Starting in October, the IRS will send warning letters to tax return preparers who appear not to be complying with Earned Income Tax Credit (EITC) due diligence requirements.
Section 6695(g) of the Internal Revenue Code states that ?any person who is a tax return preparer with respect to any return or claim for refund who fails to comply with due diligence requirements imposed by the Secretary by regulations with respect to determining eligibility for, or the amount of, the credit allowable by section 32 shall pay a penalty of $500 for each such failure.?
The penalty amount increased from $100 to $500 for returns required to be filed after Dec. 31, 2011, by the United States-Korea Free Trade Implementation Act, which was signed into law on Oct. 21, 2011, according to the EITC Due Diligence Law and Regulation page on the IRS website.
There are four due diligence requirements that tax preparers must follow, and preparers could be penalized $500 each time they fail to meet all four requirements for each EITC claim.
Generally, tax professionals who prepare EITC claims must not only ask all the questions to get the information required on Form 8867, Paid Preparers? Earned Income Credit Checklist, but they must also ask additional questions when the information their client provides seems incorrect, inconsistent, or incomplete. Tax preparers also need to prepare, submit, and keep a copy of Form 8867, and prepare and keep all worksheets showing how the credit was computed.
An estimated 22 to 26 percent of all EITC claims have some type of mistake. Those errors cost the federal government between $13.3 billion and $15.6 billion in 2013, according to the IRS. Some errors were caused by misinterpreting the law, some because the tax preparer accepted client-provided information at face value, and others were fraud.
The tax agency also noted that approximately 60 percent of all EITC errors fall into three categories:
- Claiming a child who does not meet the age, relationship, joint return, or residency tests.
- Filing as single or head of household when legally married.
- Overreporting or underreporting income or business expenses to maximize the credit.
Three of 10 tax preparers incorrectly claimed an ineligible child for the EITC, according to a study earlier this year from the US Government Accountability Office, in which undercover investigators, who posed as taxpayers, made site visits to 19 commercial tax-preparation businesses.
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