January 16, 2013
As many of you know, there is a very valuable credit available to assist lower income taxpayers to improve their economic standards. This is the Earned Income Credit or EIC. For tax year 2012, the credit can be as high as $5,891.00 to taxpayers in the "sweet spot" of both income limitations and number of dependents.
There has been a very high incidence of fraud surrounding the EIC. Here are a few classic cases:
A few years back, when they expanded the table to include a third qualifying child in the household, many taxpayers suddenly acquired their niece, nephew, grandchild or "foster child" as their 3rd qualifying dependent in order to bump up their EIC.
Self-employed people will either increase or decrease their stated income or deductions in order to position themselves where they can take advantage of the highest credit.
Using an incorrect fling status, such as single or head of household, when legally married and living together.
IRS estimates that there are 21-26% of all EIC claims have some error, costing the government about $15 billion in 2011. As tax professionals, the IRS has put more pressure on us to be sure the taxpayers are truly eligible to claim the credit. In effect, it is our job to make sure the taxpayer is telling the truth and that we are interpreting and applying the EIC tax code properly. Form 8867, EIC Checklist, is a 3 page Q&A which is mandatory for any EIC recipient, and now must be transmitted to the IRS showing the your tax professional did his/her due diligence to make this determination. If I, as your preparer, don't perform my due diligence to be sure you qualify for EIC, I can be assessed a $500 fine for every EIC client that should not have qualified, but did.
Most tax professionals love what they do, but I have a problem with this interpretation my due diligence. One of the things that I have to be on the look-out for is if the income stated on the return seems "sufficient" for the family to live on. Is it realistic for a family of 4 to live on $25,000 a year? Where is it my job to determine why or where or how that family should live and if it seems reasonable? I have to ask about child support, gifts from family members, where the children get on their school bus? If a child lives with someone other than their parent, I have to know where the parent is, how much the parent makes, and if the parent contributes to the child's welfare…
I don't mind doing my job, and I like to think that most people will be honest in their responses, but this level of verbal auditing makes me feel like a Nosey-Rosy, grilling you about your standard of living or why you might be raising your grandchild and other skeletons in your tax closet.
On the other hand, you pay me to do my job, and this is part of my job. Besides, if I don't do my job - are you going to pay my $500 IRS penalty?
I think not...
