Exempt 4029 Amish and the add'l child tax cr

[JenMO]

My understanding that the Amish who are 4029 exempt are eligible to claim the child tax credit against their income tax, but are ineligible for add'l child tax credit and EIC (refundable tax credits). I have started doing a few more Amish clients and when looking over last year's return done by a different taxpreparer, she gave them the add'l child tax credit. Who is right?

[Koss]

FICA Exemption

Those who are exempt from FICA are not automatically disqualified from claiming either credit. The rules are a bit complicated.

I don't see anything at all in the instructions for Form 8812 that addresses the 4029 exemption. However, "certain filers who have three or more qualifying children" are allowed to claim the Additional Child Tax Credit even if they fail to meet the earned income threshold of $8500.00.

For these taxpayers, the calculation of the amount of the Additional Child Tax Credit involves some rather complicated math that begins with the amount of social security and medicare tax actually withheld from their wages, plus any self-employment tax.

For an Amish taxpayer, that amount would be zero, and that may have the effect of disqualifying them from claiming the credit. But the amount of FICA tax paid only enters the equation under certain circumstances, i.e., when they have three or more children and their income is below a certain level. The simple fact that a person is 4029 exempt does not mean that they cannot claim the Additional Child Tax Credit.

The calculations in question take place right on Form 8812, and involve figures that are taken directly from Form W-2 and other lines of the return. So any tax program can probably handle this issue.

EIC is a little different. Here again, the 4029 exemption does not, by itself, disqualify the taxpayer from claiming the credit. But there are special rules that govern the definition of earned income for purposes of EIC. You'll need to take a close look at Worksheet B for EIC. See, also, the discussion that begins at the bottom of page 240 of Publication 17 (2008).

The Cliff's Notes version appears to be that for the Amish, wages that are exempt from FICA are considered earned income for purposes of EIC, but self-employment income that is exempt from FICA is not considered earned income for purposes of EIC.

Your software may or may not grasp this concept. If you can get your software to do a Schedule C without a Schedule SE, by checking a box that says "4029 Exempt," somewhere on the Schedule C screen, then the program may recognize that the Sch. C income doesn't count for EIC. Or it may not. If the program only recognizes that the self-employment income is exempt from FICA, but fails to account for why it is exempt from FICA, then it may move that income into the EIC calculations, where it doesn't belong...

I've never actually done one of these returns.

Looks like fun...

BMK

[JenMO]

My program does work well with the 4029 exemption. When I check the box, it does not figure EIC or add'l child tax crd.(I have done several other Amish, and don't give them either EIC or Add'l ctc) This is what I thought was correct. I have examined an Amish preparers work and he did not take the EIC or the add'l ctc on his clients either. But the previous preparer of the return I am now working on gave my client the add'l ctc, and he got a nice refund. Now I have to tell him I can't give him this refund. It may be a one year deal for me. Will IRS catch this? What should I tell him. Go back to your previous preparer?

[Koss]

Jen

What I don't understand is--

For last year's return, how did the tax pro complete Form 8812?

If the form was completed correctly, then the return may be correct...

Care to share any hard data?

What was the AGI, taxable income, filing status, and how many children qualify for the Child Tax Credit? And were there any other credits, such as education or child care?

BMK

[Koss]

Further thoughts

For the year in question, in which the taxpayer claimed EIC and Additional Child Tax Credit, did they have wages? Or was it all self-employment income?

And what about 2008? Is the client a wage-earner, or self-employed, or both?

I think this makes a big difference as to whether they can claim either credit.

BMK

[JenMO]

There were and are not any wages for 2007 or 2008. My program has a 4029 exemption box and does not figure the add't ctc. I looked at Pub 972 and filled out the earned income sheet. On two different lines, one for Sch C and one for Sch F it is specific
"Do Not include any amounts exempt from self employment." I think last year's preparer's software isn't very good, or it does not take the 4029 into account. She might have done an override and put in the Sch F income, I just don't know, but I am convinced that she was wrong. Do you think the IRS computers will spit this out as an error.

[Koss]

Error on the previous return

I think you're right; the other tax pro probably used an override without checking into the rules.

JenMO wrote:

Now I have to tell him I can't give him this refund. It may be a one year deal for me. Will IRS catch this? What should I tell him. Go back to your previous preparer?

And later wrote:

Do you think the IRS computers will spit this out as an error.

I don't know whether the IRS will catch it or not. But it doesn't matter. From a regulatory/compliance perspective, your responsibility is spelled out in Section 10.21 of Circular 230:

10.21 Knowledge of client’s omission.
A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.

You can't force anyone to file an amended return. You don't have to waste time preparing an amended return if the client makes it clear that he does not intend to file it. And you don't have to do an amended return at no charge.

But I wouldn't tell him to go back to the tax pro that made the mistake.

If you really want to cover your rear end, you might give him a memo with the 2008 tax return, in which you spell out the error you identified on the 2007 return, along with an explanation of the "consequences."

In this context, I think consequences means accumulating interest and potential penalties if he waits for the IRS to catch the error.

I don't know whether the IRS will catch it. He probably filed the return by mail. That might make it a little less likely. But the whole point of Section 10.21 is that you can't really tell a client to do nothing, hold their breath and hope the IRS doesn't catch the error...

With that being said, once you advise the client of the error and the potential consequences, I don't think it's a regulatory violation to candidly discuss with the client what the likelihood or probability is of the IRS identifying the mistake.

If it was an error such as accidentally failing to report $19.00 in dividend income, or accidentally overstating cash charitable donations by $32.00, I might feel comfortable telling the client that it is unlikely that the IRS would take any action.

But with EIC and ACTC, I'm not sure I would be comfortable giving such advice.

BMK

[JenMO]

I will do what you suggested and then leave it to him to decide what I should do. Thank you for your imput'