Tax preparers know that the EITC stands for Earned Income Tax Credit, which for 2021 can range from $1,502 to $6,728. Tax prepares also know that the less you earn and the more children you have, typically, the greater credit you qualify for. Additionally, most tax preparers are well aware that there are four tests a qualifying child must meet for the EITC: relationship, residency, age and joint return.
The mistake a tax preparer typically makes lies in the murky gray area of what is correct information. The client provides the information and the preparer accepts it. When a client is new and the preparer is under mounting pressure and a tight deadline, small things, such as an inconsistency, can easily be overlooked.
And while the tax preparer may not notice an inconsistency, the IRS will notice. For example, when a 23-year-old client claims to have three children who are 10, 9, and 8. While not impossible, it is unlikely and follow-up questions from the preparer are well within reason. This IRS-required documenting of client eligibility (due diligence) began in 2018.
The three deadly sins of EITC errors
There are many ways mistakes can be made when it comes to EITC credits. Here are three of the most common.
- Income reporting: A client may exaggerate losses or income or may neglect to claim business expenses on a Schedule C.
- Incorrect status: Married people both claim to be head of household (HOH) or single.
- Double dependent claims: Someone is also claiming your client as a dependent, or the client is a student who is not yet 24 and does not qualify for EITC.
Additionally, the person claiming EIC must have lived in the U.S. for over six months. IRS due diligence demands that when there are items that any reasonable person would question, a tax preparer must ask their client these questions. It is the tax preparer’s duty to ensure that the information provided is correct, complete and consistent and document the questions asked and the responses and file Form 8867. However, beyond due diligence and noticing things an average person would notice, preparers must at some point trust that the information the client is providing and attesting to is accurate.
Penalties for EIC errors
The penalties vary with the egregiousness of the error. If the whole EIC claim is denied, the filer may have to pay back the credit plus interest, file a Form 8862 and face a potential ban from being able to claim EITC for the next two years.