EITC Due Diligence
Three Most Common Errors
Publication 4687 on EITC due diligence identifies three common errors that account for more than 60% of erroneous claims. The most common form of EITC noncompliance is the improper claiming of a qualifying child. The error occurs when the taxpayers claim a child who does not meet the age, relationship, or residency requirements.
The second most frequent mistake is when taxpayers file as Single or Head of Household when they are married. According to the IRS, many times this error is caused by taxpayers failing to understand the nuances of the Head of Household filing status, but taxpayers also often improperly claim filing status of Single or Head of Household intentionally to qualify for or inflate the amount of EITC.
The third most common error made by taxpayers is the improper reporting of income. Taxpayers sometimes over- or under-report income either to qualify for or maximize the amount of EITC.
Exercise Due Diligence
A tax return preparer must exercise due diligence in preparing a return claiming an EITC. The due-diligence requirements a preparer must meet are provided in Regs. Sec. 1.6695-2(b).
There are four due-diligence requirements:
- Completion and Submission of Form 8867
- Computation of the Credit
- Retention of Records
Fundamentally, in the event that you prepare EITC claims, you must not only ask all the questions to get the information required on Form 8867, Paid Preparer’s Earned Income Credit Checklist, you also need to ask additional questions when the information your client gives you seems incorrect, inconsistent, or incomplete. Prepare and keep Form 8867 or its equivalent, and prepare and keep all worksheets showing how the credit was computed. There are additional recordkeeping requirements you need to be aware of.
Preparers who do not meet the due diligence requirements are subject to penalties and other sanctions. You could be penalized $500 for each time you fail to meet all four due-diligence requirements for each EITC claim. Other penalties that could be imposed include:
- Criminal penalties for filing fraudulent returns
- Disciplinary action by the IRS Office of Professional Responsibility
- Suspension or expulsion of the preparer’s firm from participation in IRS e-file
- Injunction barring preparers from preparing tax returns
The best approach you can take as a tax return preparer to avoid incurring penalties due to unintended errors in conducting EITC due diligence is the enhancement of your tax knowledge. Ensure that you and your staff are properly educated and trained. Because of the need for proper documentation to prove compliance with the EITC due-diligence requirements, having a good system in place for the production and retention of necessary documentation is critical for practitioners in dealing with IRS enforcement efforts of the due-diligence rules.
For more information, visit EITC Central.
By: Lori Correa