IRS is likely to question Sch C and EITC if the 8867 indicates a lack of due diligence. I don't do returns for "babysitters" who have no record of their income. Or who give me fraudulent "receipt books". You do have to disclose on the 8867 what DD steps you took for a Sch C return.
mr.phil, I agree some clients must be turned away, like the 20 year old guy that swore he was Head of Household supporting 2 babies on 7K. I asked if anyone else live in his home with him, and he said YES his brother, but his brother didn't work or earn any money! BUT, we must remember we are NOT auditors, and a good interview is as good as documentation. EIC is for the children, to supplement their parent/guardian's income. While it would be wonderful to end the fraud and abuse, we have to be very careful not to cross a line and give bad advise telling people they don't qualify because they can't prove what they said......... A good head of household worksheet and the right questions can and should be just as acceptable before turning one away because we fear a fine. Common sense must always dictate!