Every year, experienced tax preparers transition to accepting the latest standard procedures learned in their tax continuing education courses. For example, several IRS forms were revised for 2011 filing requirements and new revisions are set for the upcoming tax season with 2012 returns.
One substantial previous change incurred by tax preparation services was modification of the process for claiming the Earned Income Tax Credit. Low-income taxpayers – especially those with children – are entitled to the EITC even when it exceeds their tax liability. Because the EITC is a refundable credit, it has attracted fraudulent claims.
The EITC was enacted in 1975 with the intention of offsetting payroll taxes assessed on low-income taxpayers. The credit was subsequently expanded by including taxpayers without children as well as giving a higher credit for those with more children. To assist tax preparers in combating invalid EITC claims, the IRS provided Form 8867 about a decade ago. Tax practitioners initially retained this form as file documentation. It was only provided to the IRS upon request. Tax pros learned last year in tax preparer CE to submit the form with every transmitted tax return claiming the EITC.
The IRS reports about 27 million tax returns claim the EITC. Total payments of the credit are around $60 billion. Unfortunately, an estimate of improper EITC claims is between 23 and 28 percent of all payments. This has compelled the IRS to place greater pressure on tax preparers regarding compliance with EITC eligibility requirements. A Registered Tax Return Preparer or any other licensed tax practitioner recognized by the IRS is confronted with a $500 fine for each incidence of improperly qualifying someone for the EITC.
Although Form 8867 is a valuable list of inquiry items for tax preparers, the IRS cautions that it is not intended as a comprehensive checklist. Rather, it is only a guideline for the type of questioning demanded by the facts and circumstances of each EITC claim. The form is merely a due diligence aid.
The newly revised Form 8867 has space for listing documentation provided by a taxpayer that substantiates the EITC claim. Tax preparers must also record follow up questions asked of a taxpayer as well as explanations concerning EITC qualifications given to a taxpayer. Some examples entail details about residency for a qualifying child and earned income from a business activity.
Due diligence procedures with Form 8867 are a vital component of every tax preparer ethics course. The problem with continued fine-tuning of the form is that collecting taxpayer evidence of EITC eligibility becomes a sort of pre-audit. Tax practitioners are not required under Circular 230 to audit taxpayer records. Instead, they may rely upon all reasonable taxpayer statements. The new EITC form and accompanying process seems likely to make tax preparers appear complicit in false or misleading taxpayer responses.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.