EIC manipulation

[jimenright]

Taxpayers who have SE income could adjust thier expenses to increase the credit in certain situations. For example: The taxpayer could choose to have no written record of mileage expenses (thus they could not be claimed according to IRS rules) and in the process increase the EIC by increasing earned income. Can they be required to report expenses? Is there a rule that says you must report a particular expense even if you do not have documentation? Another method could be to declare SE income as hobby income; thus disallowing a loss from expenses.

[appelman]

Taxpayers are required to report all legitimate expenses.

Taxpayers are required to report all legitimate expenses. The IRS will allow reasonable vehicle expenses even without written record. There is obviously a lot of wiggle room here. For example, business use of home is entirely elective. But the hobby income ploy is likely to be counterproductive, since it would not be earned income for the EIC. A taxpayer who claims EIC with a substantial SE income and little or nothing in the way of expenses is probably asking for an audit. What I tell clients in such situations is to put down all your proper expenses, but don't bother looking under the rug for extras -- they're going to cost you money.

Evan Appelman, EA

[taxea]

you are not required to report expenses because if you don't the IRS gets more in taxes.
you cannot report expenses that the IRS requires documentation for that you do not have.
i.e. mileage, donations

[jimenright]

reply to reply

Appleman:

My point with hobby income is: That a net loss from SE could reduce earned income if claimed on the Scedule C and the loss could lower the earned income credit in some circumstances.

[jimenright]

reply to TAXEA

As I said, in some cases, reporting expenses can actually decrease taxes by increasing the EIC.

[appelman]

I've often honestly answered NO to the question "Is the evidence written?"

I've often honestly answered NO to the question "Is the evidence written?" without encountering any problem. If asked, the client could provide reasonable anecdotal evidence to support the vehicle expense claim.

I guess in most of the cases I've encountered, the SE income is the principal or only earned income. Hence, no SE income, no EIC!

Evan Appelman, EA

[BHoffman]

Taxtwit repellent

you are not required to report expenses because if you don't the IRS gets more in taxes.
you cannot report expenses that the IRS requires documentation for that you do not have.
i.e. mileage, donations

Now, I think we know better than that. Below is a link to a discussion on another message board that offers some good research references into this subject:

http://www.taxalmanac.org/index.php/Discussion:Not_reporting_expenses_to_receive_higher_EIC

And see below -

Cut from : https://www.eitc.irs.gov/public/site...nsExample4.ppt

"A self employed individual is required to report all income and deduct all expenses.
Authority for deduction of expenses is Revenue Ruling 56-407, 2 C.B. 564
Rev. Rul. addressed the issue of whether taxpayers may disregard allowable deductions in computing net earnings from self-employment for self-employment tax purposes. Under § 1402(a), every taxpayer (with the exception of certain farm operators) must claim all allowable deductions in computing net earnings from self-employment for self-employment tax purposes. Because the net earnings from self-employment that are included in earned income for EIC purposes are defined by cross-reference to the definition of net-earnings from self-employment under I.R.C. §1402(a), this ruling applies equally to the EIC.
See Chief Counsel Advice CCA 200022051 as well."

[erchess]

B Hoffman

The rub is precisely over whether mileage records without documentation is allowable. I am personally of the opinion that it is getting harder and harder to survive an audit without contemporaneous written records or loss of the mileage deduction. Checking the boxes that there is not evidence or there is but it is not written will shield preparer and and client from civil or even criminal fraud charges but I suspect that even though in most cases lower to middle income taxpayers in the end are not examined, the chance of examination is increased by this step. (That of course is not an argument against those check marks.)

The bare fact that we do something on even very many tax returns and make it clear on the returns what we are doing yet experience few to no examinations or notices is not in my opinion evidence that the something in question is proper. Enforcement funds are limited and are used where there appears to be the greatest chance of large recovery or where the political class indicates it should be.

[newbie]

Wrong again -

you are not required to report expenses because if you don't the IRS gets more in taxes.
you cannot report expenses that the IRS requires documentation for that you do not have.
i.e. mileage, donations

W/ EIC more expenses = less income= IRS gives more money.

And you are required to report all legitimate business expenses. If you have no vehicle documentation not a legit business expense.

[FEDUKE404]

It depends...

W/ EIC more expenses = less income= IRS gives more money.

And you are required to report all legitimate business expenses. If you have no vehicle documentation not a legit business expense.

Not quite correct - it would depend upon which side of the bell-shaped curve you are on - "more" income can be bad for EIC but it can also be good for EIC

FE

[Gene V]

Ttb 11-9

Author’s Comment: All allowable expenses must be
deducted in computing SE income. Net earnings from self-employment
are defined in IRC Section 1402(a) as the gross
income for the business “less the deductions allowed by this
subtitle which are attributable to such trade or business.”
The IRS looks closely at taxpayers who claim the EIC based on net
earnings from self-employment with little or no reported expenses and
will make appropriate adjustments or disregard the self-employment
income altogether for purposes of computing EIC. The IRS cautions
taxpayers to consider the 10-year disallowance of EIC in cases of fraud.
(Ltr. Rul. 200022051)

[Gretel]

The IRS can't have it both ways. Either they always have to accept mileage if no record is available or they won't. They cannot say it's an exception for EIC.

I once had an lady just under 65 with a legitimate child care biz. She was a darling to the children but it was too much to ask of her to keep mileage records. The other records were a challenge already. She qualified for EIC and I struggled with the issue of reporting all expenses but was encouraged by someone on this board (it's a long time ago now) that the IRS cannot have it both ways. I whole heartily agree with that.

It is one story to omit expenses, another to follow the letter of the law and not allow mileage if there are no records.

[Nashville]

Gretel is Right

If justice is blind (and we all know better), then the preparer must be blind as to whether or not to change his ordinary business income calculations because of the opportunity to maximize EIC.

If taxpayer is making $300,000 and can't take a $7000 deduction because of having no mileage log, then that is the approach.

Next client comes in with 2-3 dependents and makes only $17000, and also has no mileage log which would have given him another $7000 deduction. Same non-deductibility applies. (The charts show a maximized EIC at $17000 earned income, as opposed to a $10000 earned income)

Sorry IRS. You don't want us talking out of both sides of our mouth, so don't expect us to start now. If you don't like the mathematics of reverse mentality, you need to talk to Congress.

[RitaB]

Good answer, Ron

And, I personally don't think IRS is trying to catch the EIC scammers. I see people every year that I would audit, no question. It's almost like they WANT people to cheat. When EIC first came about, I thought it was a trick to flush out non-filers, and then it would go away. LOL. Apparently, I was incorrect about that.

[New York Enrolled Agent]

The IRS can't have it both ways.

It is one story to omit expenses, another to follow the letter of the law and not allow mileage if there are no records.

They make the rules - of course they can have it both ways.

To your second point, I believe there is enough wiggle room in Reg §1.274-5T(c) to allow the IRS to determine mileage expense in the event the taxpayer "fails to keep records" and EIC is an issue.