The IRS announced in an email to tax practitioners that it will send letters in November and December to return preparers “suspected of filing inaccurate EITC [earned income tax credit] claims” (Quick Alerts for Tax Professionals, Nov. 6, 2013). According to the IRS, the letters will explain “critical issues identified on the returns,” the consequences of filing inaccurate EITC claims, and that the IRS will continue monitoring the types of EITC claims the preparers file.
The consequences of filing inaccurate EITC claims include a penalty assessment under Sec. 6695(g), losing IRS e-file privileges, and other sanctions that could include barring preparers from tax return preparation. The IRS will also visit some tax preparers in person to provide education and outreach on meeting the EITC due-diligence requirements.
The IRS has been increasing its emphasis on EITC due diligence in recent years. The Service estimates that 22% to 26% of all EITC claims submitted contain some type of mistake, costing the government between $13.3 and $15.6 billion in 2013.
In 2012, the IRS issued final regulations modifying the due-diligence requirements on tax return preparers who prepare tax returns on which taxpayers claim the EITC (T.D. 9570). The earlier rules required preparers to complete Form 8867, Paid Preparer’s Earned Income Credit Checklist, or to otherwise record the information it required for each return claiming the EITC and keep it in the preparer’s records. The new due-diligence rules required tax return preparers to submit Form 8867 to the IRS.
The IRS has also issued Publication 4687, on EITC due diligence, in which it states that “[d]ue diligence is more than a check mark on a form or clicking through tax preparation software.” It explains in detail the steps tax preparers must take to verify the information the client has provided that is used as the basis for claiming the EITC.
The publication notes that preparers should be especially careful about the three most common errors in claiming the EITC: (1) claiming a child who does not meet the age, relationship, or residency requirements, (2) filing as single or head of household even though the taxpayer is married, and (3) reporting income or expenses incorrectly.