EITC Due Diligence Questions

[MAJ]

It's late in the season but I have a client with a particular EITC issue that throws up flags. Their income does not seem to justify their expenses (surprise). They do receive SSDI so that helps. However, the whole thing is 'questionable'.

I'd like to propose some type of general EITC DD questionaire that we can put together to help protect us and our efforts.

Has anyone put something like this together for the clients to review, answer & sign?

Thanks...

MAJ

[Burke]

I posed this exact question under a previous thread, but it got lost in the shuffle so I will reiterate it here. Just how far does the IRS expect us to make "reasonable inquiries if the information furnished appears to be incorrect, inconsistent, or incomplete." (Direct quote from Part IV of EIC 8867) Do you require SSN cards for all dependents? That would solve imaginary dependents. Ask how they are living on the meager income they are reporting? That's awkward. I have one who is obviously middle class, more than 2 children, spouse does not work, home is paid for, no investment income, does not itemize, spouse's W-2 shows 401k contributions as well as DCB deductions (which get added back to income). Huge EIC. Doesn't seem like this is the scenario Congress envisioned when they came up with this program.

[Lion]

Software

Your software probably has a questionaire embedded that you need to force print and have clients sign with maybe a question or two of your own added.

[BP.]

DCB deductions (which get added back to income).

Off the OP topic, but should more people avail themselves of this little strategy to save the $383 Fica & Medicare? I mean, if non-working spouse, they know they're prob not gonna qualify for Dep Care credit when they set up the payroll exclusion, same as when two spouses both elect to have $5,000 in DC benefits excluded- only one'll qualify, but hey, there's a little savings if both do it. (BTW- not advocating- but sarcasm not conveyed writing.) I've had people in both situations.

[Burke]

When I posed this dilemma last year, she seemed surprised that it was happening. She did not know if it was being forfeited. But I have known moderately well-paid taxpayers who took DCB (and qualified for it with sufficient child care expense) and simply used it for other purposes after receiving the funds from the company. Was just a way to shelter income from tax. Then they went on vacation with it. There is a cut-off point when the CCTC is worth less than the tax-free income.

[taxea]

I posed this exact question under a previous thread, but it got lost in the shuffle so I will reiterate it here. Just how far does the IRS expect us to make "reasonable inquiries if the information furnished appears to be incorrect, inconsistent, or incomplete." (Direct quote from Part IV of EIC 8867) Do you require SSN cards for all dependents? That would solve imaginary dependents. Ask how they are living on the meager income they are reporting? That's awkward. I have one who is obviously middle class, more than 2 children, spouse does not work, home is paid for, no investment income, does not itemize, spouse's W-2 shows 401k contributions as well as DCB deductions (which get added back to income). Huge EIC. Doesn't seem like this is the scenario Congress envisioned when they came up with this program.

The 8867 no longer requires the TP signature. I ask the questions, send them a copy to review and initial and when it comes back I file it.

[MAJ]

EITC Due Dlilgence Questions

I use TRX and they allow free form notes which I can but do not have to have the client sign. Guess what - They're signing. However, the original topic was to determine if anyone else has taken it to another level and developed their own set of questions to propose to the client to further assist in the due diligence factor.

The attached Word Template is something I threw together yesterday for a specific client but I would like to expand on this to provide a more generalized set of questions while leaving room for wildcard questions.

Using this as a BASE I thought we as a group could critique & expand to provide a general template to share.

[DonPriebe]

3) Do you confirm that the child(ren) claimed for Earned Income Credit are:
...
c. Supported by you by providing 50% or more of their wellbeing during the tax year?

Since support is not a requirement for EIC, I would drop that question.

[MLINDER42]

Due Diligence

One of my preparers had an EITC due diligence audit.We have all clients sign a copy of the 8867 which we keep in the file .He accepted that as proof of due diligence.However we had no proof of income or expenses on Schedule C or CEZ' s so he fined the preparer 100 per return there were 33 of these returns.We now have all of these clients sign a form where they enter their revenue and expenses and sign.I wanted to fight the audit but the owner just wants to pay the preparers fine.

[Edward]

Drake progdram has some excellent Due Diligence statements that can really pin down facts on EITC & Head of Household problems. I love it but the clients sometimes blink when going thru these statements. To assure some accuracy, clients as well as preparers have to sign the statements.

TOO, an article that really hits on the "Due Diligence" should be read by all preparers - an article written by Benson Kariuki, CPA, for the NATP TAXPRO Journal FALL of 2009.... In this he is citing an updated Treas. Reg. 1.6695.2. He further states:

a." To conform to the new requirements, the IRS is directing paid preparers to do the following:

(1) Evaluate info received from clients;
(2) Apply a consistent and reasonable standard to the info;
(3) Ask additional questions if the info appears to be incorrect, inconsistent, or incomplete; and
(4) Document and retain the record of indffquires made and client responses.

b. The top two directives -- evaluating info and applying consistent and reasonable standards to the taxpayer's info -- is bound to overwhelm tax preparers to such an extent that they may require assistance to navigate around them!!

c. The purpose of evaluating info is to determine whether the info supports a taxpayer's position. To reach these determinations, taxpreparers will have to carry out a verification process. Traditionally, verifying the taxpayer's info has always been the responsibility of the IRS. If tax preparers were to undertake this task, they would be upsurping IRS responsibility. The IRS has issued a disclaimer that the info evaluation is not the same as a tax audit. However, the difference will be in who is carrying out the process..."

Very interesting, huh???

[Burke]

Yes, and that is why I posed the question, "how far does the IRS expect us to go......"
The self-employment issue in MLinders post is enlightening.

[taxea]

Drake progdram has some excellent Due Diligence statements that can really pin down facts on EITC & Head of Household problems. I love it but the clients sometimes blink when going thru these statements. To assure some accuracy, clients as well as preparers have to sign the statements.

TOO, an article that really hits on the "Due Diligence" should be read by all preparers - an article written by Benson Kariuki, CPA, for the NATP TAXPRO Journal FALL of 2009.... In this he is citing an updated Treas. Reg. 1.6695.2. He further states:

a." To conform to the new requirements, the IRS is directing paid preparers to do the following:

(1) Evaluate info received from clients;
(2) Apply a consistent and reasonable standard to the info;
(3) Ask additional questions if the info appears to be incorrect, inconsistent, or incomplete; and
(4) Document and retain the record of indffquires made and client responses.

b. The top two directives -- evaluating info and applying consistent and reasonable standards to the taxpayer's info -- is bound to overwhelm tax preparers to such an extent that they may require assistance to navigate around them!!

c. The purpose of evaluating info is to determine whether the info supports a taxpayer's position. To reach these determinations, taxpreparers will have to carry out a verification process. Traditionally, verifying the taxpayer's info has always been the responsibility of the IRS. If tax preparers were to undertake this task, they would be upsurping IRS responsibility. The IRS has issued a disclaimer that the info evaluation is not the same as a tax audit. However, the difference will be in who is carrying out the process..."

Very interesting, huh???

Evaluating the info is like telling us to take the time to audit and verify their figures. I ain't doing that until the IRS makes it a requirement for us. And if they do, I will retire. How are we supposed to get any work done if we have to audit/verify. The taxpayer signs the return which puts the accuracy requirement on them.
Of course that is not to say that I will do returns when it is obvious the info is fraudulent.

[BHoffman]

Clipped this from another message board. Thought about taking liberties by doing this, but I see nothing in the post that would identify the poster in any way, and a great deal of benefit for all of us to know this. The poster had an EITC Compliance audit. Here are the results posted.

"The auditor was at my office on 5 separate days to conduct his examination.
On 1/7/2010 he conducted his interview (2 1/2 hours) and reviewed 11 files.
1/25 he reviewed 22 files, 2/16 he reviewed 24 files, on 3/23 he reviewed 30 files, on 3/24 he reviewed 29 files. That's 116 files in total.

He asked to see the 1040 or 1040A, whichever was filed, Form 8867, EIC Computation Worksheet, DOB of Taxpayer and Dependents, Schedule C income/expenses, as well as any comments and notes in the files.

The Closing Conference was today. His findings were that I was lacking with regards to my documentation on 108 files. The fine $10,800.

I told him I plan to appeal and he said the IRS wants to settle this at the lowest possible level so he can give me til noon Friday to pull the files, look them over. We'd talk then and if I think he missed something or if I wanted to point out something to him I could at that time. If we still can't settle then I could request a Managerial Conference. At which time I will need to site regs or code. If no settlement after that conference then I can Appeal. At which time I will get a 30 day letter and a copy of his report. I asked why I couldn't get a copy of his report now. His answer was that's the way we do things.

Files he quoted:

HH, male, 32yrs old, W-2 wages, 2 dep. his daughters. Maximum EIC received. I have birth certificates that list him as father and asked about who else he lived with. No one. That's all that was in the file.

Lack of DocumentationThese are his words)
You should have either divorce decree/ custody papers showing he entitled to claim his kids. There was no child care credit, you need to document who watched the kids while he was at work. There was no documentation showing he was qualified to claim HH status. Where were copies of his lease and utilites receipts?

After I asked what did HH status and have to do with EITC. He seemed aggravated with all other questions.

The long and the short of it is: asking and documenting questions isn't good enough. This IRS Agent informed me that I needed to audit every client that walked in my door. I need to prove everything I put on the tax return.

If the kids are 18 -24 and go to school, I need to have a copy of proof ie: their transcript, in my file. If they qualify to use HH status I need a copy of proof ie: lease agreement, utility bills, grocery receipts in my files.

If they have Schedule C income with EITC then I need proof of income and expenses ie: copies of their records in my file.

I will agree that I didn't document all of my questions and the clients answers, I generally spend around 45 min - 1 hours per client and do their return during that one visit. And if really being honest that total would probably be close to 45 -50 files the notes were really scarce. I asked and made my determination, just didn't write it down anywhere."

[Jesse]

Wow

That's all I can say is, wow! Time to retire?

[Burke]

This person got audited because there were 116 EITC clients in their practice in one year. It doesn't say what ratio these were to overall returns. Do any of us do anywhere close to that many? PS: I hope they did appeal this audtior's ridiculous requirements for "documentation." That probably answers my question as to why the statements about due diligence on 8867 are so vague. They can interpret however they wish.