Sep 22 • 💰TAX PRO Lounge
Step-by-step 8867 Due Diligence Notes (template)
- What’s being claimed (scope)“Return claims: [EITC] [CTC/ODC] [AOTC] [HOH]. 8867 completed and filed with return.”
2. Identity & relationship check
“Verified taxpayer/dep(s) identity & relationship. Docs reviewed (if relied upon): [SS card(s)], [birth cert], [court/guardianship], [school/medical records], [lease].” (Form 8867 allows you to list documents relied upon; none are specifically required unless facts trigger questions.)
3. Residency & household composition
“Confirmed where each person lived and months in home; noted any temporary absences. Identified qualifying person(s) (if HOH) and confirmed tie-breaker not applicable.” (Knowledge requirement: ask adequate questions; document answers.)
4. Filing status (HOH if claimed)
“Computed ‘cost of keeping up a home’ and confirmed taxpayer paid > 50%. Saved worksheet in file.” (Worksheets/computations must be retained.)
5. Income reasonableness
“Matched income items to source docs; reconciled any gaps. If SE income, confirmed bona fide business activity; assisted with reasonable reconstruction when records incomplete.” (Reasonable follow-ups required when info is incomplete/inconsistent.)
6. Credit-specific tests
• EITC — Verified age/relationship/residency; filing status not MFS; no disqualifying investment income issue based on info provided.
• CTC/ODC — Verified age/SSN and support; identified which children qualify for CTC vs ODC.
• AOTC — Reviewed 1098-T & billing; at least half-time; no 5th year; no felony drug conviction based on taxpayer statement; calculated QHEE net of tax-free aid.
“Saved credit worksheets (EITC, Sch 8812/CTC, Form 8863/AOTC).” (You must keep applicable worksheets.)
7. Reasonable inquiries (red-flags addressed)
“Documented follow-up Q&A wherever facts were inconsistent/incomplete. Recorded who provided each answer and when.” (Knowledge + record keeping requirements.)
8. Documents relied upon (8867 line 5)
“Relied upon and listed on 8867: [W-2(s)], [1098-T/bursar stmt], [school/medical mail showing address], [lease/utility bills], [child-care statements], etc.” (Line 5 lets you list the docs you relied on.)
9. Submission
“Submitted Form 8867 with the return; copy retained.” (8867 must be filed with the return.)
10. Record retention statement
“Retain for 3 years from the latest of: return due date, e-file date, date presented for signature, or date my portion was given to signing preparer. File includes: 8867, credit worksheets, documents relied upon, and my Q&A notes (how/when/from whom info was obtained).”
⚠️ Note: No set of notes can prevent an IRS or due-diligence audit, but following the four 8867 due-diligence requirements and keeping these records protects you from §6695(g) penalties (the penalty is indexed annually; for 2025 letters cite $635 per failure, up to $2,540 per return).
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Step-by-step 8867 Due Diligence Notes (template)
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