EITC Due Diligence: What Every Tax Practitioner Needs to Know

Earned Income Tax Credit (EITC) is a benefit for working people with low to moderate income. The credit reduces the amount of tax you owe and may also even give taxpayers a refund. The amount of the credit depends on a recipient’s income and number of children, along with other requirements that must be met. To receive the credit, the taxpayer must file a tax return with the IRS, even if he or she owes no tax or is not otherwise required to file.

The Earned Income Due Diligence requirement is a standard used to determine if your client is truly eligible for an EIC credit. If you are a tax preparer who is being investigated by the IRS, you are expected to know the tax laws, ask the right questions, maintain proper documentations of questions asked and answers, and obtain all of the facts to ensure clients actually qualify for EITC.

The preparers must apply the due diligence requirements to every tax return, focused to correctly determine a taxpayer’s eligibility for the credit. If there are any errors, you may be audited. Auditors review the preparer’s EITC returns, looking at their due diligence records, including worksheets and checklists.

Due diligence promotes accurate EITC claims. Incorrect tax returns and failure to comply with the due diligence requirements can severely affect the preparer and client.

Possible Penalties

Possible penalties that can be placed against you include, but are not limited to, a $500 penalty against you and your employer for each failure, subject to punitive action by the IRS, barred from preparing your tax returns, or even criminal prosecution.

The IRS has really specified their audit selection process, and report that with the new process, they penalize over 90% of the preparers audited. These penalties are usually due to a failure to meet the knowledge standard.

The IRS suggests paying particular attention to the following issues that account for more than half of all EITC errors:

-Claiming a child who does not meet the age, residency or relationship requirements

-Filing as single or head of household when married

-Incorrectly reporting income or expense

-Incorrectly reporting Social Security Numbers

A tax attorney makes all the difference in this matter. It is absolutely necessary to speak with an experienced attorney, specializing in this matter. We can make sure that minimal or no penalties are measured against you.

Contact us today!