relief or reduction of penalties where appropriate. 
4. Appeals & Litigation – Taking your case before the IRS Office of Appeals or U.S. Tax Court when necessary. 
5. Compliance Planning – Helping you implement systems to protect against future audits and penalties.

• Penalties Removed: IRS sought $30,000 in penalties for alleged EITC due diligence failures. We proved our client maintained adequate documentation. Penalties were abated in full.
   
• Audit Closed: Tax preparer accused of improperly granting Head of Household filing status. We showed the client’s files contained sufficient due diligence checklists. IRS closed audit with no penalties.
   
• Penalty Reduction: Preparer facing $50,000 in due diligence penalties for AOTC claims. We negotiated settlement, reducing liability by more than 80%.
   

• Exclusively Defending Tax Professionals – Unlike general tax firms, we focus on preparers, EAs, CPAs, and professionals under IRS scrutiny.
   
• Proven Record of Penalty Defense – From abatement to appeals, we’ve saved our clients millions in penalties.
   
• Criminal Tax Insight – We know when a Due Diligence Audit may turn into a criminal referra and how to protect you and your business. 

An IRS Due Diligence Audit can threaten not only your income but your entire career. Having an experienced defense team by your side is the best way to safeguard your livelihood.

We defend the defenders of the tax system. Protect your practice today.