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The due diligence tax preparer penalty is a fine for income tax preparers who fail to meet due diligence requirements when preparing tax returns that claim certain credits or head of household filing status.

The IRS takes due diligence very seriously because fraudulent claims are becoming increasingly common. The agency even conducts “Knock and Talk” visits as part of its Preparer Compliance Program to educate preparers, discuss errors, and explain the risks of not providing accurate tax returns.

Let’s take a closer look at what due diligence for tax preparers means, how preparers should perform it, and the penalties for not following the rules.

What Is Due Diligence for Tax Preparers?

People use tax experts to prepare their income taxes for them because the experts know how to take advantage of tax rules. By claiming all possible tax credits or tax deductions, clients keep more of the money they earn rather than handing it over to the IRS.

U.S. income tax preparers must adhere to tax laws and conduct due diligence when they prepare tax returns for taxpayers who claim certain tax credits or head of household (HOH) filing status. HOH status gives an unmarried filer with a qualifying dependent certain tax advantages that a single filer does not have.

The IRS requires due diligence from tax preparers to make sure their clients really do qualify for the credits or HOH status because they will pay less tax to the IRS.

The credits that fall under due diligence are the following:

•   Earned income tax credit (EITC)

•   Child tax credit (CTC), additional child tax credit (ACTC), credit for other dependents (ODC)

•   American opportunity tax credit (AOTC)

•   Head of household (HOH) filing status

Recommended: What Are the Different Types of Taxes?

What Is the Due Diligence Tax Preparer Penalty for 2026?

Each failure on a return filed in 2026 carries a penalty of $650. (By comparison, the penalty for returns filed in 2025 is $635 per failure.) If a preparer claims all four benefits on a return and fails to perform due diligence for each benefit, the penalty for that return is $2,600. The preparer can also be referred to the Office of Professional Responsibility, or even the IRS Criminal Investigation Unit, if their failure to comply is deemed willful. It’s also possible that the IRS may request the Department of Justice to seek an injunction to stop the preparer from preparing any future returns.

What Are the Four Due Diligence Requirements?

To comply with due diligence and avoid a penalty, the IRS requires a tax preparer to do the following:

Complete and Submit Form 8867

The form must be based on information obtained from the client. It can be submitted to the IRS with the e-Filed return or claim, or included in the filed return or claim.

Compute the Credits

The preparer must complete the appropriate worksheets for each applicable credit (such as those found in the instructions for Form 1040 or Form 8863) and keep records of the information and calculations used.

Conduct the Knowledge Test

The preparer must interview the client to verify that the information on income tax withholdings, earnings, dependents, and all relevant data are correct, consistent, and complete. The preparer must also keep a record of the interview.

Keep the Records for at Least Three Years

Documents can be held in electronic or paper format.

Recommended: Your 2025 Tax Season Prep List

What Are Examples of a Due Diligence Penalty?

Let’s say a taxpayer who is preparing for tax season wants to claim the earned income tax credit (EITC). This credit is calculated by multiplying the taxpayer’s income by a percentage determined by the IRS. The amount of the credit phases out above certain income levels that vary depending on the number of qualifying children the taxpayer has. A due diligence penalty might be levied if the tax preparer makes one of the following common errors:

•   The tax preparer fails to verify if a child qualifies under the EITC in terms of their age, relationship, or residency requirements.

•   The tax preparer files claiming the client is single or head of household even though the taxpayer is married.

•   The tax preparer reports inaccurate income or expenses for the client.

The IRS gives more specific guidelines to tax preparers in Publication 4687. The publication gives specific examples of situations where the practitioner should ask further questions to fulfill the due diligence requirement. For example, “A 22-year-old client wants to claim two sons, ages 10 and 11, as qualifying children for the EITC.”

In this case, the IRS recommends the tax preparer does some further checking because the children’s ages are so close to the client’s age. The preparer is expected to make reasonable inquiries to verify the children’s relationship with the client.

Another example from the IRS: “A client has two qualifying children and wants to claim the EITC. She claims to have earned $20,000 in income from her Schedule C business and had no business expenses.”

The IRS considers it unusual for someone who is self-employed to have no business expenses. Due diligence expects the preparer to ask additional reasonable questions to determine whether their client is carrying on a business and whether the information about her income and expenses are correct.

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Pros and Cons of the Due Diligence Penalty

The due diligence requirements demand extra work from tax preparers, such as conducting in-depth interviews and storing documents. However, preparers can establish policies and procedures with checklists and consistent practices, which should keep them organized and prevent them from falling foul of the IRS.

Pros

•   If the tax preparer can show they have “reasonable cause” for an understatement on the return, and the preparer acted in “good faith” while preparing the return, the preparer generally will not be penalized.

•   Following a due diligence checklist for every tax return helps the tax preparer minimize mistakes and keep their process consistent.

•   If a checklist is always followed, it is more likely that the preparer acts in good faith while preparing returns and will not be penalized.

Cons

•   Tax preparers may need to develop a system and a checklist for due diligence cases and follow it consistently.

•   Tax preparers need to keep meticulous records of interviews and documents.

•   Tax preparers must stay up to date with current and new requirements related to due diligence, as the IRS rulings change frequently to help reduce tax fraud and abuse.

Staying organized is essential for tax preparers, but it’s also important for taxpayers to have their finances in order during tax season and beyond. A money tracker app can help.

The Takeaway

The IRS takes due diligence seriously when taxpayers are claiming certain tax benefits or head of household status. Therefore, it’s critical that tax preparers follow the due diligence rules and develop consistent processes and checklists to ensure they comply. Due diligence penalties are significant, and a preparer may even be referred to the Department of Justice and prevented from practicing. The due diligence requirements may mean extra work for tax preparers, such as conducting in-depth interviews, creating checklists, and storing documents. However, the extra work is well worth it to keep them organized and on the right side of the IRS.

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FAQ

What is the due diligence penalty for 2026?

The penalty for returns filed in 2026 is $650 for each failure on a return. If a preparer claims all four benefits on a return and fails to perform due diligence for each benefit, the penalty for that return is $2,600.

What happens to a paid preparer who fails to meet the due diligence requirements IRC 6695 G?

Under IRC 6695 G, the penalty in calendar year 2026 is $650 for each failure of a tax preparer to meet due diligence requirements and determine a taxpayer’s eligibility for the head of household filing status or the following credits:

•   Any dependent credit, including the Additional Child Tax Credit and Child Tax Credit

•   American Opportunity Credit

•   Earned Income Tax Credit

•   Lifetime Learning Credit

What happens if a tax preparer doesn’t meet the due diligence requirements?

In addition to facing penalties, a tax preparer who does not do due diligence will be referred to the Office of Professional Responsibility. If the failure is deemed willful, the preparer can be referred to the IRS Criminal Investigation, and the Department of Justice may take away the right for the preparer to work on any future returns.

Photo credit: iStock/fizkes

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SORL-Q425-073

Sometimes student loan debt can start to feel like it’s slowing you down. Maybe the interest rate is too high, you’re not happy with your loan terms, or you’re frustrated with the lender’s customer service. If so, you have the right to look for a new lender and transfer your debt to a different company.

However, you can’t simply ask a new lender to take on your debt with the same terms. To transfer your student loan, you generally need to take out a new loan with a new lender or servicer. The process of switching will be different depending on whether your student loans are private or federal, and it may involve consolidating the loan or refinancing.

If you’re thinking about a loan transfer, keep in mind that there’s no guarantee you’ll end up in a more favorable situation just by switching lenders. Here’s what you need to know about student loan transfers.

How Do I Transfer Student Loans to Another Private Lender?

If you have private student loans, the main way to transfer your debt to another lender is to refinance your loans. This involves taking out a new loan with a different lender and using it to pay off your current student loans. Moving forward, you only make payments on your new loan to your new lender.

If you have multiple private student loans, refinancing can simplify repayment by giving you only one monthly payment to manage. And, if your financial picture has improved since you took out your original private student loans, you may be able to qualify for a lower interest rate. Another perk of refinancing is the ability to lengthen your repayment timeline to reduce your monthly payment amount. Keep in mind, though, that a longer repayment period will generally end up costing you more in the long run.

You’ll need to meet certain criteria to be eligible for private student loan transfer via student loan refinancing. Most lenders have a minimum income threshold as well as a minimum credit score (often in the upper 600s). If you don’t meet the income or credit requirements, you may be able to qualify by adding a cosigner.

Many lenders offer prequalification, which lets you see what type of rates and terms you may be able to qualify for without impacting your credit score. To find the loan with the best rate, it can be a good idea to shop around and compare lenders through prequalifying. Once you find a lender you want to work with, you’ll need to officially apply for the student loan refinance.

Can I Transfer My Sallie Mae Loans to Another Lender?

Currently, Sallie Mae only offers private student loans. Prior to 2014, however, the lender serviced federal student loans. If you want to refinance a Sallie Mae loan you took out before 2014, you’ll need to check whether it’s federal or private before moving forward.

If you took out a Sallie Mae loan after 2014, it’s a private student loan, and you can refinance the loan with another private lender. This might be a good idea if you can qualify for a lower interest rate.

What’s the Difference Between a Lender and a Loan Servicer?

While the terms lender and loan servicer are often used interchangeably, they are not the same thing. Here’s a look at how they differ.

Student Loan Lender

A lender is an institution or company that originates and funds the student loan. In other words, they’re the one lending you the money. For example, if you apply for a federal student loan, the federal government is your lender. If you apply for a private student loan, you can choose between a number of private lenders.

A Student Loan Servicer

A federal student loan servicer is the middleman between you and the federal government (the lender). Servicers handle your student loan billing and payments, and they keep track of whether you pay your loans on time. They will help you if you’re having trouble with your repayment plan or need to change your address or other personal information.

You do not get to pick your servicer. During the course of your federal student loan, your servicer might change a few times. For example, if you had a loan with Great Lakes, it was likely transferred to Nelnet some time between March 2022 and June 2023. You’ll typically get notified of a student loan transfer two two weeks prior to your transfer date.

If you have a federal student loan and you’re not sure who your servicer is, you can log in to your account on StudentAid.gov to find out.

Can I Change My Student Loan Servicer?

You can’t change your federal student loan servicer directly. However, if you’re willing to do some legwork, there are two main ways to move your federal student debt to a new servicer or lender.

If you want to keep your federal loan status but switch to a different loan servicer, you can transfer your loans by consolidating them into a Direct Consolidation Loan. If your main objective is to save on interest, you may want to look into refinancing your student loans with a private lender. Read below to learn more about each scenario.

What About Consolidating My Student Loans?

One way to switch loan servicers is to consolidate your federal student loan(s). This allows you to transfer the debt to a different servicer but keep your federal student loan status, since the lender will still be the federal government.

The consolidation process lets you combine several federal student loans into a single, easier-to-manage Direct Consolidation Loan. While it does not reduce your interest rate, it can lower your payment by extending the term. The downside is that the extended term will mean you pay more in interest over time.

Since not all federal loans have the same interest rate, the interest rate on a new Direct Consolidation Loan will be a weighted average based on your current loan amounts and interest rates. Any unpaid interest is added to your principal balance. The combined amount will be your new loan’s principal balance. You’ll then pay interest on the new principal balance.

Consolidation can be a good option if you are unhappy with your servicer or have several servicers and want to simplify your student debt by having only one payment.

If you have Federal Family Education Program or Parent PLUS loans, you need to consolidate to be eligible for income-driven repayment, public service loan forgiveness, and other relief programs.

You can complete a consolidation loan application at StudentAid.gov.

What About Student Loan Refinancing?

Another way to change your federal student loan servicer is to refinance your federal student loans with a private lender. If you also have private student loans, you can refinance them together with federal loans, giving you a single loan payment each month.

Generally, refinancing federal student loans may make sense if you can qualify for a lower interest rate. If you have higher-interest federal student loans, such as graduate PLUS loans or Direct Unsubsidized Loans, you may be able to get a lower rate by refinancing. To qualify for the best rates on a private student refinance, you generally need to have strong financials (or can recruit a cosigner who does).

It’s important to note that refinancing federal student loans with a private lender means losing federal protections, such as income-driven repayment plans, federal deferment and forbearance programs, and loan forgiveness options like Public Service Loan Forgiveness (PSLF).

If you’re interested in refinancing your federal loans, it’s a good idea to review offers from multiple lenders to find the best deal. Many private lenders will allow you to prequalify via a soft credit check so you can see your likely new interest rate without negatively impacting your credit score.

What About Transferring My Student Loan Balance to a Credit Card?

You generally can’t pay federal student loans with a credit card. If you have private loans, however, another option for student loan transfer is to move the balance onto a credit card and pay your monthly bills there. Some credit card issuers allow student transfers, but not all.

Generally speaking, this tactic only makes sense if you can qualify for a card with a 0% introductory rate and can pay off the entire balance before that promotional period expires (often between 12 and 21 months). Otherwise, you could be left paying even more in interest than you would with the original loan.

To see if you can manage this repayment schedule, simply divide your loan balance by the number of months you would need to pay it off before interest applies. Also check to make sure the credit card offers a high enough credit limit to accommodate your loan, and find out if there are any transfer fees.

If you decide it’s a good deal and are confident you can make it work, you would apply for the credit card and, once approved, give your credit card account details to your loan servicer. Your credit card issuer would then pay off your private student loan debt and move the balance to your credit card account. Moving forward, you only make payments to the credit card issuer.

Is It Possible to Transfer Student Loans From Parent to Student?

The federal government does not offer a way to transfer Parent PLUS loans to the child. However, if you’re looking to have your Parent PLUS loans transferred to your child, refinancing the loans with a private lender allows you to do that.

To make this type of loan transfer, you’ll first need to identify Parent PLUS refinance lenders that allow loan transfers. After that, your child may want to prequalify with a few of these lenders to see where they can get the best rate.

If your child meets the lender’s qualifications on their own, you can fully transfer the loan to them. If they don’t, you can serve as a cosigner on the refinanced loan and work with them to meet the lender’s cosigner release requirements. Many lenders allow cosigner release after a set number of successful payments.

The Takeaway

If you’re interested in transferring your student loans to a new servicer or lender, you have some options. If you have federal student loans, you can consolidate your loans to get a different servicer. If you have federal, private, or a mix of both types of student loans, another option for loan transfer is to refinance your loans with a private lender.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

FAQ

What happens if my student loans are transferred to a new servicer?

If your federal student loans are transferred to a new loan servicer, you will be notified at least two weeks in advance and provided with the new servicer’s name and contact information, according to the Education Department. The new servicer will take over the loan, and they should reach out to you when the loan transfer is complete. At that point, they will handle the billing, payments, and customer service for your student loans.

Can I stop my student loans from being transferred?

Generally, you cannot stop your federal loans from being transferred to a new loan servicer. Federal loans are owned by the Education Department, which assigns them to a servicer. If the contract with that servicer ends, your loans will be transferred to a new loan servicer.

Can a student loan transfer lower my payments?

Transferring your student loans might lower your monthly payments if you refinance the loans and qualify for a lower interest rate. You could also lower your payments by extending the payment term through refinancing — or with a federal Direct Consolidation Loan — but a longer loan term will cost you more in interest over the life of the loan. Be aware that refinancing federal student loans into private loans makes them ineligible for federal benefits like income-driven repayment and forgiveness.

SoFi Student Loan Refinance
Terms and conditions apply. SoFi Refinance Student Loans are private loans. When you refinance federal loans with a SoFi loan, YOU FORFEIT YOUR ELIGIBILITY FOR ALL FEDERAL LOAN BENEFITS, including all flexible federal repayment and forgiveness options that are or may become available to federal student loan borrowers including, but not limited to: Public Service Loan Forgiveness (PSLF), Income-Based Repayment, Income-Contingent Repayment, extended repayment plans, PAYE or SAVE. Lowest rates reserved for the most creditworthy borrowers. Learn more at SoFi.com/eligibility. SoFi Refinance Student Loans are originated by SoFi Bank, N.A. Member FDIC. NMLS #696891 (www.nmlsconsumeraccess.org).

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