The treasury regulations explain the due diligence rules. The regulation state that there are four due diligence requirements tax the preparer must meet to avoid a penalty. The penalty is asserted against each tax return file.
The four basic due diligence requirements are:
1. Aquire and demonstrate a working knowledge of each of the refundable credits;
2. Complete the Due Diligence Check List, Form 8867;
3. Compute the credits and keep your computation worksheets;
4. Ask relevant questions and write down the client's answers as well as requesting relevant supporting documents and keeping a copy of the records for a minimum of three years.