SE EIC Fraud

[Nashville]

All of a sudden because sleazy liars give us wrong information, IRS is coming after US instead of the perpetrators.

I believe the potential for fraud is huge for self-employed people, and a growing number of them are now knowledgeable that not turning in all their expenses can increase their refund.. How are we supposed to know that? How are we supposed to know who is living with them, or whose kids they are?

I don't dispute that we should have an idea of what is reasonable, and if someone owns a million $ house and consistently turns in low earnings, but what is "reasonable" to us and to an auditor are two different things. It is THEIR job to audit -- not ours, and we shouldn't be penalized for what we can't be expected to know.

One rather obvious situation was a 350 lb. woman who cleaned houses for a living and said she made $200 per week cleaning five houses. No bank account. No receipt book. Nothing. She dropped her pencil and was not physically able to pick it up.

One of our members was turned in because an EIC customer was in prison most of the year. How was he supposed to know that?

If I have to audit someone's self-employment income because they get EIC for things that are not obvious two things are going to happen:
a) I will stop doing EIC returns for the self-employed.
b) My self-employed customers will leave - they won't put up with me auditing them anyway.

[OtisMozzetti]

due diligence questions

My latest nightmare consists of the individual who claimed his cousins for EITC, and then, after he got an IRS letter, came back in saying that "in [his] culture cousins are considered to be nieces and nephews".

I guess the solution is to document the answers to a reasonable number of due diligence questions. I don't know whether one has to ask the taxpayer's relationship with whomever the taxpayer says is the parent of nieces and nephews that are to be claimed.

[DaveO]

I had a call from a fellow who said he was married to a resident alien who had 2 children (not his). They had filed together using their ITINs for the last three years. They got the child tax credit but not the EIC. Now they have their SSNs and want to amend their returns to claim the EITC. They had their original returns done at HRB but said they told them they couldn’t help them with the amends. I see in the regs this is allowed but I’m thinking there must be a pitfall somewhere on the DD issue. I quoted them double the usual fee and said it would be 100% cash in advance. Any insight out there?

[JohnH]

A couple of insights:
1) I don't think your fee is high enough
2) Payment terms are OK.

[erchess]

Due Diligence

My software (Drake) contains questions for me to ask, I think four pages worth though not all pages are necessary for all clients. If I have any doubts about the situation I have clients sign the pages that apply to them.

I am fortunate in that relatively few of my clients get EIC since the nature of my business (done in their homes or offices) is not conducive to me printing checks which in turn means that I can't do enough bank products to make a bank happy. I think we have all observed that the majority of people who get large amounts of EIC are unwilling to pay out of pocket to get their taxes done but don't care how much is taken from their refund if they get the remainder fast enough.

[OtisMozzetti]

double the usual fee, for what reason?

I quoted them double the usual fee and said it would be 100% cash in advance.

I'll go along with the 100% cash in advance, but I don't understand why it should be necessary to quote them double whatever the usual fee is with you (other than in case you are just seeking to grab a share of their "windfall" under the charging what the traffic will bear business philosophy).

The amendments themselves, for the 3 different years, could almost just consist of photocopying the returns prepared elsewhere and filling in a 1040X downloaded from www.irs.gov along with Schedule EIC (possibly no need to enter the entire return into the software you are using). Because of DD requirements, and since we are on the topic of Due Diligence, I would certainly also go through a due diligence questionnaire including any additional questions that seem to be reasonable inquiries. Incidentally, you don't need to fool around with a state return.

Those clients are going to be very, very happy about raking in 3 years of EITC. I recall some clients a few years back where first I handled an ITIN application for the husband, and then submitted the back EITC claims when he received an SSN a year or so later. They have been steady clients ever since.

[JohnH]

I wasn't thinking so much about the work load as I was about the filing situation & risks. Resident alien, kids not his, ITINs, HRB not interested?. Looks like a good opportunity to learn what type of work not to take on, unless he just likes lying awake at night. Maybe I'm just too conservative...

[taxea]

All of a sudden because sleazy liars give us wrong information, IRS is coming after US instead of the perpetrators.

I believe the potential for fraud is huge for self-employed people, and a growing number of them are now knowledgeable that not turning in all their expenses can increase their refund.. How are we supposed to know that? How are we supposed to know who is living with them, or whose kids they are?

I don't dispute that we should have an idea of what is reasonable, and if someone owns a million $ house and consistently turns in low earnings, but what is "reasonable" to us and to an auditor are two different things. It is THEIR job to audit -- not ours, and we shouldn't be penalized for what we can't be expected to know.

One rather obvious situation was a 350 lb. woman who cleaned houses for a living and said she made $200 per week cleaning five houses. No bank account. No receipt book. Nothing. She dropped her pencil and was not physically able to pick it up.

One of our members was turned in because an EIC customer was in prison most of the year. How was he supposed to know that?

If I have to audit someone's self-employment income because they get EIC for things that are not obvious two things are going to happen:
a) I will stop doing EIC returns for the self-employed.
b) My self-employed customers will leave - they won't put up with me auditing them anyway.

if the tp information raises your suspicion and they have no records to document the information-don't do the returns

if you have done the returns and discover the dependents did not qualify as dependents, file an amended return-if client won't sign it send it with an explanation to fraud unit.

find out why HRB would not help them with the amended before you get involved

for EIC have them complete and sign the due diligence form.

[Snaggletooth]

Whistleblowing

-if client won't sign it send it with an explanation to fraud unit.

If we prepare the amended return and give it to the client with mailing instructions, we have fulfilled our obligation. Why is it necessary to squeal on the taxpayer?

[Black Bart]

Why a double fee?

double the usual fee, for what reason?
I'll go along with the 100% cash in advance, but I don't understand why it should be necessary to quote them double whatever the usual fee is with you (other than in case you are just seeking to grab a share of their "windfall" under the charging what the traffic will bear business philosophy).

It's the "wedgie factor," that is, how much worry, work, time and trouble is this case going to be?

The scenario you describe:

The amendments...could...just consist of photocopying the returns...and filling in a 1040X...along with Schedule EIC (possibly no need to enter the entire return into the software you are using)....I would...go through a due diligence questionnaire including...reasonable inquiries...don't need...state return.

might very well play out in exactly that "no problem" manner.

But so might John's....and it's just a tad ominous:

I wasn't thinking so much about the work load as I was about the filing situation & risks. Resident alien, kids not his, ITINs, HRB not interested?. Looks like a good opportunity to learn what type of work not to take on, unless he just likes lying awake at night...

HRB(whose judgment I respect)'s position alone is enough for me to turn it down; I don't believe they decline work without very good reason. We all like to do a good turn if we can, but it's a fact that some "poor" people will often tell you anything/whatever's necessary because they desperately need EIC money (and those DD rules are to nail your hide to the wall, not his).

Those clients are going to be very, very happy about raking in 3 years of EITC...

No doubt, but we're in business rather than social work and the poor/noble/Kumbaya cases I've done frequently resulted in twice the work/worry and an unwillingness to pay more than the original quote.

[DaveO]

My concern exactly

I wasn't thinking so much about the work load as I was about the filing situation & risks. Resident alien, kids not his, ITINs, HRB not interested?. Looks like a good opportunity to learn what type of work not to take on, unless he just likes lying awake at night. Maybe I'm just too conservative...

I figured there had to be a very good reason why HRB would not amend their own returns. I also assumed that the taxpayer knew what that reason was and would attempt to conceal it from me. Not trying to rake off anyones windfall but my experience with working with immigrants and their tax problems in the past has made me very wary of getting involved in what may be a messy case. I already have enough low pay, no pay work to last me for a while, I decided not to add to it.

[gkaiseril]

I do not think all HRB offices function that way. They offer free ITIN service and have authorized acceptance agents for processing the ITIN. Further their instructions to the preparers are to inform the client that when an SSN is obtained for the spouse and children, that any open tax year can be amended to claim the EIC.

This maybe more a problem of with the preparer not wanting to do the amendment for just the cost of the EIC form. From my experience, that is you professionally and courteously service these individuals, they will be very loyal to you because of they respectful way you have treated them.

And yes there are many more problems in servicing ITIN clients because of the way the IRS deals with them and the issue about ITINS and W-2s with wrong SSN numbers. And then there could be state issues with ITIN returns. The states are more than willing to take their money but ...

[OtisMozzetti]

Black Bart, it is a pleasure to hear your spirited views and informed business judgement.

...
HRB(whose judgment I respect)'s position alone is enough for me to turn it down; I don't believe they decline work without very good reason.
...

I believe that gkaiseril covered this by pointing out that what happened at HRB could well have consisted of a preparer who didn't want to do the paperwork required right then to amend the returns for the price he thought he was expected to charge. In any event whatever is responded at HRB probably isn't always the same depending upon whom is asked and when they are asked. Earlier postings have suggested to find out what did happen at HRB; about all there is to work with consists of whatever the client(s() is/are willing to explain about those client(s)' perception of what happened. Covert phone calls to HRB probably would not illuminate much of anything.

[Black Bart]

Ha, ha.

Black Bart, it is a pleasure to hear your spirited views and informed business judgement.

Thanks Otis . That's the nicest way I've ever heard anybody put it when it appears somebody else is being a horse's rear-end (there once was a politician -- Bella Abzug -- who frequently and publicly smarted off/showed her a** to the exasperation of her colleagues who would invariably and charitably thank her for her "refreshing" views). Anyhow, looking back, my last "Kumbaya" remark was about half-smart/refreshing and for that I apologize to you (although I still feel the same about those clients). My "sour grapes" attitude comes from being burned a few times by junk cases -- I felt they owed me a lot of gratitude and a little more money (I got neither).

But anyway, you and gkaiseril are right that it could be the Block preparer's attitude rather the Block firm's policy (but I wouldn't bet the farm on it).

...whatever is responded at HRB probably isn't always the same...

I do not think all HRB offices function that way...their instructions to the preparers are to inform the client that when an SSN is obtained...any open tax year can be amended...This maybe more a problem of with the preparer not wanting to do the amendment...

And yes, I've done a few that, after rasslin' halfway 'round the world with them, turned out to be happy campers and good money-makers for me. So you both have good points -- that is: be positive & take a chance/ nothing ventured, nothing gained/ grow your business/ help out a pore boy and he'll wash your shoelaces from on/ don't be an economic girly-man (somebody else say that first?)/ get outta your rut, you ol' stick-in-the mud/ do unto others...etc., etc., etc....

...Those clients are going to be very, very happy about raking in 3 years of EITC. I recall some clients a few years back where first I handled an ITIN application for the husband, and then submitted the back EITC claims when he received an SSN a year or so later. They have been steady clients ever since.

...From my experience, that is you professionally and courteously service these individuals, they will be very loyal to you because of they respectful way you have treated them...

Dang, but it's gettin' harder and harder to be hard-hearted nowadays -- the woods are just chock-full of do-gooders with a death wish (but there's no doubt our profession needs a lot more of 'em).

[Edsel]

Reality Check

Let's stop and look at these topics realistically.

Firstly, our mindset should be independent of the way H&RBlock operates. How they have handled a client, or how Sam across town handles him, or how Gleim CPA handles him should not affect our approach. Having said that, sometimes after a short session with the client you can find out quickly why others have taken a position with him.

Also, even if we have prepared the original return and then run into a situation where we subsequently are made aware of facts which will disqualify the client from receiving EIC, there seems to be an automatic feeling that we are obligated to file an amended return, and this client will love and appreciate us for being forthright.

I may have missed something in this portrayal, but I don't think any of this is realistic. We are not going to be loved and appreciated for reminding this guy that he has lied to us because we have now found out updated information that is going to cost him money. And unless we are PAID to file an amended return, we should not be under obligation to do so.
We can certainly require this as a condition of future business, but we should not be forced to do work free.

A more likely scenario might be:
Bart: "Shagnasty, that ol' gal you told me was your daughter, turns out she's really your lover and not kin to you. We're going to have to do an amended return. Please pay me $100 for filling it out, and get ready to pay the IRS $3000.
Shagnasty: "Bart, I ain't paying you nothin."
Bart: "If you don't I won't do your return this year."
Shagnasty: "I ain't payin' $3000 for the golden opportunity to come back and put up with you next year anyway. Besides, Sweet Sue actually IS Big Bertha's daughter. I'll tell you something else too Bart. Ain't no one in Stewart's Forge gonna fill out my return. I'm gonna drive over to Hangin' Limb where don't none of them people know Sweet Sue."
Bart: "Shagnasty thet ain't no way to act. We s'pposed to be Pillows of the Community. and you are supposed to appreciate me for being forthright."
Shagnasty: "I'm gonna have to talk to Sweet Sue. She's supposed to look 16, not 30."

It has also been suggested that if they don't consent to an amended return, we turn them in. Does this force the client to pay us for doing an amended return?