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Problems Associated With Due Diligence

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Due diligence happens by not understanding the law or by taking what the client says at “face value.” Other times, it is straight out fraud! As a tax preparer, I need to give due diligence more diligence. Doing this, will protect my clients, build their trust, and possibly receive more referrals. Equally important, it will protect me from getting in trouble with the law (IRS). Penalties can be avoided by following due diligence. Plus, it is the ethical thing to do. With that being said, the due diligence issues presented in this scenario and the steps to comply with due diligence are as follows:
The first thing came to mind was to verify Charlie’s age and filing status. For his age, I would ask to see his social security card and driver’s …show more content…

If so, then information such as legal documents regarding the separation would be needed. This is because he might fall under a different filing status and may also meet the requirements as head of household. Also, things such as alimony paid or received and child support could be a factor in preparing his income tax. Plus, this could help in determining who can claim the children as an exemption and receive the child tax credit and earned income tax credit.
In addition to the inquiries above, I would need to help him figure out if the children meet the requirements as a qualifying child. The test includes verification of the children’s age, residency, and relationship. In some cases, where the child is older, the joint return test would be required too, but the latter does not seem to apply in this scenario. However, for clarification of the children’s age and to comply with due diligence, I would ask for their social security cards. Furthermore, to ensure his confidence in me, I would help him understand that these are the IRS requirements and that I am here to assist him in properly filing his taxes.
Now, as we determine if the relationship and residency tests are met, I must (1) explain to him what relationships are acceptable as a qualifying child, which are most relatives except cousins, and (2) verify that he provided his residency for the children for over half of the year. This can be substantiated by him providing (1) receipts of

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