A practitioner holds a client's refund check, an unpaid invoice, and a spouse who wants the same representative. Three Circular 230 rules fire at once, and each has a different answer.
Due diligence means taking reasonable care to get things right before you file a document or tell someone something. Circular 230 section 10.22 imposes due diligence in three places: preparing or filing returns and other documents, determining the correctness of oral or written representations to the Treasury Department, and determining the correctness of representations made to clients.
Practitioners often rely on work done by someone else, such as an employee who drafts part of a return. Relying on another person's work product satisfies due diligence requirements only under these conditions:
- You used reasonable care in engaging, supervising, training, and evaluating that person.
- The person was competent for the specific task you delegated.
- Nothing you know contradicts the work product you accepted.
- Delegating the work never transfers responsibility. You remain answerable for the filed document.
Common mistakes
- Treating 16 annual hours as full compliance. Sixteen hours a year for three years adds up to 48, not 72. The annual floor and the cycle total are separate tests, and the cycle total controls.
- Applying section 6695(g) once per return. The penalty applies per failure, per item. Four failed items on one 2025 return produce $2,540, not $635.
- Believing client consent cures a refund check negotiation. The conflict rules in section 10.29 have a consent path; section 10.31 does not. Negotiating the check with a signed client authorization is still a violation.
Bottom line
- Due diligence: reasonable care in preparing, in representations to Treasury, and in representations to clients; reliance on others requires care in engaging, supervising, training, and evaluating.
- Section 6695(g): $635 per failure per return for returns filed in 2025, per item, so four items equal $2,540; Form 8867 and records kept 3 years.
- Conflict of interest waiver: reasonable belief, legality, informed consent, written confirmation within 30 days, consents retained 36 months from the conclusion of the representation.
- Section 10.31: no endorsing or negotiating a client's federal tax refund check, ever, with no consent exception.
Exam shortcut
Read the stem for the practitioner's motive before the rule. If the delay, the fee arrangement, or the advice benefits the practitioner rather than the taxpayer, the answer is a violation almost every time. Three stem signals and their answers. "Client consented in writing" near a refund check means the answer is still a violation; section 10.31 has no consent path.
The full lesson (about 4,492 words, 30 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- 1A
- 1B
- 1C
- 2
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