Increase on preparers due diligence failure for EIC credit

[Jesse]

Congress passed the Korea trade agreement on October 12, along with agreements with Colombia (HR 3078) and Panama (HR 3079), which the president also signed on Friday.

The free trade agreement with South Korea raises the penalty on tax preparers who fail to do the necessary due diligence on earned income tax credit filers to $500 from $100, for returns that must be filed after December 31, 2011.

[FEDUKE404]

About the EITC

The preparer can use all proper due diligence and the EITC credit is often still fraudulent.

There is only so much a preparer can do (essentially asking the proper questions) without directly accusing the client of some.....untruthfulness.

Having several years ago worked part-time at a brand-name tax operation (I knew the owners), I have seen all of the tricks. Rest assured there are many (not quite most...yet!) who know exactly what to say and how to say it in order to milk the EITC cow. (I found it truly amazing several years back when so many foster children magically became blood relatives!!) They know where the "sweet spot" is....gotta have some income but "not too much." (I even had cases where I explained to them why their EITC was lower....wages had gone up scenario....and they would just grab a W2 (or 1099!) and say let's forget that one. Yeah, we quit then....but they were ready for "round 2" with someone else.) There are certainly more than enough "relatives" around to find the needed names and Social Security numbers.

I even had one teenager to walk in with a folded piece of notebook paper bearing a few numbers. She had been "baking cookies" and had just enough income to get into the early ranges of the EITC. When it was obvious her "plan" was a bit shaky (even a Sch C-EZ does have a few necessary questions), she exited the office.

The other aspect that really galled me was that virtually all of these "time for my annual guvment check" folks would use RALs, and frequently also the "instant cash" option to get an immediate check, and then walk across the parking lot to the check cashing place. Not a problem...no real money out of their pockets!

Time to move on...my blood pressure is rising....

FE

[S T]

Eitc

Fortunately for me, all of my clients are referrals or long time clients - so I have the "picture in hand" pretty quick.

I "almost" NEVER file a return with EITC on it - and guess that is probably going to go to "zero returns" now with this "Due Diligence proposal"

A lot of us thought the FTHB Credit or Adoption Credit was bad enough - - but I am not going to participate in the "EITC" Group and be under scruntiny! Now the IRS wants us to E-file or attach the paperwork (before we were required only to keep in file" - I can't charge enough to go through these "hoops" and be subjected to scruntiny and possible penalties or fines later.

The IRS issued proposed regulations that would require paid tax return preparers, beginning in 2012, to file a due diligence checklist, Form 8867, with any federal return claiming the Earned Income Tax Credit (EITC). It is the same form that is currently required to be completed and retained in a preparer’s records.

Irs can ask all of the store fronts and the "DIY people" to complete the form and remit with the tax returns.

I know we have some people on this board that have already been through some "auditing" on EITC - Good Luck!

I am just not willing to participate!

Sandy

[JohnH]

I think I prepared 3 or 4 returns with some EITC on them. Next year it will probably be none. I agree with FE and Sandy - just not worth the hassle and associated risk.

[Gary2]

Irs can ask all of the store fronts and the "DIY people" to complete the form and remit with the tax returns.

The DIY people don't have to file it, unless there's some new meaning for "Paid Preparer's ... Checklist" that I don't know about.

It strikes me that the preparers who are most worried about the scrutiny and possible penalties are the ones least likely to be hit with them. Seriously, the IRS doesn't expect you to contact every town hall in the country just to be sure your client was never married.

[S T]

Diy

Gary2,
Well noted on the "DIY" (not being part of the paid preparer group) but don't you think that there should be some form that the "DIY" people need to file as well to substantiante their EITC Claim

I guess what concerns me and irritates me - is that we (most of us) know the EITC regulations and due diligence - but IRS is going to penalize us - for due diligence, but there does not seem to be any effort to penalize "others" including the DIY people or preparers that are not signing the returns. And as if the PTIN and other registrations are going to Stop the so-called preparer people that are not registering.

What is the current penalty - a taxpayer that is caught in fraud of EITC can not claim that credit for 10 years??? IRS estimates that somewhere between 23 - 28 percent of EITC claims are paid in error! Is IRS even bothering to note those returns and investigate, when it is easier to "track us down - as in Registered Professionals"

Seems like any preparer of EITC returns will be at risk of investigation, penalties, etc. and that will only be the preparer or office that actually signs the tax forms.

Granted there have been more "preparers" or others that have been found and brought before the DOJ or States - but I do not want IRS in my office!

Sandy

[JohnH]

It's easier and much more profitable to enforce the law against basically law-abiding citizens who slip up or make mistakes. They are the ones who have more to lose and thus will pay their fines & move on.

So the key is to lay little traps for them and then spring the traps at the appropriate time & let the revenue flow in. All the while, claim that the cost of enforcement exceeds the amount collected just to keep the game going and provide some political cover for the bureaucrats.

[Gary2]

Gary2,
Well noted on the "DIY" (not being part of the paid preparer group) but don't you think that there should be some form that the "DIY" people need to file as well to substantiante their EITC Claim

The form only substantiates that the preparer followed all the steps, asked the right questions of the right person, and believes they met the knowledge requirement. It doesn't substantiate any of the data. I expect that 100% of the e-filed 8867 forms will have all the right boxes checked, so they'll tell the IRS nothing. I think the real reasons that the IRS is requiring it is so the taxpayer gets a copy, and so that neither the preparer nor the taxpayer can claim they didn't know about it. This should help the IRS prosecute fraud cases against the taxpayers.

I guess what concerns me and irritates me - is that we (most of us) know the EITC regulations and due diligence - but IRS is going to penalize us - for due diligence

I'm not sure if you mean that the new 8867 filing requirement is a "penalty" or that you anticipate being fined in spite of your best efforts to do such returns correctly.

What is the current penalty - a taxpayer that is caught in fraud of EITC can not claim that credit for 10 years??? IRS estimates that somewhere between 23 - 28 percent of EITC claims are paid in error! Is IRS even bothering to note those returns and investigate, when it is easier to "track us down - as in Registered Professionals"

Two points: Part of the problem is that most of the taxpayers with fraudulent EITC claims don't have the money to pay it back, so denying them the EITC for future years is the strongest possible penalty short of incarceration. These are often people who fall into the right income ranges but don't have the dependents, or people whose businesses are marginally above the income ranges.

The second point is that there's a real cottage industry of illicit preparers that facilitate these returns (along with returns that are fraudulent in other ways), and pocket a big chunk of the resulting refunds. That's the real target of these rules.

Seems like any preparer of EITC returns will be at risk of investigation, penalties, etc. and that will only be the preparer or office that actually signs the tax forms.

No, only those preparers of EITC who don't know the rules or don't bother applying them. I don't see why a preparer who does EITC returns properly should feel at risk.

From what I've read of the IRS stance on this, they're not trying to raise revenue through penalties. They're trying to increase compliance, and the preparer penalties are one of the "stick" pieces to encourage many less qualified preparers to do better. The penalties aren't there to collect money from competent, honest preparers.

[MLINDER42]

Eic Due Diligence

One of my preparers had an EITC due diligence audit 2 years ago.We have always had the clients sign a copy of the 8867 which we keep in the file.This took care of most of the problems.He caught her on 33 Schedule C returns that he said we did not have enough back up.The fine was $3300.00 my boss did not want to fight it so he paid.If they do it now the fine would be $16,500 which we would fight.I feel if we fought the first one we would have won in the end.I feel more people will fight these fines and in the end they will collect less money.

[WhiteOleander]

I am curious about the 33 Sch. Cs that the agent said the preparer didn't have enough back-up for. What was being referred to? No back up for the income. Or deductions? etc.? Are we supposed to audit the t/p? If the client says they made $$$ doing whatever, do I have to audit them and prove how much they made or did not make?

If so, I think this is getting serious. The gov't is trying to force us to do their job.

[MLINDER42]

Eitc Due Diligence

The auditor wanted back up for both income and expenses.He never would answer what back up we should have.This is why I wanted to fight the fine.My boss took the easy way and paid the fine.The fine was against the preparer not our EFIN and not against me.If either of these had happened I would have talked him in to fighting it.

[BHoffman]

do I have to audit them and prove how much they made or did not make?

Yes, we are expected to audit every EITC return and keep workpapers. The IRS considers tax preparers to be the "first line of defense" against taxpayer fraud.

From here: http://www.irs.gov/newsroom/article/...206382,00.html

snip from "Prepared Remarks of Doug Shulman, Commissioner of Internal Revenue, Before the National Press Club on April 13, 2009:

"I believe the IRS has to do a better job working with the tax preparer community and making them part of our overall compliance strategy. They can be our first line of defense against non-compliance and stop a small problem from becoming a big one."

[DaveO]

[/QUOTE]
"I believe the IRS has to do a better job working with the tax preparer community and making them part of our overall compliance strategy. They can be our first line of defense against non-compliance and stop a small problem from becoming a big one."[/QUOTE]

If that's the case they need to be paying their share of the rent.

[WhiteOleander]

"I believe the IRS has to do a better job working with the tax preparer community and making them part of our overall compliance strategy. They can be our first line of defense against non-compliance and stop a small problem from becoming a big one."[/QUOTE]

If that's the case they need to be paying their share of the rent.[/QUOTE]

And we need access to the gov't employee health care and pension programs!!!!!

[Burke]

We have always had the clients sign a copy of the 8867 which we keep in the file.This took care of most of the problems.

I just returned from a tax conference in which the speaker said we needed to have the client sign the 8867. Haven't seen a new form, not sure if this is an IRS requirement or just her good sense advice. Have been having the one or two I do each year initial the answers to a number of the questions. Think signature is a good idea whether needed or not.