Eic Audit

[gman]

Just curious, has anyone ever had an EIC audit???

What does it include???? Documentation??

[Koss]

EIC Audit

Usually, the IRS requests documentation to substantiate that the child in question meets the age, relationship and residency tests.

Relationship and age should be easy: You send in a copy of the birth certificate.

But it may not be as easy as it sounds. If the taxpayer is legitimately claiming EIC for her nephew, you may have to provide three different birth certificates in order to establish that the relationship exists.

Residency is the tough one. Depending on the child's age, you may be able to use medical records or school records... you might be able to use a residential lease, if it identifies the children living in the household.

BMK

[gman]

Thanks

I do apporx 30 EIC returns a year, and a few have low income that I do question the individuals about, Of course, they always answer correctly, but a couple seem questionable to me. I try to document, but they sign without reading anything..

[Koss]

Type of Audit

Maybe I misunderstood your original question.

I thought you were asking about cases where the IRS conducts a correspondence audit of an individual return, seeking to establish whether the taxpayer is entitled to claim EIC.

Maybe you were asking about a "due diligence" audit of the preparer.

And that's a totally different animal.

I've never been through such an audit. But my understanding is that the IRS does not expect us to request or retain copies of birth certificates or anything else of that nature.

The requirement is that we keep our own record of the questions we asked and the information that we collected. You can do this by completing Form 8862 during your interview; your software may do it for you.

But the form and the questions are sometimes not enough. The IRS does expect us to use common sense. IRS guidance states that we cannot ignore facts that are inconsistent or obviously false. So when a client changes their story in order to fit the fact pattern that they need in order to be eligible for EIC, we are expected to use good judgment, and to avoid knowingly facilitating a fraudulent claim.

The cleanest example would be the wife with the kids, where the husband moved out in August. So she's stuck with MFS, because he was still living with her at some point during the last six months of the year. MFS disqualifies her from EIC.

So after you patiently explain, in great detail, why she cannot use HoH filing status, and why she cannot claim EIC, the client thinks for a moment, and says, "well, you know... my husband actually moved out in April... does that make a difference?"

Yep. Sure does. It means I can't prepare the return.

BMK

[KBTS]

EIC Compliance Audit

Here is a post from another forum regarding an EIC compliance audit:

They were fined for 3 returns at a $100 each. They targeted 12 out of the 25 returns, and the auditors had issues with 5 of the 12. When they come to audit they already have 25 returns selected for the compliance check. It is not a random 25 like the ERO compliance audit is.

Penalty #1:
Taxpayer has 20 year old son who he says was a student for more than 5 months. The IRS had no records of the son drawing any scholarships or receiving a 1098T. The IRS said that they should have asked for 1098T or Report Card or etc.

Penalty #2:
Taxpayer filed as HOH and claimed two children for EIC. The male taxpayer and the kids had the same last name. The IRS said their records showed the taxpayer was in prison for 8 months of the year. The IRS said that they should have asked more questions and documented.

Penalty #3:
Taxpayer brought in handwritten 1099misc for $13000 claiming self employment. The IRS concluded that the preparer should have documented more information because they believed the 1099misc was falsified income.

When agent was asked about dependents last names being different from taxpayers last name, they said that you should probably be getting copies of birth certificates, school records, and maybe other verifiable records to prove the relationship and residency.

They keep saying they are not asking us to audit for them, but isn't that exactly how they are portraying this program.

My understanding on the law is that further documentation is needed when things appear to be incorrect. I cannot see how a 20 year old in school appears incorrect. Also are we supposed to ask every client "have you been in jail this past year", or do we get everyone claiming EIC to provide all their bills to us. Also, around my area it is not uncommon for 1099misc to be provided handwritten.

[S T]

Preparers and EIC

Fortunately, I don't have more than about 6 returns a year that would qualify for EIC, but if this is what professional preparers that are trying to exercise due diligence have to look forward to, maybe we should just explain to the t/p that the IRS will calculate and forward them the appropriate amount.

Let IRS perform their own diligence!

Sandy

[DaveO]

Let IRS perform their own diligence!

I'm all for that!

I have made reasonable inquires and properly excluded a tax payer from the EITC only to have the IRS send them a letter saying that the return may have been prepared incorrectly and they may be due an additional refund. Just sign and return this form. After they do so and get another $2000 check they think I'm an idiot or worse.

The thing that worries me most about proposals to license all tax preparers is the influx of HRB and JH refugees. I don't encourage or solicit that business but a certain amount is unavoidable. The fact that we offer no bank products helps keep it to a minimum.