Meeting your EITC Due Diligence in a nutshell (updated)

[ILLMAS]

Here is a presentation from the 2012 IRS Nationwide Tax Forum, good information to review for the 2013 season

Don't forget to check out these videos

http://www.eitc.irs.gov/rptoolkit/ddvideos/

20 - Meeting Your EITC Due Diligence (embedded video) - REV 1.pdf

[Pacun]

Thank you Marco for posting.

If the penalty is $500, I wonder what the formula is for charging our services.

Let's say that you prepare a return for someone who uses the standard deduction with three children and makes $50K. How much will you charge that person?

How about if that person makes less than that and will get EIC for $300? How much will you charge this person since you have to deal with EIC due diligence.

[JohnH]

I think not doing them is the best defense. The only businesslike way I know to balance the risk-reward is to specialize in them. That way you're spreading the risk across a large volume of returns (still with an appropriate surcharge). That's why I keep the HRB phone number handy and I give it to anyone qualifying for EIC, except for a couple of slam dunk situations.

[Jack from Ohio]

I think not doing them is the best defense. The only businesslike way I know to balance the risk-reward is to specialize in them. That way you're spreading the risk across a large volume of returns (still with an appropriate surcharge). That's why I keep the HRB phone number handy and I give it to anyone qualifying for EIC, except for a couple of slam dunk situations.

I am pleased to know that you consider every EIC client to be dishonest. I am also pleased that you have so many clients that you can blatantly disregard a huge number of clients.

I am a bit miffed and confused by your position. Do you also turn away FTHB, American Opportunity, Adoption Credit and Additional Child Tax Credits as well?

There is as much fraud in those areas too? Please help me understand??

[JohnH]

Sorry if I offended your sensibilities. No need to get miffed. I'd suggest you run your tax business according to your standards and I'll do the same. Too bad our businesses are not located closer together. I'd rather send EIC clients to someone I know rather than to HRB.

You jumped to lots of conclusions about my reasons. Most of your leaps are without merit and frankly poorly thought out. I don't assume most EIC claimants are cheats - I just don't want to accept the risks the IRS has placed on tax preparers in this regard.

And just for the record, I did turn down all but two of the many FTHB inquiries I received. One was military (no way I'd turn down one of our heroes) and the other was a church member who also used another church member as their agent.

I assume your inclusion of the AOC, Adoption Credt, etc was just a matter of piling on or perhaps getting carried away by emotion, since you are smart enough to know that the preparer risks are nowhere near as severe as the special and unique risks of the EIC. Plus those are items much easier to document satisfactorily without the risks and 4 pages of CYA.

I run a business, not a social sevices agency or a counseljing service. Its my philosophy that good business practice always relies on the ability to make distinctions.

[Pacun]

I agree with you John. The risk is high and the burden to document everything makes it a "not so attractive business venture".

In the past, I have turned away many schedule C tax payers. Not necessarily because I don't trust them but because I want a piece of mind (and that's the way I have decided to run my business). I think I will be happy when EIC tax payers don't return next year because I will have to spend so much time in the interview. Do you know how many ways I have to translate (to Spanish) and interpret the questions asked by the due diligence? That's without mentioning that most of the time I don't get an answer tto the question but instead I get a whole story about other tax preparers not asking so many as I do.

As someone mentioned, we have been doing this for the last two years, but I just found out that another tax preparer around the corner has been audited about 3 times and the IRS has found nothing wrong. I wonder how you will feel when you have your "not so smart" client when the IRS agent has pulled a chair next to you and the agent is auditing your interview!

[Jack from Ohio]

Please feel free to send any of your "too risky" clients to me. I choose to be a professional. I abide by Cir. 230. I am smart enough to handle the necessary documentation for due dilligence. Frankly, it is not a rocket science thing to achieve due dilligence documentation as to protect my integrity and practice.

Do not worry about being close by. I also have experience doing returns for people from all 50 states. Contact me and I will send you my contact information.

Additional documentation required by EIC Due Dilligence is reason to increase my fees for those it applies to. It is not my decision for the IRS to increase their audit activities, but I am totally professional enough to deal with it.

I would welcome the IRS auditor to audit my interview process with my EIC clients. No worries here, and he/she will leave understanding that he/she wasted their time. It is not rocket science, or even calculus!!

Please excuse me for ranting. I choose to be professional and adapt as necessary to the changes in my career field. I choose not to "run from the tough ones," rather use the tough ones (handling them professionally and charging reasonable fees for my professionalism, experience and skills) to increase my client list and therefore my bottom line.

This is why my practice will be here 15 years from now, and many other preparers are "checking out" of the tax preparation business because it is "too hard" or "too risky."

Rant Over!!!

[Jack from Ohio]

Anyone interested in my process for EIC documentation, send me a message and I will be glad to share.

[mlinderEA]

My one office's business is primarily EIC I have had 3 audits of different preparers.The out come of the one 2 weeks ago is still up in the air.Each time I have had to change my procedures to make sure my preparers are doing it properly.Last year I asked 151 clients to leave that could not document their schedule CEZ earnings or that the child lived with them.I raised all returns with EIC $25.00 last year and will raise again $25.00 this year.It is much easier to do the right thing when you are in a small office much harder when you have 14 preparers during the early peak doing almost only EIC returns.

[JohnH]

@ Pacun - apparently we think alike on this issue.

@ Jack from Ohio - thanks for being there. Somebody's got to do those returns. And who knows, if you ever have an EIC compliance audit, I'm betting IRS will pat you on the head and give you an "attaboy" award.

[Lion EA]

My clientele in expensive Fairfield County, CT, is such that EIC is rare. However, the two I have do worry me. One is a freebie, daughter of a long-time friend (also a freebie) who has children but won't disclose much about her ex-husband or who lives with her or if she has any non-W-2 income. If I were charging her and if her mother had not helped me when I was a single parent, I'd have sent her to HRB long ago. The other is a divorced mother who teaches violin from home and has a couple of minor W-2 gigs. Her family lives locally (but not with her) and contributes generously to my client and her son. She drops off her folder with a page-long list of her income and expense totals. Do I now need to have her bring in bank statements, receipts, etc.? And, copy them for my files? She's a sweetheart and a referral from a long-time client, so I hate to send her away. But, with only two EIC clients, I won't have this due diligence stuff down to a science and likely will miss something that keeps me awake at night or spend WAY too much time on these returns while others wait in my queue.

[mlinderEA]

Each one of my preparers that was audited did over 150 EIC returns.In talking to the auditers all people they have audited do over 125 EIC returns.If you only do a few you have no worries.They are concentrating on people that do volumn.So the fines will be high.

[Lion EA]

That will help me sleep better. Thank you.

[mcb39]

I cannot say that I have ever lost any sleep over any EIC return that I have prepared. The due diligence doesn't bother me. EITC is part of the tax law and if I have a client who is entitled to receive this benefit, I do the necessary research to make sure that the client gets every deduction and/or credit that the law allows. I don't have a huge amount of them, but I do have several and they change as circumstances change. My clientele is fairly established so I generally know my clients very well and, as a sole preparer I generally know or can easily find out if they qualify. I believe every single client deserves the best job that I can legally do for them without having to go to HRB or Liberty to have a large portion of their return siphoned off. That is why I do what I do and have done the testing and followed the regs so that I am still here and able to help those who need me. Clients come in with returns from HRB and VITA; some of which are so badly botched that you can spot an error on the first page. Why would I, in good conscience, send someone who is already in need to one of those preparers? Luckily, however, I am not in an area where I am largely exposed to a lot of fraudulent claims.

[Lion EA]

I'm not worried about fraud. I'm worried about the time it will take to pour through bank statements to highlight biz deposits and to review biz bills paid and to explain why I need doctor bills with home address for the child (actually, ex-husband pays child's medical bills, so that won't work, and he's preschool age, so no school records yet). What do I need to prove child lived with mother all year (half year)? And, to take into account the gifts to mother and son from client's parents and on and on and on. What documentation do I need to keep? For how long?

[jainen]

>>won't disclose much about her ex-husband or who lives with her or if she has any non-W-2 income... drops off her folder with a page-long list of her income and expense totals<<

Personally, I would not be able to complete these two returns. Not because of EIC, though.

[Lion EA]

For #1, when her ex claims the child, her return rejects, so the issue is brought to a head. For my other questions, I ask her mother to leave the room (usually sitting there watching the baby) while I interview the daughter to my satisfaction, but it takes two interviews since it's hard to get mother to leave, thinks she's helping or at least trying to help. For #2, I don't do her bookkeeping and she doesn't use a computer program, so I've been happy with her W-2s, 1098, and her written totals for business income and expenses by category. If I have to add up her receipts, I will have to send her away or get her to start in December. I've had no reason to question her totals; when she's had questions, she's included her detail. Will I have to do bookkeeping for any EIC client with a schedule C? She will leave when I tell her how much I charge for bookkeeping on top of tax preparation. Many of you spoke of not turning EIC clients away, but do your price increases drive them away anyway?

I feel like I will have to spend more unpaid time on just a couple of clients or charge more to a single mom who can ill afford higher prices compared to the rest of my non-EIC clients. If the government feels in its wisdom that it should give EIC monies to these clients, then why are they imposing rules that make it necessary for tax preparers to take away some of that EIC money to cover the resuling more involved tax preparation? Why don't they just mail a check to all low-income parents apart from the tax preparation process? Wouldn't more money stay in the hands of the supposed beneficiaries that way? Or, mail us tax preparers checks if the government is trying to move more money to us!

[mlinderEA]

Spend a day in my office during the last ten days of January and you can see why the IRS has tightened up on EIC.The amount of fraud is unbelieveable.The problem is most of the kids do not live with the say people all year.My office is in a very poor area and it is a different world.

[Jack from Ohio]

Several have responded to me. I will package an e-mail with attachments and a detailed list of what we do. Those that have already responded, please be sure to send an e-mail address for me to reply to.

More than happy to share the tools I use.

[jainen]

>>why are they imposing rules that make it necessary for tax preparers to take away some of that EIC money<<

Come on, you could ask the same of any tax benefit. How about net operating loss? Instead of paying taxes, a business owner can reinvest the profits in his own enterprise, perhaps even in the form of a salary to himself. That can generate refunds for years back and decades forward, except of course I'm going to charge for the forms.

A great deal of EIC fraud is actually Schedule C fraud, which is generally much easier to get away with than listing extra Social Security numbers. And I would guess that EIC is a relatively small part of Schedule C fraud. I have my own opinions about what are good or bad parts of our tax system, but professionally they are all good for me--it's what I do for a living. I give some price breaks, mostly if the client has very good records or has been loyal. But I don't refuse clients unless it's something beyond my skill. EIC is easy; even the due diligence questions are filled in automatically.

Just use an organizer and an engagement letter with a proper interview. IRS is not looking at YOU.

[mlinderEA]

THE EIC fraud that I have seen not counting schedule Care married couples each filing HOH and spliting the children or people not working selling the childs SS # to some one else.The additional info on the 8867 is aimed at the second one.I do not know of how to combat the first one when you do not know the clients except to do the return.

[Pacun]

Jack, I have never seen an EIC tax payer who sends his taxes to be prepared in another state. I have seen that they drive 4 hours to NY from the DC area to have them prepared but they never mail their documents. (I think they believe every one else steals, except themselves.)

Jainen, I agree with you, Schedule C fraud is more than IEC fraud and I am talking about net dollars. Why is EIC fraud more newsable than Schedule C? This is my anology. If you don't see the money, you don't miss it. In other words, if I have to pay 6K in taxes, it will not hurt me if all that amount if withheld from my paycheck. It will really hurt me if I have to pay 4K (less) from my checking on April 15. Using that principle, EIC fraud is more newsable than Sch C fraud because the IRS is giving money to people that the IRS already collected, whereas Sch C money was never seen by the IRS and, as a result, it hurts less.

[Max W]

This is the way the IRS puts its burden of doing their job onto the tax preparer.

We are essentially auditing the income and expenses of the client and being held responsible if something does not turn out correctly.

Small wonder that there are preparers who would shy away from doing these returns. They put a number of subjective elements into the presentation - 'Apply a common sense standard to the

information provided by your client

- Evaluate whether the information is

complete and gather any missing facts

- Determine if the information is consistent;

recognize contradictory statements and

statements you know not to be true

These are the kinds of instructions that are int the IRS audit guidelines.

The IRS should not be allowed to put such a heavy onus on the preparer and a tax preparer protest is in order.

If they succeed in this, what comes next? What new area will they impose on us?

[jainen]

>>Evaluate whether the information is complete and gather any missing facts. Determine if the information is consistent; recognize contradictory statements and statements you know not to be true<<

How is that even a tiny bit different from what you have to do with ANY other issue? Compare it to Circular 230 Section 10.34 Standards with Respect to Tax Returns, "The practitioner may not, however, ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete."

In other words, tax preparation is a professional activity, not simply a clerical function of filling in forms.

[Jack from Ohio]

Jack, I have never seen an EIC tax payer who sends his taxes to be prepared in another state. I have seen that they drive 4 hours to NY from the DC area to have them prepared but they never mail their documents. (I think they believe every one else steals, except themselves.)

I work at a firm that does ~3,000 returns. These come from all 50 states. Approx 10% have EIC. I have been there 8 years and had 2 EIC returns with "issues." NONE in the past 3 years.

Just because you have never seen....