Earned Income Credit - Due Diligence?

[zeros]

Other than "not" providing a dependent a home, what would be some of the qualifications for EIC that a preparer could overlook and thus be subject to a penalty? When a client of mine walks out the door with her return and a Earned Income Credit of $4500 I get a little nervous. Did I think of everything, etc?

[MLINDER42]

eic due diligence

Do you have them sign copy of the 8867? If not you have no proof that you asked the questions.If it is a schedule C do you have back up for the figures?

[Gretel]

A previous thread provided a link to the IRS section for "Due Diligence EIC" questions. Depending on the situation you might need to ask a lot more questions then form 8867 provides for.

[veritas]

So we get a penalty

of $500 for EITC errors?

What's the penalty for giving out 500 million in loan guarantees for a failed company?

I won't take any new clients with EITC for children.

[S T]

Consensus

Veritas
I think this is the consensus for a lot of us that only prepare a handful of EITC returns,
I know for me - I am not going to take any new clients with EITC - I have less than 3-5 now - and those are established long time clients.

I am not willing to incur the $ 500 penalty

Sandy

[David1980]

A previous thread provided a link to the IRS section for "Due Diligence EIC" questions. Depending on the situation you might need to ask a lot more questions then form 8867 provides for.

Agreed. Doing the 8867 only on a return that has, for example, a Schedule C is probably still going to be penalized $500. I'm planning to have worksheets for the (thankfully) very few EIC clients. Fill out the worksheet with the taxpayer and then have them sign off. Haven't decided whether I'll make my own or look for some pre-created EIC worksheets.

[Gretel]

Same here. No no EIC clients with children. It is just ridiculous.

[taxxcpa]

Anyone who only does two or three EIC returns is not likely to be questioned. The IRS will probably be looking at preparers who have EICs and RALs for the majority of their clients.

[geekgirldany]

I only have around 3 or 4 EIC clients. Drake is very good about filling out the EIC Worksheets for self employed people. Checking off what info they give you. There is also a place for them to sign on the 8867. So when they come to pickup they probably sign 5 times.

Most new clients that have come to me that are EIC were (at the time) wanting the money that day. So since I did not do that they went somewhere else.

[FEDUKE404]

Form 8867 issues

....There is also a place for them to sign on the 8867.....

You can modify an official IRS form??? That's a new one on me!

While I am here: A recent discussion with my software provider revealed they will automatically plan to have the Form 8867 included (transmitted) with all efiled EITC returns when/if that becomes a final IRS decision.

As for a "signature form" they have no reliable response, as the only 2011 Form 8867 that is currently out there is still a draft.

In so many words, at this time they do not know much more about the status than we do....

On a side note, I am really curious to know what the H&R Blocks et al are going to do to address the EITC due diligence issues. Since their exposure to EITC risk is likely severe, separate from the level of due diligence shown by their preparers (and software)....things could get quite interesting!! I assume they already charged an arm and a leg for a "simple" 1040-EZ or 1040-A whenever any EITC forms/questions were also involved. I can only imagine how they deal with this potential financial drain. OTOH, I would assume there may be many "new" EITC clients who have been turned away from other preparers (assuming they have a valid PTIN) so on sheer increased volume of such returns Block et al may potentially come out ahead.

FE

[Gary2]

You might start here for more EITC info for preparers: http://www.eitc.irs.gov/rptoolkit/main/ .

The old rules allowed a substitute 8867, just like they allow custom-designed 1099s and W-2s. I'm not sure if the new rules are final, yet, or if they'll allow modified versions that are substantially the same.

[Gretel]

On a side note, I am really curious to know what the H&R Blocks et al are going to do to address the EITC due diligence issues. Since their exposure to EITC risk is likely severe, separate from the level of due diligence shown by their preparers (and software)....things could get quite interesting!! I assume they already charged an arm and a leg for a "simple" 1040-EZ or 1040-A whenever any EITC forms/questions were also involved. I can only imagine how they deal with this potential financial drain. OTOH, I would assume there may be many "new" EITC clients who have been turned away from other preparers (assuming they have a valid PTIN) so on sheer increased volume of such returns Block et al may potentially come out ahead.

I was thinking about them too and that they are probably at an advantage. It is easy enough for them to create their own questionnaire regarding HOH, EIC etc. Any preparer just goes down the lines of the questionnaire and writes down the answers. This is basically all that "due diligence" is, right? Doesn't matter if either side listens well or if answers are true. Would not be surprised in the least if H&R Block is behind the $500 penalty.

[origun]

Some random thoughts from the trenches at HRB

First, I agree with FEDUKE 404 who says that Block charges an "arm and a leg" for EITC returns. I have complained about this for years to management to no avail! I have always assumed the company was just charging what the traffic would bear and when people are poor, not educated and desperate for quick money, they will pay whatever they have to. (With no more RALs, they don't get their money as quickly as they used to!) However, I now realize the company might have to deal with more audits and penalties at the corporate level than I realized; the whole pricing picture involves more than just doing a quick and easy return at the preparer's desk.

From my perspective, the company has done a fairly decent job writing software and training their preparers to show "due diligence" when preparing EITC returns. When things come up when doing the return that might be suspicious (e.g., EITC for a HOH with income of only $12000 and 6 dependents, including nieces and nephews and grandchildren, or only Schedule C income for $15,000 and no expenses), we are prompted to ask about other income, expenses, residency, etc. and document their responses. In highly questionable situations, I will print out a form and have them complete and sign it. Some people who don't hesitate to falsify information in a person-to-person interview are more reluctant to attest to it in writing. To further help us to show "due diligence" and protect ourselves and the company, we all are required to take classes each year on ethics and due diligence. When I mentioned the new $500 penalty to a company manager, he didn't seem very concerned about its impact to the company...for whatever that is worth!

Most of us on this forum are probably middle class people who have always worked hard and paid our way and, by nature of our own situation, we resent those who don't. However, especially in the current economic situation in many parts of our country, there really are many people receiving EITC for the first time because they are underemployed and really need it to make it through hard times. The EITC recipients aren't all cheaters and freeloaders out there! I applaud efforts by the IRS to combat fraud but don't necessarily think the whole program should be done away with.

[taxxcpa]

l The EITC recipients aren't all cheaters and freeloaders out there! I applaud efforts by the IRS to combat fraud but don't necessarily think the whole program should be done away with.

Not all are cheaters, but those who get the EIC year-after-year should be limited to about two years. I think the EIC is the wrong way to provide welfare and should be abolished. Instead, the EIC crowd should go apply for welfare and provide proof that a valid need exists.

Even applying for welfare takes more initiative than claiming an income that qualifies you for the maximum EIC.