Due Diligence “Reasonable Inquiry” for Tax Pros

When the IRS talks about “reasonable” due diligence, they typically do not expect you to conduct and in-depth audit of your clients' financial lives. They are asking you to exercise sound professional judgment, apply the law correctly, and document your work thoroughly.

Refundable credits like EITC, CTC/ACTC, AOTC, and filing statuses such as Head of Household are frequent audit triggers, and the IRS expects tax professionals to verify eligibility through reasonable inquiries, not blind acceptance of what a taxpayer says.

This standard exists to protect taxpayers, safeguard the tax system, and protect YOU.

Asking appropriate questions and keeping good documents is important

What the IRS Means by “Reasonable Inquiry”

Under Treasury Circular No. 230 and other guidance, a paid tax return preparer has a duty of diligence that involves making reasonable inquiries. The IRS defines reasonable inquiry as asking appropriate questions when information appears incorrect, inconsistent, or incomplete, as well as documenting what you did to resolve those issues.

The Due Diligence Standard Requires Tax Pros To:

• Know the law — especially rules for EITC, CTC/ACTC, AOTC, HOH, and Schedule C income

• Ask appropriate questions — when information seems unclear, incomplete, or inconsistent

• Evaluate answers for consistency — with other facts, forms, and documentation

• Resolve conflicting information — before finalizing the return

• Document what you did — including the questions you asked and the answers received

These reasonable inquiry due diligence requirements are not optional for tax pros. They are written into IRS regulations and they are what examiners look for first during a due diligence audit.

Due Diligence Reasonable Inquiry For Tax Pros

As a tax professional you are not required to interrogate and investigate your client, but you must not ignore red flags either.

Reasonableness is about judgment. If something doesn’t look right, feels incomplete, or raises questions, you are expected to dig deeper and document what you did.

Examples include:

• A child claimed for EITC who does not appear to live with the taxpayer

• Schedule C income that matches the exact amount needed to qualify for a credit

• HOH claimed without evidence the taxpayer paid more than half the household cost

• Multiple dependents rotating between different taxpayers over different years

• Tuition claimed without supporting records

If a return contains risk indicators and you do not ask follow-up questions, the IRS may conclude you failed the reasonable inquiry standard.

Documentation Is the Best Defense for Tax Pros

The IRS has a simple principle: If it is not written down, it did not happen.

Strong due diligence documentation includes:

• What you asked

• What the client said

• What you reviewed

• Why you concluded eligibility was met

• Notes about inconsistencies and how you resolved them

Reasonable Inquiry Key Takeaways

• You must exercise reasonable professional judgment.

• You are not required to interrogate your client, but you must not ignore red flags.

• Refundable credits and certain filing statuses require heightened due diligence.

• Ask questions when information is incomplete, inconsistent, or questionable.

• Document your work or risk failing a due diligence audit.

Doing this protects your license, your business, and your clients.

Why This Matters More Than Ever

The IRS is investing heavily in data analytics, cross-matching, and automated eligibility flagging.

Those who:

✔ Know the law

✔ Follow consistent intake processes

✔ Ask clarifying questions

✔ Maintain strong documentation

…are far better protected today and in the future.

Practical Tips to Meet the “Reasonable” Due Diligence Standard

• Use structured intake and due diligence questionnaires

• Train staff on red-flag indicators

• Standardize documentation expectations

• Keep contemporaneous notes — not after-the-fact recreations

• Treat every return as reviewable

And remember: your notes should stand on their own. Someone unfamiliar with the client should be able to read them and understand why the credit or filing status was allowed.

Final Thought

The IRS reasonable inquiry standard is about being thorough, thoughtful, consistent, and well-documented. To protect yourself and your business, you should train yourself and your staff to ask, clarify, and document everything. Create standard processes and documentation for customer interviews and document capture, paying extra close attention to areas that are known triggers for the IRS. That is what “reasonable” means, and it will help your tax business run more efficiently and profitably.

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