Question

What does Circular 230 mean by "due diligence"?  Does due diligence mean auditing all of a clients records? Does the level of review depend on the circumstances?

Please answer this question according to the Treasury Department Circular No. 230.

Answer 1

Circular 230 is about maintaining "Due Diligence" while preparation and filing of tax returns.

Some points to understand due Diligence -

1. Due Diligence means taking reasonable care in verifying the authenticity of information provided by client.

2. Due Diligence, in simple words, is taking appropriate actions to gain assurance from the client while filing tax returns to IRS.

3. Due Diligence does not mean auditing all of a clients records. This is definitely not a practical approach. If any item or transaction is unusual or doubtful, the practitioner is required to verify the same very carefully.

4. Due Diligence generally depends on the nature of information provided, nature of transactions entered. Basically, level of due Diligence varies from client to client and circumstance to circumstance.

5. The purpose of due diligence is to provide fair opinion or report by the Practitioner.