Episode One- Attorney’s Observations When Dealing with IRS Representatives

LEGAL THOUGHTS – Attorney’s Observations When Dealing with IRS Representatives

COLEMAN JACKSON, ATTORNEY & LEGAL COUNSEL | Transcription of Legal Thoughts        Posted on June 10, 2024

Topic: Attorney’s Key Take Aways Preparer Due Diligence

Attorney Introduction:

My name is Coleman Jackson, and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas. In addition to myself, we have a Legal Assistant, Leiliane Godeiro, Law Clerks, Ayesha Jain and Mlaah Singh, and Administrative Assistant, Michelle Gutierrez.

On today’s “Legal Thoughts” podcast, our Law Clerk, Mlaah Singh, will be interviewing me in a brand new Legal Thoughts podcast series that we have entitled : “Tax Return Preparer Due Diligence and Preparer Penalties. ” We urge our audience to follow our podcast and invite all their neighbors, friends and acquaintances to please tune in to this series of Legal Thoughts Podcasts on Apple Podcast, Google Podcast, Spotify or wherever you listen to podcasts. The four episodes in our Tax Return Preparer Penalty Case Series are as follows:

  1. Attorney’s Observations from Dealing with an Uptick in Return Preparer Penalty Cases
  2. Navigating Due Diligence for Tax Preparers
  3. Managing IRS Due Diligence Investigations
  4. Strategies for Compliance and Risk Mitigation


Interviewer Introduction:

Hi everyone, my name is Mlaah Singh and I am a Law Clerk at the tax, business structuring, contracts, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas, 75206. Our English phone number is 214-599-0431 and our dedicated Spanish language line is 214-599-0432.

Good afternoon Attorney; thank you for allowing me to interview you regarding what appears to be an uptick in IRS examinations and investigations of Paid Tax Return Preparers.

Mr. Jackson, thank you for joining me to discuss this matter. Over your career within tax law for over 35+ years, you must have quite an understanding of what it is like to work with IRS representatives on international and federal tax matters, as well as your representation of taxpayers with matters before the Financial Crimes Enforcement Network. In fact we have an ongoing series of Legal Thoughts Podcast on the Corporate Transparency Act’s Beneficial Ownership Information Reporting Requirements estimated to impact over 42 million small and medium sized businesses all over the country.

Perhaps this new series of podcast dealing with IRS’s Due Diligence Examinations is just as important and is likely to address impacts on paid tax return preparers and their customers due to IRS Paid Preparer Due Diligence Investigations. So, I believe our Legal Thoughts Podcast’s listeners absolutely must hear your perspective on this apparent uptick in Paid Tax Return Preparer Due Diligence Investigations. My first question is this one:

Question Number One: What are some of your key takeaways gleaned while representing tax return preparers in IRS exams regarding paid tax return preparer due diligence requirements?


Interviewee: Coleman Jackson, Lawyer


Thanks Mlaah for this question. I will not talk about any specifics here; in general I will share my general observations with respect to IRS Paid Preparer Due Diligence Investigations. Some key takeaways are as follows:

My first take away: there appears to be an uptick in IRS examinations of paid tax return preparers since 2023 under Internal Revenue Code Section 6695(a) which imposes the duty for preparers to annually determine a taxpayer’s eligibility to take the following tax positions on their individual federal tax returns:

Head of Household Status

Child Tax Credit

Additional Child Tax Credit

The American Opportunity Credit, and

The Earned Income Tax Credit


My second take away is that it appears that this uptick is impacting low and medium income taxpayers to a greater extent because they are more likely to take these types of tax positions since most of these tax credits have income caps. That means, high income earners do not qualify for these types of tax credits.

My third take away is that it appears that immigrant families are more impacted by this uptick in preparer examinations than other American households. The reason for this can be difficult to pinpoint for sure, but it looks like it could be due to the following- Immigrants may have a tendency to use paid preparers who do not have traditional licensures, such as, certified public accountants, enrolled agents or attorney credentials. Generally the preparers and their customers are from the same country or speak the same native language. Typically these preparers charge less for return preparation than Certified Public Accountants or Enrolled Agents. These preparers may be perceived as having less education and therefore Artificial Intelligence could kick out the returns for human examination (but note that if this occurs; it is probably not intentional targeting of immigrant tax returns). From my observation, the practical effect creates this result.

Artificial intelligence algorithms could carry the bias and blindness of those who create them thereby kicking out a higher degree of tax returns that does not conform to some standard pattern. For example, African languages, Latin Languages, family traditions where children does not have their father’s surname. Immigrants can reside in multigenerational households that consist or grand-parents, parents, children and even nieces and nephews on very little household income. AI algorithms might simply kick these returns out as abnormal household patterns. IRS examiners who lack foreign language skills and social awareness of cultural traditions other than western traditional expressions or practices might be quite alarmed when they review these algorithm flagged abnormalities. This could lead to heightened review after algorithms flags a bunch of the tax preparer’s returns for human review.

All of these factors and more could explain why there is a higher incidence of immigrant taxpayers being impacted by paid preparer due diligence examinations by the IRS in recent years. Again, this is the practical effect; but it does not necessarily mean immigrant tax returns are targeted. Nor does it mean that low income taxpayers are being intentionally targeted by the IRS for audit examination either. It is simply the practical effect and, again, this perceived uptick in paid preparer exams could be driven by computer algorithms that have no conscience, no soul and no humanity. They just see a life or family pattern that does not fit perceived norms.

My fourth takeaway is that Internal Revenue Code Section 6695(g) allows the IRS to impose a very high penalty if a paid tax return preparer fails to meet four precise due diligence requirements. The penalty for tax periods ending in 2023 was $560 for each violation. The practical implication of these penalties is that paid tax return preparers can come in with high proposed tax penalties in the tens of thousands to hundreds of thousands of dollars depending usually upon the number of returns they do and how many penalties they have been assessed.

Mlaah, we can talk more about the four due diligence requirements imposed on paid tax return preparers in a later podcast in this series or right now. I will let you direct our path through this series by the questions you ask. What do you think our Legal Thoughts Podcast audience should know now. Keep in mind, we don’t have to tell them everything they need to know about this topic all at once.


INTERVIEWER: Mlaah Singh, Tax Law Clerk

Interviewer Comment:

Thank you for your insightful answer Mr. Jackson, it seems as though there are many requirements and qualifications to satisfy in order to avoid sizable penalties. As you mentioned, it is important for our listeners who represent low and medium sized businesses or identify as an Immigrant to pay close attention to what is expected of them for respective annual federal tax return preparation and reporting.

Question Number Two: So, my next question is, how do paid tax return preparers ensure they comprehend the intricate eligibility criteria for tax credits such as the Earned Income Credit, Child Tax Credit, Additional Child Tax Credit, and Head of Household filing status?


Interviewee: Coleman Jackson, Lawyer


Excellent Mlaah! Very astute question.

First: Paid Tax Return Preparers must know the four tax positions where these due diligence requirements are applicable:

  1. Taxpayer’s eligibility to claim head of household tax filing status;
  2. Taxpayer’s eligibility to claim the American Opportunity Tax Credit;
  3. Taxpayer’s eligibility to claim the Child Tax Credit; and
  4. Taxpayer’s eligibility to claim the Earned Income Credit


Second: Paid Tax Return Preparers must know the four due diligence requirements for determining whether a taxpayer is eligible for these tax benefits:

  1. Due diligence requirement number 1 requires that the tax return preparer complete an eligibility checklist or have alternative eligibility records based on information provided by the taxpayer or information reasonably known by the preparer. Practical Note: from myexperience in representing tax return preparers in IRS Tax Return Preparer Cases– it is absolutely best practice to document these eligibility on Form 8867, Paid Preparer’s Due Diligence Checklist. Also it is critical that this checklist be attached to the taxpayer’s return and a copy maintained in the files of the return preparer with all documentation used to establish the taxpayer’s eligibility to take the tax position.
  2. Due diligence requirement number 2 requires that the tax return preparer completion of Form 8867 be based on information provided by the taxpayer or based on information otherwise reasonably known by the return preparer. Under this second due diligence requirement the tax return preparer must accurately compute the credit amount and must maintain a copy of the computation worksheets. Again from representing return preparers over the years in these matters; it is critical that the return preparer keep contemporaneous files on all this. IRS Due Diligence Examinations can be a surprise knock on the tax return preparer’s business door.
  3. Due diligence requirement number 3 requires that the tax return preparer do some contemporaneous reasonable inquiries whenever the tax return preparer either knows, or have a reason to know that any of the information used by them in preparation of the taxpayer’s return looks inconsistent, incorrect or incomplete or otherwise raise the eyebrows of a reasonable and well informed tax return preparer knowledgeable in tax law. This is an objective standard, meaning what would a “reasonable well informed tax professional” think about the information supplied to the tax return preparer. Practice Note: the tax return preparer must make contemporaneous notes of any inquiry they make to establish eligibility of the tax position and they can expect to have to produce these contemporaneous notes in the event they receive a knock on their door from an IRS Agent seeking to conduct a Paid Preparer Due Diligence Examination. Word to the wise— the knowledge and inquiry must be documented, it is insufficient that the tax return preparer has knowledge of taxpayer’s in their head, for example family members, church members or other people the return preparer knows or thinks they know.
  4. Due Diligence Requirement Number 4 requires that the paid tax return preparer to retain a copy of all of the eligibility materials used in establishing eligibility for the tax positions on the return for three years after the June 30th following the date the return or claim for refund was given to the taxpayer. Practice Note: This material should be kept in normal business records for at least three or four years from when the tax return is filed with the IRS.

Let me just say this– from experience in representing tax return preparer’s, another common area that comes under review is tax returns where the tax return contains a Schedule C. Often times we have seen the IRS examiner query the return preparer regarding tax positions taken on Schedule C using the same knowledge, need to inquire rules and documentation standards as those used for the CTC, AOTC, EIC, and Head of Household Filing Status. Word for the wise: Know your schedule C filers and document their business tax positions contemporaneously. Keep a copy of this contemporaneous documentation in your business files. A return preparer cannot simply take a customer’s word for business receipts and deductions. They must make reasonable inquiries and keep evidence of it in their books and records.


INTERVIEWER:Mlaah Singh, Tax Law Clerk

Interviewer Comment:

Thank you for breaking down your answer in such a way. In summation, Mr. Jackson has pointed out that in order for Due Diligence to be satisfied, a taxpayer must first conduct an eligibility checklist or at least have alternative eligibility records. Next in summary, the attorney has said that a taxpayer must complete Form 8867. Then, a taxpayer must address any inconsistencies that they discover while performing their tax return preparation duties. And finally, in summary the attorney has warned about the need for the paid tax return preparer to create contemporary records and maintain those records in their normal course of business. So moving forward, my next question is,

Question Number Three: What are the frequent challenges that tax return preparers encounter when navigating the due diligence requirements for common tax positions?


Interviewee: Coleman Jackson, Lawyer


Tax return preparers navigating Paid Preparer Due Diligence Eligibility Requirements are confronted with challenges such as:

They must maintain current knowledge of all relevant tax laws and changes. So they will have to incur the cost of going to continuing tax education courses to make sure that they a knowledgeable about the tax positions that they might confront during tax season;

They must know their clients. For example, I know some Certified Public Accountants who refuse to accept any client that they don’t know through credible referrals. This may present the challenge of growing a vibrant tax preparation practice. They must complete due diligence checklists and do reasonable inquiries. All of this could be time consuming and expensive. Maybe their clients do not want to pay a reasonable fee for tax preparation work because they think it is easy or simple.

These are a few of the challenges that I have heard about when talking to tax return preparers. There are likely many more challenges presented to preparer’s who must comply with due diligence eligibility requirements.

Perhaps in our next podcast in this series, we can talk about specific types of challenges experienced by tax return preparers facing penalties for failure to be diligent in determining eligibility for EITC, AOTC, CTC/ACTC and HOH. We can do that in a future podcast episode in this Preparer Due Diligence Requirements Series if you like. We are going to have to go for now because I have to get to an appointment.


INTERVIEWER WRAP-UP: MlaahSingh, Tax Law Clerk

Attorney, thank you for sitting with me today in our 1st podcast on this very important topic: “Tax Return Preparer Due Diligence Requirements” I surely hope our audience will benefit from this Legal Thoughts series on tax preparer due diligence requirements and due diligence penalty cases. Folks, stay tuned to upcoming Legal Thoughts Podcasts on this important federal tax topic!

Our audience can send us inquiries at www.cjacksonlaw.com if they have questions or wish to comment on our podcasts in this series or any of our Legal Thoughts podcasts, blogs, or Law Watch Videos posted on our YouTube Channel. You can send an email directly to attorney at cj@cjacksonlaw.com and suggest other tax topics that you want us to discuss in future Legal Thoughts Podcast. We are open to your ideas for topics in tax and business law.

Our listeners who want to hear more podcasts like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast. Everybody take care! And come back in about two weeks, for more taxation, business structuring, contracts litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers: 214-599-0431 | Spanish callers: 214-599-0432 |Portuguese callers: 214-272-3100



Thank you all for giving us your ear today as we started our new Legal Thoughts Podcast Series dealing with the Paid Tax Return Preparer Due Diligence Requirements for Determining Eligibility for Certain Tax Benefits. This was our first Episode in this series of podcast. We are basically talking about issues that can benefit our audience; especially, paid tax return preparers in our audience that frequently come up in IRS Paid Tax Preparer Penalty Cases. Stay tune for future episodes in this series.

Until next time, take care.

If you want to see or hear more taxation, business structuring and contracts litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C. Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast. Stay tuned! We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration. Until next time, take care.

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