Form 8867 Due Diligence: Four Rules and the 2027 Penalty

If your software automatically produces Form 8867, that doesn’t mean your due diligence work is done. The form is a certification of what you’ve actually asked, checked and documented.

For returns and refund claims filed in 2027, the federal due diligence penalty under Section 6695(g) is $665 per failure. Multiple covered benefits can mean multiple failures on one return. That’s an expensive reminder that a checkbox isn’t a substitute for a process.

Which tax benefits trigger Form 8867?

Paid preparer due diligence applies when a return claims the earned income credit, the child tax credit or related dependent credits, the American opportunity tax credit, or head of household filing status.

The rules apply even when your client has filed with you for years. A familiar name doesn’t replace the current-year questions.

There are four covered benefit categories, not one penalty simply because Form 8867 was attached to a return. Head of household has its own eligibility tests. The EITC and child-related credits require careful questions about residency, relationship and other applicable rules. Education credits raise a different set of questions about qualifying expenses, scholarships and student eligibility.

That is why a single generic question such as “Do all dependents qualify?” isn’t enough. A professional interview makes the requirements understandable to the taxpayer and gives the preparer a record of how the answer was established.

The four requirements, in plain English

These are separate duties. A properly filed form does not excuse weak notes, unsupported computations or missing records.

Let’s make the knowledge requirement concrete. Your organizer says a child lived with the taxpayer for 12 months, but the client later mentions the child spent the summer living with another relative. The correct response isn’t to change the answer to “No” without asking more. It’s to ask where the child actually lived, for how long and what records support the timeline. Record the client’s answer when the conversation happens.

Likewise, a self-employed client who reports significant cash income and no expenses may need follow-up questions about business activity and records. The goal isn’t to challenge every client automatically. It’s to resolve information a reasonable, well-informed preparer would recognize as incomplete or inconsistent.

What does $665 per failure mean?

Consider a return that claims head of household, the EITC and a child tax credit. If a preparer fails due diligence for all three covered benefits, the potential Section 6695(g) penalty can reach $1,995 for that return ($665 × 3). The penalty isn’t based on how much you charged to prepare the return.

This is why written office procedures matter. The client interview, preparer’s notes and reviewer checks should tell the same story.

For the recordkeeping rule, think beyond saving the final Form 8867. You also need the credit computations, documents actually relied upon, a record of who provided the information and when, and notes of additional questions and answers. The three-year retention period is measured from the latest of several possible dates under the regulations; it isn’t always three years from January 1 or simply three years from the day the client first walked in.

Picture an IRS review two years later. Would the next preparer be able to find the facts without calling the client to repeat the entire interview? That’s the standard your workflow should aim to meet.

What I would check before the season

• Does our organizer ask the current-year eligibility questions?
• Can preparers show their notes when an answer conflicts?
• Are worksheets and relied-upon documents saved with the return?
• Does the reviewer check due diligence before the client signs and the return is transmitted?

Give reviewers a short list of specific things to look for. When a return claims head of household, can they see the household-cost and marital-status analysis? For an EITC return, are the qualifying-child facts supported? If an education credit is claimed, is there a record of qualified expenses and relevant scholarships? A green software diagnostic doesn’t tell you the answers.

The firm’s role matters too. Train staff on consistent follow-up questions, give them a clear escalation path and spot-check files while the season is running. Correcting a weak note before e-filing is far easier than reconstructing the conversation in response to a penalty letter.

Also check the applicable current-year rules before the first live return. New Social Security number requirements can affect certain dependent and education credit claims, and Form 8867 or its instructions may be revised ahead of the season. A procedure written around last year’s form can create this year’s avoidable mistake.

The takeaway: Form 8867 due diligence should be documented while the client facts are fresh—not recreated after an IRS letter arrives. The Due Diligence Toolkit 2026 includes interview prompts and recordkeeping guidance; the Common 1040 Errors Checklist 2026 supports your final return review.

Official source: IRS — Instructions for Form 8867, IRS — 2027 penalty amount, Rev. Proc. 2025-32.

For general education for tax professionals; reviewed October 23, 2026. Confirm current forms and guidance before relying on tax-law details.