The Treasury Department reports that fraud continues to be prevalent in the earned income tax credit (EITC) program. The IRS estimates that 22-26 percent of EITC payments were issued improperly in 2013, which resulted in a dollar value between $13.3 and $15.6 billion.
According to an IRS report titled Compliance Estimates for the EITC Claimed on 2006-2008 Returns, which was issued in August 2014, unenrolled return preparers reported 54 percent of over-claims on tax returns with the Earned Income Tax Credit. Income misreporting is the leading error type, while problems related to qualifying children make up the second most frequent type of error. In National Research Program audits, 94.8 percent of returns with EITC claims are subject to either an office audit or field audit.
IRS sending tax preparer due diligence letters
The IRS began sending educational Letters 5364 and 4858 to tax preparers in January 2015, and will continue to do so through the 2015 filing season. Letter 4858 addresses questionable earned income tax credit claims, and the IRS will continue to monitor EITC claims to see if the quality improves. If accuracy does not improve, follow-up measures will be taken, including an on-site audit. Letter 5364 is sent when Form 8867 (EITC checklist) is missing from the tax return, and follow-up procedures will include penalty assessment if Form 8867 continues to be missing.
IRS contacting preparers by telephone
The IRS is also calling some tax preparers who have received Letters 4833 and 5025 in the fall of 2014. The IRS is trying to address preparers who continue to file questionable EITC claims. For security purposes, the callers identify themselves as IRS employees, provide their ID numbers and ask the preparers to verify their identity. Preparers only need to provide the last four digits of their SSN or PTIN.
The IRS provides an abundance of resources to ensure that your firm stays compliant with the Earned Income Tax Credit, in order to best service to your clients. Here are some of those resources:
- Compliance Estimates for the EITC Claimed on 2006-2008 Returns
- IRS Publication 596: comprehensive publication addressing all EITC rules, including child relationship, age and residency rules
- IRS Webinars: avoid common errors and penalties relating to refundable credits, benefits of due diligence, etc.
- EITC Toolkit for Preparers
- EITC Due Diligence Requirements
- EITC Preparer Compliance Program
- EITC Assistant: interactive tool regarding EITC qualification requirements
- EITC income limits, maximum credit amounts and tax law updates
- Special rules for military, clergy and the disabled
- EITC forms and publications
- Frequently asked questions about EITC
- Handling processing errors
- Earned Income Tax Credit information for tax professionals