IRS Finds Increased Noncompliance by Tax Preparers on EITC Claims

[kcjenkins]

Last tax season marked an increasing level of noncompliance by tax preparers with the Internal Revenue Service’s due diligence reporting requirements for the Earned Income Tax Credit, according to a new report reviewing the IRS’s performance during the delayed tax season.

The report , from the Treasury Inspector General for Tax Administration, found that as of March 2, 2013, TIGTA had identified 122,133 paid tax return preparers filing 708,298 tax returns claiming $2 billion in EITC without the required Form 8867 attached to the tax return. This equates to more than $354 million in penalties that can potentially be assessed by the IRS.

In addition, TIGTA’s report raised concerns about the potential misuse of the split refund option to direct multiple tax refunds to the same bank account. TIGTA notified the IRS in February that some tax refunds were apparently directed incorrectly to tax preparers’ accounts.

As of May 2, 2013, taxpayers filed 385,591 tax returns with a Form 8888, Allocation of Refund (Including Savings Bond Purchases), requesting multiple direct deposits to the same bank account. Direct deposits totaling more than $150.8 million were made to 46,897 bank accounts.
Each of the 46,897 bank accounts identified by TIGTA had three or more Form 8888 deposits from different taxpayers into these accounts. TIGTA determined that 248,027 (64 percent) of the 385,591 tax returns were prepared by a paid tax preparer.

The IRS reported that it identified 579,183 tax returns with $3.6 billion claimed in fraudulent refunds during tax return processing and prevented the issuance of $3.47 billion (96.4 percent) of those refunds.

“The IRS is continuing to expand its efforts to identify and prevent fraudulent tax returns from being processed,” Treasury Inspector General J. Russell George said in a statement Wednesday.

IRS Response

Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division, pointed out in response to the TIGTA report that the IRS has expanded its efforts to reduce the payment of erroneous claims for the Earned Income Tax Credit. “Final regulations addressing the requirement for paid tax return preparers to include Form 8867, Paid Preparer's Earned Income Credit Checklist, with returns claiming EITC, were issued in late December 2011,” she wrote. “The IRS quickly expanded its outreach program to educate the practitioner community. The outreach activities included specifically notifying 5,000 EITC preparers who had not included Form 8867 with the tax year 2011 returns they prepared. We also worked with the software development community to ensure the Form 8867 was available for tax year 2012 return preparation software products. Despite these efforts, systemic issues were discovered that caused Form 8867 to appear incomplete or missing from some software products. We worked with the software vendors to resolve the problem; however, the data set for those tax year 2012 returns whose paid preparers may be subject to the due diligence penalty does not have an accuracy level sufficient for the IRS to assert the penalty without additional analysis.”

The IRS’s own in-process review of tax returns that met its penalty criteria found that 65,749 returns, prepared by 2,474 paid return preparers, claiming $151.6 million worth of Earned Income Tax Credits, had no Form 8867 attached to the return, Bogadi noted. “This is significantly less than the 158,348 returns, prepared by 52,826 preparers, claiming $362 million of EITC, as reported by the Treasury Inspector General for Tax Administration,” she added. “Consequently, we do not agree with the associated outcome measure of $354 million, as it is overstated. When our analysis is completed, we will pursue penalty assertion for those previously noncompliant return preparers who were notified of the due diligence requirements. With the resolution of technical issues affecting the penalty administration, we are prepared to fully enforce the due diligence provisions in the upcoming 2014 filing season.”

In addition, TIGTA identified 42,961 questionable education tax credits totaling $58.5 million and $2.6 million in questionable Plug-in Electronic Drive Motor Vehicle Credits issued by the IRS as of May 2. However, Bogadi differed with TIGTA’s assessment of the level of dubious education tax credits.

“We also disagree with the $37.7 million outcome measure associated with the American Opportunity Tax Credit and the $20.7 million outcome measure associated with the Lifetime Learning Credit claimed for tax year 2012 by students who are of an age at which they are unlikely to be enrolled in a four-year college or vocational program,” she wrote. “The law providing the education credits and defining student eligibility does not establish minimum ages, maximum ages, or likely ages at which students may qualify for the credits. While student age is one attribute to be considered when evaluating the potential for an erroneous or fraudulent claim, it cannot be the sole determinant. Establishing a likely age for pursuing post-secondary education is subjective. The IRS does consider the age of students, along with other criteria, as part of a comprehensive screening process to evaluate the fraud potential of the entire return and to stop those refunds from being issued when additional scrutiny is deemed necessary. The student age is also considered in a post-processing environment when returns are scored for audit potential. The macro-level data analysis performed by the TIGTA did not take the next step of contacting taxpayers to ascertain facts and circumstances, and determine whether their credit claims were legitimate or not.”

[Guest Taxed]

>>> The outreach activities included specifically notifying 5,000 EITC preparers who had not included Form 8867 with the tax year 2011 returns they prepared. We also worked with the software development community to ensure the Form 8867 was available for tax year 2012 return preparation software products. Despite these efforts, systemic issues were discovered that caused Form 8867 to appear incomplete or missing from some software products.

What professional tax software does not make you complete 8867 for EITC? (Drake, Taxwise, ATX all require)

My understanding is that the e-file will be rejected without a 8867?

Are they talking about Turbo Tax preparers?

[kcjenkins]

Probably.

[Mr. Pencil]

TIGTA had identified 122,133 paid tax return preparers... without the required Form 8867....

outreach activities included specifically notifying 5,000 EITC preparers who had not included Form 8867

Nuthin' to worry about--IRS has it under control!

[kcjenkins]

Sure, find 122133, notify 5000, that should fix it. 4% should be enough, right?

[Mr. Pencil]

Sure, find 122133, notify 5000, that should fix it. 4% should be enough, right?

Exactly! When the other 96% hear about those notifications, they'll be scared into doing the right thing. That's how the government efficiently uses limited resources.

[Guest Taxed]

I wonder if IRS is going to de-certify tax prep software companies, that don't force a 8867 to be completed and correctly e-filed?

[MsTabbyKats]

Tax Act has the 8867, But, what does it actually "prove"? Nothing.....just that you can check off boxes.

EITC was supposed to encourage people to work....by giving them "a bonus".

It's turned into a farce....encouraged by companies such as H&R....with those stupid "Come & get your free money" kind of ads.

[Guest Taxed]

Not sure how Tax Act works these days. I had used it one year I think it was 1999. But does Tax Act let you e-file a return with EIC without completing the form 8867? It is my understanding that a copy of the 8867 that you complete must be part of the e-file that is transmitted. Now if it is not completed as per instructions is another issue?

My organizers went out this week and now I am beginning to get responses. Just reminded a single mother what documents I need again this year for EIC.

[MsTabbyKats]

Not sure how Tax Act works these days. I had used it one year I think it was 1999. But does Tax Act let you e-file a return with EIC without completing the form 8867? It is my understanding that a copy of the 8867 that you complete must be part of the e-file that is transmitted. Now if it is not completed as per instructions is another issue?

My organizers went out this week and now I am beginning to get responses. Just reminded a single mother what documents I need again this year for EIC.

You cannot e-file without the 8867.

But....having it really means nothing other than someone filed it in correctly.

It's not really proof of anything.....and if someone's goal is to get the client the highest refund possible....this preparer will just check the right boxes.

That's all I mean.

It's very easy to do a Schedule C for someone claiming to make $17500 as a cleaning lady with 3 kids.....and you don't need to submit any bona fide proof. It's not rocket science.

[Guest Taxed]

>>> It's very easy to do a Schedule C for someone claiming to make $17500 as a cleaning lady with 3 kids.....and you don't need to submit any bona fide proof. It's not rocket science.

Any tax preparer who participates in that kind of fraud, deserve the wrath of IRS in my opinion.

[MsTabbyKats]

>>> It's very easy to do a Schedule C for someone claiming to make $17500 as a cleaning lady with 3 kids.....and you don't need to submit any bona fide proof. It's not rocket science.

Any tax preparer who participates in that kind of fraud, deserve the wrath of IRS in my opinion.

With all due respect (and this is said tongue-in-cheek.....not to be taken at face value) apparently you haven't met many tax preparers. I get several requests for this each year for this kind of stuff. Unless I'm going to send a private investigator to tail the client.....how would I know I how much the person actually makes?

The EITC puts too much responsibility on the honest preparers....which is why I won't take any new client self employed people with potential earned income credits. There's too much chance for questions which means more work for me.

And the old clients that I do get read the riot act every year.

[Guest Taxed]

I am sure there are many crooked tax preparers all of the country that participate in this sort of fraud.

I have many Sch C clients and I don't need to send a private investigator because I am not an auditor. I rely on their documentation with reasonable due diligence and document it. If something does not smell right, I ask follow up question and document it.

For the few clients that qualify for EITC, I follow the checklist much to the displeasure of the taxpayer.

Like I posted before, I get numerous calls from people off the street or sometimes even stopping by and these are EITC shoppers and I direct them to VITA or the nearest Liberty or HRB.

[joanmcq]

If you check the box for a Sch C, you have to say what documentation you used to prepare the return. For example I have a client with a Sch c biz that gets EIC. I checked that I used taxpayer prepared P&L statements, and also 1099s received from her customers (she only sells wholesale). I have also observed her making the items she sells, and seen her wares in catalogs from the fore mentioned vendors. I note this in the 'other' section. On an EIC audit, if the preparer doesn't have the docs she or he said was used to prepare the return...penalty.

[Pacun]

I know we should not charge by the amount of refund but the penalty is $500 per EIC that you don't have adequate records. So technically, we should charge a lot more for a return that includes EIC form, but how about the ones that only get $5 as EIC? If you prepare 600 of those claims, you are not likely to be checked by the IRS, but if you prepare 600 returns with $4000 EIC claims on each return, you are likely to be questioned. So, let's say that I charge a flat rate of $200 per EIC form. Let's say that I charge $100 to a client if they simply want to know if they qualify for EIC. So, a client would pay me $100 to find out that the EIC will be only $5. If he wants to claim those $5, he will have to pay me another $100 because the IRS mandates that I charge a flat rate for everybody. Paying me the extra $100 to claim $5 credit would not make any economic sense to the client.

What do you think?

[Guest Taxed]

If someone calls me (which they do) to ask if they qualify for EIC and how much they can get, I tell them I don't know because I would have to go through that checklist of 8867 and run the numbers. I can't give them any estimates. If they insist, I also keep my handy dandy chart of VITA sites in our area and the phone # of Liberty and HRB to re-direct them.

If you will notice in your area Liberty and others will be more than glad to give them an estimate and they generally quote a higher amount with the assumption that all the kids qualify. I know this for a fact because one year I picked up the GF of one of my client, and one of her kids did not qualify but Liberty quoted her with the assumption that both kids qualified. Boy did I have a hard time explaining why I was lower

[MsTabbyKats]

I know we should not charge by the amount of refund but the penalty is $500 per EIC that you don't have adequate records. So technically, we should charge a lot more for a return that includes EIC form, but how about the ones that only get $5 as EIC? If you prepare 600 of those claims, you are not likely to be checked by the IRS, but if you prepare 600 returns with $4000 EIC claims on each return, you are likely to be questioned. So, let's say that I charge a flat rate of $200 per EIC form. Let's say that I charge $100 to a client if they simply want to know if they qualify for EIC. So, a client would pay me $100 to find out that the EIC will be only $5. If he wants to claim those $5, he will have to pay me another $100 because the IRS mandates that I charge a flat rate for everybody. Paying me the extra $100 to claim $5 credit would not make any economic sense to the client.

What do you think?

However...if you're doing it according to IRS regulations...you shouldn't get a penalty.

You really need to use common sense about this whole EITC thing. The IRS isn't going to question someone claiming $5. That wouldn't be very cost effective on their part.

IMHO...it's the questionable returns that we need to focus on....such as Schedule C people. And...people with investment income that get EITCs.

I know I'll be "stepping on toes" this year with a few people. But, I'm not risking the fine.

[jklcpa]

However...if you're doing it according to IRS regulations...you shouldn't get a penalty.

You really need to use common sense about this whole EITC thing. The IRS isn't going to question someone claiming $5. That wouldn't be very cost effective on their part.

IMHO...it's the questionable returns that we need to focus on....such as Schedule C people. And...people with investment income that get EITCs.

I know I'll be "stepping on toes" this year with a few people. But, I'm not risking the fine.

The more important consideration is that if a preparer is doing a large number if EIC returns, the IRS can come in and choose a sample of those returns to test. Let's say they start by choosing 25 returns and find that the preparer's procedures and documentation are substandard. That's $12,500 in penalties. Now that's cost effective!

[Jack from Ohio]

Another thing to keep in mind, if you require documentation for a few of your 8867 clients and not all, you fall into the "know or should have known" area of Circular 230. If you do not treat all 8867 clients with the same level of scrutiny, you are waving the red flag.

Karen Hawkins is a no-nonsense and totally aggressive person in these areas. She will pull your PTIN at the drop of a hat if she suspects such things. I heard her speak at the IRS Forum in Atlanta. She scares me!!

[mcb39]

>>> It's very easy to do a Schedule C for someone claiming to make $17500 as a cleaning lady with 3 kids.....and you don't need to submit any bona fide proof. It's not rocket science.

Any tax preparer who participates in that kind of fraud, deserve the wrath of IRS in my opinion.

In 2011, I posted the request of a client to eliminate some of the deductions on a Sch C to raise the taxpayer's taxable income. I have printed ten pages of replies from these boards telling me to "run for the hills". I refused to amend the return and she was very angry with me. Fast Forward to two weeks ago: I had to appear in court as a witness for the defendant (husband) because they have since divorced and she keeps trying to get more money out of him. I had to testify that she had asked me to alter a prepared return. I also had to show the engagement letter and refer to the fact that I had ten pages of agreement from you, my associates, that I would not agree to commit fraud. Her attorney tried to make me look uneducated and not capable of preparing a Schedule C return. I believe it backfired on her client because I had kept good records. The big issue was really over the 2012 return and the splitting of income for 11 months. It was an extremely difficult return and her attorney tried to make me look incompetent. I doubt that she succeeded. Bear in mind that I was not on trial here; just a witness for the defendant. The point here is that over the years, this couple has collected EIC in bad business years. They had seven rentals, three Sch C, etc. I have always been able to back up the facts; and since the 8867 became required, I have always filed it. You never know when these returns are going to come back to haunt you.

[MsTabbyKats]

In 2011, I posted the request of a client to eliminate some of the deductions on a Sch C to raise the taxpayer's taxable income. I have printed ten pages of replies from these boards telling me to "run for the hills". I refused to amend the return and she was very angry with me. Fast Forward to two weeks ago: I had to appear in court as a witness for the defendant (husband) because they have since divorced and she keeps trying to get more money out of him. I had to testify that she had asked me to alter a prepared return. I also had to show the engagement letter and refer to the fact that I had ten pages of agreement from you, my associates, that I would not agree to commit fraud. Her attorney tried to make me look uneducated and not capable of preparing a Schedule C return. I believe it backfired on her client because I had kept good records. The big issue was really over the 2012 return and the splitting of income for 11 months. It was an extremely difficult return and her attorney tried to make me look incompetent. I doubt that she succeeded. Bear in mind that I was not on trial here; just a witness for the defendant. The point here is that over the years, this couple has collected EIC in bad business years. They had seven rentals, three Sch C, etc. I have always been able to back up the facts; and since the 8867 became required, I have always filed it. You never know when these returns are going to come back to haunt you.

You mention that they have seven rentals. This would fall under my "EITCs to stay away from".

Why? Because in theory people who are landlords have assets.

I have 2 (one is a guys whose mtge payments are more than his W-2 income....and he has 2 kids and a non-working spouse........the other one has hundreds of thousands of dollars in stock transactions and has three kids and a non-working spouse....also W-2) who may need a new preparer.

[mcb39]

I had been doing their returns since 2000. At one time; all of the rentals were losses. They also had three Sch C businesses; two of which fell by the wayside. They have two daughters who qualified them for the Child Tax Credit and a small EIC. I am aware of what you are saying, but I believe that EIC is based on your AGI and not on the assets you have. I am also aware that once the rentals started to show a profit, it was considered investment income and disqualified them from EIC. There are a lot of variables to many tax returns. Just because someone has assets does not necessarily mean that they cannot receive EIC.

The point I was trying to make here was not so much about the 8867 as it was about your duty and requirement to keep all records that you are supposed to and that, also, it doesn't hurt to keep anything and everything that can protect you from noncompliance in any event.

[Guest Taxed]

>> There are a lot of variables to many tax returns. Just because someone has assets does not necessarily mean that they cannot receive EIC.

True. in 2009 one of my good clients a store owner had a 20K loss in his business. That year he qualified for EIC and at first he was hesitant to get EIC because he thought only certain type of people get EIC (typical stereotypes). But his wife, who had a small W2 income from part time work prevailed on him and they accepted close to $3K in EIC. These folks had a nice house, 2 cars.

[MsTabbyKats]

>> There are a lot of variables to many tax returns. Just because someone has assets does not necessarily mean that they cannot receive EIC.

True. in 2009 one of my good clients a store owner had a 20K loss in his business. That year he qualified for EIC and at first he was hesitant to get EIC because he thought only certain type of people get EIC (typical stereotypes). But his wife, who had a small W2 income from part time work prevailed on him and they accepted close to $3K in EIC. These folks had a nice house, 2 cars.

I completely understand all these variables....however....these people (not specifically anyone....but mine for sure) are still eating. How can one justify...in my #1 case....paying more in mtge interest alone than the entire W-2? Logic is involved (or, as my people say "sechel")....it's impossible.....and leaves too much room for questions.

I don't have an issue with people who honestly "have a bad year" and get the credit....but when it goes on for years and years (and is 100% legit on paper)....even I have a breaking point!

[joanmcq]

Unless you are living on savings, it's hard to justify more mortgage interest than income. That would be a huge red flag for me. I did have one client in a similar situation, except that the first year I did his return he had sold a vacation home for a 50k gain and gotten over $200k cash out. He had been a successful real estate agent & was burned out and took a few years off to take care of a dying ex. He had no income for two years at all except the piddling interest on the cash. But I knew he had savings., asked a lot of questions.