IRS enforcement

[Jesse]

Nashville, I do agree with you 100%.

They come with 25 preselected returns. Thats right I said they. There are two of them. One goes thru the returns while the other gives you a four hour intense interview on EIC. No problem. Well read on.

Do you know if they notify you in advance or just show up at your door?

Fine #1
Father claiming son who is 19 and a student. IRS said that no school issued student 1098. They charged $100 because they did not get copy of report card or some other proof.

I generally don't worry about seeing the 1098T because they are so often inaccurate. I do the drill and ask them to get a transaction transcript to determine the actual cost of tuition and qualified expenses. However, if the parent is eligible for EIC the student often qualifies for grants and the parent has not actually paid any tuition or the income is low enough the hope or lifetime credits are a mute issue. There could be a ton of variables but I just believe I should be able to take my clients at their word if they tell me their child is enrolled in school full time.

Fine #2
Father claiming 2 kids with same last name and claimed HOH. The IRS agent stated that their records showed the taxpayer was incarcerated for more than half of the year so he could not have been HOH. Fined $100.

This is obsurd, unless it could be proven the preparer indeed had blatant knowledge of the fact for some reason.

Fine #3
Woman came in with handwritten 1099misc and filed Schedule C. The IRS said the payers name on the 1099misc never filed a copy with the IRS. The IRS concluded that the 1099misc could be fraudelent.
Fined $100

This too, in our area we have many loggers from the old school without a computer and no intention of paying someone to do such a "simple" task. One hand writes their W-2's, 1099MISC and 1099S forms. To what length does a preparer need to go to verify the issuer actually exists? Is there someplace to go to verify a social security or Fed ID number of the issuer?

Now in all three of these scenarios, I can not think of many ways a lot of us would have filed them any different. The IRS is using information that we do not have on hand to penalize us. I thought the knowledge requirement was for issues that gave us some reason to believe the information given. For example, a 22 year old claiming a 15 year old as his son. That in itself gives us reason to ask more questions. However in the examples above, I see no reason why you shouldn't have been able to rely on the word of your client. The only way to catch any of this kind of stuff is to begin requiring proof from all of your clients. In essence your are auditing them if you have to have proof for everything they are telling you.

One thing I do for all EIC clients is walk thru each line on the form 8867. I liked the old form that had a final page that included a signature line for the taxpayer, 2006 or 07 they did away with that. But I still print out the form and I kept a copy of the final page from a 2006 Form 8867 that has some additional questions and the signature line.

A couple questions on form 8867 are "Did the child live with the taxpayer in the United States for over half of the year?" and "Was the child under age 19 or under age 24 and a full-time student or any age and permanently and totally disabled?". Would this establish due dilligence in scenerio #1 or #2 or would further proof be needed?

[DaveO]

The new due dilegence requirements are insane. I don't know if I should slap a sur-charge on every EIC return I do or just refuse to do them. Even in cases where I have determined the taxpayer didn't qualify for the EITC and prepared the return accordingly the IRS sends them a letter saying, "You may be entitled to an additional refund, please sign this and return it and we'll send you some money." My credibility has been damaged and my relationship with the client compromised. Maybe I should just disallow it on all returns and shift the burden over to the IRS?

[dtlee]

The new due dilegence requirements are insane. I don't know if I should slap a sur-charge on every EIC return I do or just refuse to do them. Even in cases where I have determined the taxpayer didn't qualify for the EITC and prepared the return accordingly the IRS sends them a letter saying, "You may be entitled to an additional refund, please sign this and return it and we'll send you some money." My credibility has been damaged and my relationship with the client compromised. Maybe I should just disallow it on all returns and shift the burden over to the IRS?

Actually, this is in stark contrast to what used to happen. Before I electronically filed returns, I would prepare a return and not give a client the EIC because they were not qualified for some reason and the word "NO" would print alongside the line.

The data transcribers were never informed to enter anything for that line (I had a friend who worked there and after she told me and I expressed disbelief, she brought me her training manual as proof). Thus, the IRS would ignore the "NO" and send the credit anyway.

Then the client would be calling and telling me that the IRS said I had done the return wrong and I would lose credibility with the client.

I guess the whole point of the EIC is to have us lose credibility with our clients.

[Nashville]

Giant Welfare Program

Doug I think (based on very good sources) that it is congressional intent to have the IRS send out these billions and billions as a mammoth "spread the wealth" project.

One preparer on the east coast was turned in for colluding with taxpayers to maximize EIC and giving to persons who did not qualify. IRS was tipped off about this, and after 2 years told the informant that they had tracked these activities and nothing was going to be done. That "congress didn't want the process to be hampered."

Another (personal friend in the business) was horrified at his own clients (some 2200 of them coming to his "Fast Tax" storefront office) and wrote his congressman. After several months and a couple more letters, the congressman replied that "as a rule, most of congress feels like the EIC program is one of the best things that ever happened to the economy", but that "preparers themselves should take the initiative to crack down on situations that are abusive."

Have you looked at Form 8867 supplied by your software company? Every question has the "Yes and No" questions pre-marked with a default answer designed to walk the EIC through the entire form with no disqualifiers. I don't believe this is an accident. In other words, any keypuncher can zoom through the form without even having to answer the questions. My software is TaxSlayer, but this is also the case on all the other software packages I have seen.

As a profession, we have very little lobbying influence. NATP and NAEA are the best we have going, and I would hardly classify them as a "lobby." This "due diligence" campaign to penalize preparers would never fly in an environment where they had to deal with the AMA or the American Bar Assoc.

It is also easier to collect a $300 penalty from a financially-stable tax preparer than it is to chase down a derelict transient taxpayer who has cheated the govt out of a $4000 EIC. Most of these guys are what are called "judgement-proof" in the legal profession.

[Davc]

Have you looked at Form 8867 supplied by your software company? Every question has the "Yes and No" questions pre-marked with a default answer designed to walk the EIC through the entire form with no disqualifiers. I don't believe this is an accident. In other words, any keypuncher can zoom through the form without even having to answer the questions. My software is TaxSlayer, but this is also the case on all the other software packages I have seen.

You must check the boxes to get EIC and 8867 in Drake.

[Jesse]

It is also easier to collect a $300 penalty from a financially-stable tax preparer than it is to chase down a derelict transient taxpayer who has cheated the govt out of a $4000 EIC. Most of these guys are what are called "judgement-proof" in the legal profession.

Sad, but oh how true!

[David1980]

You must check the boxes to get EIC and 8867 in Drake.

CrossLink defaults most of them but requires a few to be checked. The "taxpayer claimed as dependent", same for children, and part IV.

I guess it makes sense for the software to answer some of them (is the TP filing MFJ, or is the TP filing Form 2555, etc.)

8867 auto-complete features really take away the whole point of 8867.

[joanmcq]

You have to check them off in ATX too. And you get a diagnostic if you don't do the form. I'm glad I'm not a storefront walk-in.

[erchess]

I was Mistaken on one point

Regarding the guy who went to prison, I was under the impression that spending one day in confinement during the taxable year made a person ineligible for the EIC. I have therefore always asked EIC Clients if they spent any time in confinement during the year but for some reason never had one who said they had. I now see that was wrong. I don't suppose the client in question was a Felon who lost his citizenship was he? I am sure most of us ask clients if they are citizens and if not whether they are here legally or illegally.

I am aware of the cost and I pay the cost of having representation when I talk to the IRS or a State Department of Revenue about my own compliance whether as a small business owner or a tax professional.

[Zee]

Regarding the guy who went to prison, I was under the impression that spending one day in confinement during the taxable year made a person ineligible for the EIC. I have therefore always asked EIC Clients if they spent any time in confinement during the year but for some reason never had one who said they had. I now see that was wrong. I don't suppose the client in question was a Felon who lost his citizenship was he? I am sure most of us ask clients if they are citizens and if not whether they are here legally or illegally.

I am aware of the cost and I pay the cost of having representation when I talk to the IRS or a State Department of Revenue about my own compliance.

I guess we'll just have to disagree. IMHO, it isn't worth the cost of an attorney for 4 or more hours or representation on an examination of 25 returns. Tax attorney's here in Florida are $375-450 hour. But, I guess would depend on the quality of the preparer. I doubt many on this site would benefit from an attorney representing them during an audit of 25 returns.

[ChEAr$]

There's more to the story

I suspect in the case of the three returns.

the IRS people who conduct these, according to the press release of yesterday, will
call first for an appointment if it's merely to check due diligence. But if they show up
unannounced, chances are there's a CID agent in the door. maybe not of course.

Anyway, according to that press release, due diligence checks will be made when IRS notices a high probability of a preparer with a large number of EIC forms filed with his returns, esp those with high dollar amounts. The fact that in this case the two agents
only picked out three to check suggests that out of all those from preparer, these three
were slam dunks.

Agree?

As to a handwritten 1099-misc. I know of one preparer locally who (used to) prepare
schedule c returns for single women with kids claiming income from house cleaning.
Naturally these were all EIC returns and without 1099-miscs probably.
Well, after all, IRS DOES say that taxpayer must keep records of income, meaning
taxpayer's record of receipts would meet the test. (grin)

[taxea]

I submit that your original questions you ask prior to or during preparation of the return should be suffficient enough to prevent the kind of errors that your "friend" got questioned for.

This is exactly why I send my clients a thorough checklist and worksheets so that their handwriting is on the information that they submit to me. That ought to be proof enough that the client provided the information.

They also signed the due diligence for EIC whether or not the IRS requires their signature any longer. This document is kept in my file as required by the IRS so my clients sign it as required by my office policy. taxea

[BP.]

I'm surprised at the consensus on this.

I have quite a few clients who only need to prepare approximately 1 or 2 1099's -they do them by hand every year.

I would not have acted differently in any case.

I agree with you, equinecpa.

Thanks for the info, quicksam.

[taxea]

1. handwritten 1099's have long been a red flag to the IRS
2. The IRS does require preparers to complete the due diligence for EIC and requires us to keep a copy in our office files.
As I said before, just last year they quit requiring the taxpayers to sign the form but my office policy still requires the clients signature.

[DonPriebe]

1. handwritten 1099's have long been a red flag to the IRS

Interesting comment, considering that the IRS can only know that a 1099-MISC is handwritten by looking at the copy sent in by the PAYER. The recipient does not attach a 1099-MISC to his return, nor is a copy of it submitted within the e-file. There is also no such thing as a non-standard 1099-MISC. (See Pubs 1345, 1345A, 1346)