SoundSounds fine.
You can connect the two fans in parallel, as long as they don't use more than 5A combined, as that is the maximum of the TIP120. Though you definitely need to attach ana heatsink to the TIP120, if you are using a largish amount of current. Though in that case, I'd suggest using a MOSFET instead of a Darlington Transistor (TIP120), as MOSFETs don't heat up that much.
The diode is not needed if you use the TIP120, as there is already a diode inside the package.
Since you are using 12V as a power supply, the voltage regulator has to convert 7v into heat. Depending on the amount of current you use, this could result in the voltage regulator getting very hot. If you are only powering the ATMega328 and maybe some ledsLEDs from the 5v line, you'll be fine. Just don't connect something like a 5v fan.