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July 30, 2021


EITC audits: What tax preparers should know

The earned income tax credit (EITC) is one of the federal government’s largest anti-poverty programs. It can also be a source of headaches and possible penalties for professional tax preparers.

Geared toward the working poor, the EITC program offers credits totaling nearly $60 billion each year. The program helps nearly six million people across the country – almost half of them children. For people living paycheck-to-paycheck, it’s a vital financial lifeline.

EITC audits are surprisingly common

When it comes to tax audits, it’s a common misconception that the ultrawealthy are the most likely to attract IRS scrutiny. According to a recent report from the Treasury Inspector General for Tax Administration, nearly a third of the IRS’s tax audits over the last decade have involved EITC issues. And a disproportionate number of those audits involve returns from taxpayers in southern states. EITC audits are typically conducted entirely by correspondence.

People claiming EITC are more likely than wealthier taxpayers to get audited, which may mean their refunds are withheld. That’s a big deal for those living paycheck to paycheck.

Tax preparers face potentially high stakes in EITC audits

The EITC program has tricky eligibility rules. Tax preparers must know the intricacies of those rules. They must also adhere to due diligence requirements when preparing returns that claim the EITC. If an audit uncovers grounds for due diligence violations, preparers could face stiff monetary penalties, e-file suspension, disciplinary action, or even criminal proceedings for fraudulent returns.

Given the potentially high stakes involved when facing EITC audits, it’s important for tax preparers to protect their careers and reputations by seeking qualified legal guidance.