IRS 6695(g) Due Diligence Penalty Guide

If you've been preparing taxes for more than a few years, you've probably heard about IRC Section 6695(g). But do you know exactly what triggers this penalty, how much it costs, and how to avoid it?

The stakes are high. For tax returns filed in 2026, the IRC §6695(g) penalty is $650 per failure and can compound quickly across multiple credit failures and multiple returns. For a busy tax prep office, one audit cycle could wipe out months of profit.

Yet many preparers still don't have a clear system to ensure they're meeting all the requirements.

This guide covers the workflow tax offices use to reduce 6695(g) exposure.

What Is IRC 6695(g)?

IRC Section 6695(g) is part of the "Due Diligence" penalty structure. It applies to penalties for failing to comply with due diligence requirements when claiming EITC, CTC/ACTC/ODC, AOTC, or Head of Household filing status.

The IRS expects tax preparers to exercise "due diligence" before claiming these covered tax benefits on behalf of clients. This means:

• Asking the right questions — You must inquire about facts that would qualify or disqualify a client for the covered benefits
• Verifying the information — You need to verify at least some of the key facts (income, dependents, filing status)
• Documenting your work — You must create a paper trail showing you asked and verified

If you skip these steps, you're vulnerable to the penalty.

The Dollar Impact

Here's what the penalty structure looks like for 2026-filed returns:

• For tax returns filed in 2026, the IRC §6695(g) penalty is $650 per failure. The penalty is per covered tax benefit failure on each return. A single return claiming all four covered tax benefits (EITC, CTC/ACTC/ODC, AOTC, and Head of Household filing status) that fails due-diligence requirements on every benefit could trigger up to $2,600 in penalties (4 × $650).
• The penalty is indexed to inflation under IRC §6695(h), so it changes each tax year. Always verify the current year's amount on irs.gov before relying on this number for compliance.

For a small office that prepares just 100 returns a year and has one due diligence failure on, say, 10 of them, that's $6,500 in penalties for one repeated issue (10 failures × $650).

The IRS doesn't typically catch these through client audits. Instead, they audit you — the preparer. During a preparer compliance exam, agents look at a sample of returns and check whether you documented your due diligence work.

If your work papers don't show that you asked about income, dependents, and other eligibility factors, the IRS examiner has a factual basis to propose the penalty.

Form 8867: Your Due Diligence Checklist

The most important document in your due diligence armor is Form 8867: Paid Preparer's Declaration for a Return with a Claim for Earned Income Credit or Credit for Other Dependents.

This form is the preparer's affidavit that you:

1. Interviewed the client — face-to-face, video, or phone

2. Asked about specific facts — income, dependents, filing status, education status

3. Verified key information — through documents or other means

4. Assessed eligibility — based on what you learned

5. Retained supporting documentation — for at least 3 years

Form 8867 must accompany returns claiming the affected credits or Head of Household filing status; failure to file it is a primary trigger for the §6695(g) penalty.

The Questions You Must Ask

Here's what the IRS expects you to document in your work papers:

About Dependents:

• Full name, SSN, date of birth
• Relationship to taxpayer
• Months lived in the home
• Citizenship status
• Disability status (if applicable)
• Whether the dependent had gross income

About Income:

• Source and type of income
• Expected income amount
• Whether income is reported correctly on W-2s, 1099s, etc.

About Household Status:

• Who lived in the home and when
• Marital status changes during the year
• Any custody arrangements (for CTC)

About Education (if claiming AOTC):

• Name of school
• Year in school
• Qualified education expenses

How to Avoid the Penalty: A Three-Step System

Step 1: Create an Interview Checklist

Don't rely on memory. Build a checklist that covers every EITC, CTC/ACTC/ODC, AOTC, and Head of Household due diligence question. Have clients complete it in your intake or during an appointment. File this checklist in your work papers.

Intaxion's bilingual intake can capture many of these facts directly, reducing transcription errors and creating a permanent record.

Step 2: Verify at Least Some Facts

The IRS doesn't require 100% verification on every item. But you need to verify something. Examples:

• View the child's Social Security card or birth certificate
• Review the child's school report card or medical record to confirm residency / education status
• Confirm against your prior-year file if you prepared the return last year
• For newly issued SSNs, ask the client for the SS-5 receipt or the actual card

A note on what not to use: SSA's SSN Verification Service (SSNVS) is for W-2 wage-reporting only — its terms of use explicitly forbid using it for tax-return preparation. IRS TIN Matching is for verifying TINs on payee statements (1099 series), not dependents on a 1040. The verification options for a dependent's SSN are document-based, as listed above.

Document what you verified and how.

Step 3: File Your Work Papers Correctly

Your work papers should include:

• Completed Form 8867 (signed and dated)
• The interview checklist or client questionnaire
• Documentation of verification
• Notes from your conversation with the client
• Copies of supporting documents (if relevant)

Organize these by return and keep them for at least 3 years.

Common Mistakes That Trigger Penalties

Mistake #1: Not Filing Form 8867

This is the #1 violation the IRS finds. You claim an affected credit or Head of Household filing status but forgot to file Form 8867. Failure to file is a primary trigger for the §6695(g) penalty.

Mistake #2: Form 8867 Signed but No Interview

The form says "I interviewed the taxpayer," but your work papers show no evidence of an actual conversation. The IRS will assume the interview didn't happen.

Mistake #3: Missing Key Facts

Your interview notes mention the dependent's name but not their SSN, relationship, or time in the home. Incomplete due diligence = penalty.

Mistake #4: No Verification

You ask about facts but never verify them. One dependent claim gets challenged during an IRS exam, and suddenly all your work papers are under scrutiny.

Mistake #5: Delegating Without Documenting

You had a junior preparer conduct the interview, but their notes don't clearly document what was asked. You can't prove due diligence happened.

Your Due Diligence System Should Be Automated

If you're managing due diligence through spreadsheets, email templates, and handwritten notes, you're making this harder than it needs to be.

A solid intake system (like Intaxion) can:

• Capture required due diligence facts for the affected credits and Head of Household status in a structured form
• Create permanent records of client responses
• Generate Form 8867 automatically from the intake data
• Flag missing information before you file
• Organize work papers by tax year and client

This can reduce penalty exposure and retyping. Instead of rebuilding interview notes after the fact, you're reviewing structured data and support while the file is still open.

What Happens If the IRS Audits You?

If the IRS selects you for a preparer compliance exam, expect them to:

1. Request a sample of returns (typically 10-25)

2. Ask for your work papers for those returns

3. Check whether Form 8867 was filed

4. Review whether you asked about and verified facts for the affected credits and Head of Household status

5. Propose penalties for any deficiencies

The IRS also looks at the pattern of errors. If you show due diligence for most returns but miss it on 2-3, that's often where penalties focus.

The Free Penalty Risk Calculator

Wondering how much penalty exposure you currently have? We built a free calculator that estimates your risk based on:

• Number of returns prepared per year
• Percentage claiming EITC/CTC
• Your current verification practices

It takes about 5 minutes and doesn't require any signup.

The Takeaway

IRC 6695(g) penalties are preventable. The IRS isn't trying to trap you — they want preparers to do due diligence to protect the integrity of tax-benefit eligibility determinations (and to prevent fraud).

If you have a documented system for:

1. Interviewing clients about affected credit and Head of Household facts

2. Verifying at least some of those facts

3. Filing Form 8867 with every relevant return

4. Keeping organized work papers

...you'll be in a stronger position if the IRS reviews the file.

The key is consistency and documentation. The form matters less than what you're doing.