EITC Audit Defense

Expanded Compliance Aims to Improve Accuracy

At Ellsworth Law Group we have had excellent success defending tax preparers from EITC audits.  We just finished one EITC preparer audit on the West Coast where our client owned 7 tax preparation locations with one of the national tax preparation chains. We spent two days preparing for the audit, the audit took place (500+ files) and the auditors came back and said they were making no penalty claims.  In fact they took no enforcement action at all and were congratulatory to our client on how well kept the tax files were for EITC purposes.  With EITC penalties now runnning $500/file it makes sense more than ever to take affirmative action and allow us to review your office practices prior to any IRS audit so that we can make recommendations that will help you too succeed in any EITC audit.  Or, if you are the latest victim of an EITC audit please call us now, before the audit, so that we can review files and help you prepare for the audit.  Our fees are money well spent, as our West Coast client will attest.

More and more EITC return preparers will get letters or personal visits from the IRS as the agency expands its EITC preparer compliance initiative. If you’re preparing tax returns, you are a target for these letters and visits and possible fines.  One preparer came to us with $41,500 in fines and we were able to get that reduced to one-third by taking action on her appeal that proved the IRS was wrong in their evaluations on 66% of her files.  A great result, again.

The IRS estimates one in four EITC claims contain some type of mistake, costing the government $11 billion to $14 billion per year in erroneous payments. Because the tax professional community prepares two thirds of EITC claims, the quality of their work has a significant impact on reducing claims paid in error.

Errors occur for many reasons, including:

  • Lack of knowledge about EITC tax law
  • Honest preparer mistakes
  • Client provides incorrect information intentionally or unintentionally
  • Disregard of EITC due diligence requirements
  • Blatant disregard of tax laws to claim EITC in error

A tiered compliance approach, initiated last year, focuses on reducing EITC errors by:

  • Helping new EITC preparers get off to a solid start;
  • Ensuring experienced preparers who filed questionable EITC claims understand the law and their due diligence requirements;
  • Conducting on-site visits or due diligence audits of preparers filing returns with high probability of EITC errors; and
  • Barring preparers with a history of non-compliance from return preparation.

This four-pronged compliance effort tailors the treatment to the degree of risk for future errors. It is less invasive, less time consuming and more cost-effective for both the preparer and IRS. It also aligns with IRS’s overall effort to boost taxpayer compliance and strengthen industry standards within the tax professional community.

A tax audit attorney can be consulted for additional advice regarding EITC. You can also find out more about our EITC Due Diligence Compliance Program on our EITC Return Preparer toolkit.

Consequences of Non-compliance

EITC return preparers who fail to meet the knowledge standard and other due diligence requirements are subject to civil penalties. Their clients who filed a return with a false EITC claim could also face penalties in addition to repaying any credit paid in error plus interest.

Penalties include:

  • $500 penalty for each due diligence failure to comply for return preparers or their employers
  • A minimum $1,000 penalty against return preparers who prepare EITC claims if any part of an understatement of tax liability is due to an unreasonable position
  • A minimum $5,000 penalty against return preparers who prepare EITC claims if any part of an understatement of tax liability is due to reckless or intentional disregard of rules or regulations by the tax preparer
  • Your clients face accuracy and/or fraud penalties, plus a ban from claiming EITC for 2 or 10 years for incorrect claims.

Return-related preparer penalties can also result in:

  • Disciplinary action by the IRS Office of Professional Responsibility.
  • Suspension or expulsion of the preparer’s firm from participation in IRS e-file
  • Injunction barring preparation of federal tax returns

due diligence

Requirement Description
Completion of Eligibility checklist
  • Either complete Form 8867 or its equivalent
  • Complete checklist based on information provided by the taxpayer for the preparer
Computation of the Credit
  • Keep the EIC worksheet or an equivalent that demonstrates how the EIC was computed
Knowledge
  • Not know or have reason to know that any information used in determining the taxpayer’s eligibility for, or the amount of, the EIC is incorrect, incomplete or inconsistent
  • Not ignore the implications of information furnished or known
  • Make reasonable inquiries if a reasonable and well-informed tax return preparer, knowledgeable in the law, would conclude the information furnished appears to be incorrect, inconsistent or incomplete
  • Document in your records any additional inquiries made and your client’s responses.
Record Retention
  • Retain Form 8867 and EIC worksheet or the equivalent
  • Maintain record of how and when the information used to complete these forms was obtained
  • Verify the identity of the person furnishing the information
  • Retain records for 3 years after the June 30th following the date the return or claim was presented for signature

Key Facts about EITC Due Diligence Visits

  • The EITC Due Diligence visit is an examination to determine whether you, as a paid preparer, are in compliance with IRC §6695(g).
  • The visits are conducted yearly and start in October
  • If you are selected for a visit, the examiner will notify you by phone or letter.
  • Be prepared to schedule an appointment within 15 days of the notification.
  • If you are an employee of a tax preparation firm, your employer will also be contacted and interviewed.
  • The examiner will review your compliance with all four due diligence requirements.
  • General examination guidelines apply to these visits.
  • If the examiner determines you have not met the requirements, he or she will propose penalties at the rate of 100 dollars for each return not meeting the requirements.
  • If penalties are proposed you may request an informal managerial hearing to discuss.

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