Responding To Earned Income Credit Concerns

If you're a tax return preparer with lower-income clients, you know that the earned income tax credit (EITC or EIC) is important to many of them. On returns filed in 2016, the IRS paid out about $67 billion in refundable credits to more than 27 million taxpayers under the EITC program.

It's also important to know, however, that the IRS has imposed strict requirements for preparers to show due diligence in verifying EITC eligibility and preventing fraud. Failure to follow these requirements can result in an audit and in civil penalties.

At Brown, PC, we can guide you skillfully in responding to these concerns. Our firm is led by attorney Lawrence Brown, a former trial attorney for the Justice Department's Tax Division. Based in Dallas-Fort Worth, our attorneys help clients across the country.

What Do You Need To Verify?

Determining eligibility for the EITC and the amount of the credit can get pretty complicated. There are more than 20 separate calculations involved.

But as a paid tax preparer, you have to put in place a process to make reasonable efforts to verify that the information provided by your client is accurate. This includes asking follow-up questions and documenting the responses from clients on criteria that include:

  • Filing status – Was a divorce finalized? Does anyone else live with you? Is there anyone who can claim you as a dependent?
  • Dependents – Where is the other parent? Do you have documentation that shows a child resides at the same address (for example, school records or a driver's license)? For nonchild dependents, it's important to analyze whether all EIC relationship requirements are met.
  • Amount of income – How do you support yourself? Are there any other sources of income you have received such as child support or government benefits? Does another person in the household contribute support?

Asking The Right Follow-Up Questions

Let's look at an example to make this all more real.

Suppose your client says he or she is not married. You need to ask follow-up questions on things like divorce and cohabitation, such as:

  • Were you ever married? If so, when were you divorced?
  • Does anyone else live with you?

Or if your client is claiming a dependent who has a different last name, you have to ask why that is.

Once you've asked the necessary questions, you'll have to file a form 8867, the Paid Preparer's Due Diligence Checklist. This form has to be submitted along with returns claiming the EITC or other refundable tax credits. Our lawyers can walk you through these compliance steps.

What If You Are Facing A Due Diligence Audit?

If the IRS has found too many errors on returns you filed in the past, you may be subjected to a due diligence audit. We can help you respond to concerns the IRS may have about your business practices, such as poor documentation of EITC verification steps or a lack of training of individual employees on those steps.

No matter what the specific concerns are, the stakes are high. At a penalty of $510 per return for failing to ask the right questions and document the responses, the financial costs can really add up when your business handles many returns each filing season.

A due diligence audit can have significant consequences for your taxpayer clients as well, ranging from accuracy-related penalties to a ban on claiming refundable credits in future years. Our lawyers can advise you on an effective response.

As in other areas of tax law, we take a proactive approach to resolving the issues with the IRS. We have a proven record of assisting clients in avoiding or minimizing penalties and finding favorable solutions.

Get The Skilled Counsel You Need

Call our office today to arrange a confidential consultation about your EIC circumstances and options. Or, if you prefer, complete our online form.

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