IRS Finds Increased Noncompliance by Tax Preparers on EITC Claims

[kcjenkins]

Yes, we all have to apply the 'smell test'. As my mother taught me, "if in doubt, don't".

[Richcpaman]

PaCun:

You stated this:

"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."

Do not, for an instant, presume that the IRS is doing this.

That is what makes all of this so stupid.

We an go around and around on this forum, and the real problem isn't with anyone who posts on this forum, or ones like them.

Sure, some of us might be "lucky" enough to catch a field audit on our EITC filed returns proceures...

But I doubt if any of us would end up having our business's closed down...

You just look at the IRS's own PR about shutting down fraudulent preparer's... They are about two-three years behind, and never catching up.

All this impacts those of us who are compliant and trying to stay with in the rules, but it is effort wasted.

Rich

[taxxcpa]

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.

I once had a client whose mortgage exceeded her "taxable" income. She had nontaxable income of $100,000 per year as settlement for serious injuries due to a collision by a truck driven by a drunken driver. The IRS raised no questions about it.

[Guest Taxed]

>> She had nontaxable income of $100,000 per year as settlement for serious injuries due to a collision by a truck driven by a drunken driver<<<

When you pick up a new client and they say they have a large judgement that is suppose to be tax free, ask a lot of questions and see the actual judgement.

Few years back I picked up a client insisting that the judgement was tax free only to find out that more than 50% of the judgement was actually punitive damages. The compensatory portion was less, however he was told supposedly by his attorney that he did not have to pay any taxes??

[mcb39]

Few years back I picked up a client insisting that the judgement was tax free only to find out that more than 50% of the judgement was actually punitive damages. The compensatory portion was less, however he was told supposedly by his attorney that he did not have to pay any taxes??

Being an attorney does not automatically make you a tax professional. Just as being a tax professional does not make you an attorney. We have all had our experiences with these types of situations. Therein lies the obligation to do due diligence.; which you must have done.

[Mr. Pencil]

How can one justify...in my #1 case....paying more in mtge interest alone than the entire W-2?

I don't understand the question, or why there even is a question. Form 8867 quotes Circular 230 in boldface, "You may not ignore the implications of information furnished to you or known by you, and you must make reasonable inquiries if the information furnished to you appears to be incorrect, inconsistent, or incomplete." So at that point the preparer either gets the answer or ends the engagement. Either way, how can it be #1?

For those who think the math is "impossible," try this. An intact family with both parents WORKING FULL-TIME at minimum wage like the major corporations pay--eligible for EIC? That's why I called complaints about EIC "the same old prejudice that the working poor are lazy or worse."

[MsTabbyKats]

The person in question owns a "fast food place". I don't do his corporate tax return. The corporation issues him a W-2. The W-2 is generally for something like $15,000.

I know where he's getting his money....but it's NONE OF MY BUSINESS.....remember...all those privacy issues!

Is it my job to interrogate him...and ask him how he feeds & clothes his family? He can tell me they eat scraps left over from his "fast food place"....and take clothing from the Goodwill bins.

My job is to take the papers he gives me....and enter them in the program...and come up with a result.

If the IRS feels this is ridiculous....let them figure it out. They have his SS#....and can link it to his mtge loan and his corporation.

I'll just go over the 8867....and have him sign off.

When I signed up for this occupation...a tax preparer was only responsible to enter the data given to her by the taxpayer.

They made me take a test....I did. They made me take classes....I did. Then it turned out I didn't need the test or classes.

Now...they want me to be their police!!!!! In thinking it over....no way. I'm not following the client around; I'm not asking what he had for dinner yesterday. That's not my job.

On paper....he's fine. Period.

[Mr. Pencil]

I'll just go over the 8867....and have him sign off.

Sign what? Where? He's already signing the tax return under penalty of perjury, so what good is signing something else not under penalty of perjury? How can he sign off the professional's responsibility anyway? Why would a professional sign a return under penalty of perjury when she doesn't believe it is true? Even worse, why would a professional want to sign under penalty of perjury, KNOWING that it is false? And I don't mean the client data. If a professional feels "my job is to take the papers he gives me," why not have him give the papers? Weird.

[jklcpa]

The person in question owns a "fast food place". I don't do his corporate tax return. The corporation issues him a W-2. The W-2 is generally for something like $15,000.

I know where he's getting his money....but it's NONE OF MY BUSINESS.....remember...all those privacy issues!

Is it my job to interrogate him...and ask him how he feeds & clothes his family? He can tell me they eat scraps left over from his "fast food place"....and take clothing from the Goodwill bins.

My job is to take the papers he gives me....and enter them in the program...and come up with a result.

If the IRS feels this is ridiculous....let them figure it out. They have his SS#....and can link it to his mtge loan and his corporation.

I'll just go over the 8867....and have him sign off.

When I signed up for this occupation...a tax preparer was only responsible to enter the data given to her by the taxpayer.

They made me take a test....I did. They made me take classes....I did. Then it turned out I didn't need the test or classes.

Now...they want me to be their police!!!!! In thinking it over....no way. I'm not following the client around; I'm not asking what he had for dinner yesterday. That's not my job.

On paper....he's fine. Period.

In answer to the bold above:

Yes, it is.

Yes, it is.

No, the job of a preparer is more involved than that.

That's not good enough.

No, that's not true.

Please review the EITC due diligence requirements, specifically the bullet points in the "Knowledge" section: http://www.eitc.irs.gov/Tax-Preparer-Toolkit/dd/lawandregs

and Circ 230, and review the meaning of the jurat you sign on each Form 1040 that you prepare.

Maybe you should lay off those chill pills for a while.

[MsTabbyKats]

What exactly don't you understand?

People have told me Karen Hawkins would put me in "tax preparer jail" if I don't get the 8867 signed....although I said that rule is not written anywhere...nor is there a space for signing.

I don't know what's true or false....I only know what I am told. Maybe he gets huge gifts from his family (very large family) every year. (I do have clients that get large gifts from abroad.)

Don't you think the IRS should do some legwork here? After all...they have a lot more pieces of the puzzle. And I am not allowed to invade his privacy!

I don't think this whole scenario makes sense....but I don't know any facts to the contrary....so who am I to judge?

And why is determining the truth...beyond the paper that I am given and what I am told....my responsibility?

Now...Mr Pencil...do you honestly believe that each and every client of yours tells you the 100% truth? Nobody forgot to tell you about an Ebay sale for $50? Or, interest from a bank for $4.73?

[MsTabbyKats]

In answer to the bold above:

Yes, it is.

Yes, it is.

No, the job of a preparer is more involved than that.

That's not good enough.

No, that's not true.

Please review the EITC due diligence requirements, specifically the bullet points in the "Knowledge" section: http://www.eitc.irs.gov/Tax-Preparer-Toolkit/dd/lawandregs

and Circ 230, and review the meaning of the jurat you sign on each Form 1040 that you prepare.

Maybe you should lay off those chill pills for a while.

Ok...I'll put him in an interrogation room....with the threat of waterboarding....unless he confesses.

The bottom line is that he will tell me what he wants me to know....and nothing more.

Privacy rights....I cannot delve into someone's personal business.

As others have said....when the IRS pays me to be a detective....I'll be a detective.

[JohnH]

In cases of this type, It isn't a matter of IRS paying you to be a detective.

It's a matter of the IRS charging you a pretty hefty fine if you refuse to be their detective.

You've just illustrated one of the many reasons I simply don't prepare returns eligible for EIC.

[David1980]

Even someone who does choose to prepare EIC returns is going to end up turning away some taxpayers. If you suspect things are fishy and the taxpayer isn't willing or isn't able to provide anything to remove those suspicions you wouldn't very well be able to do the return. And really, that's the intent. Don't do the return.

[MsTabbyKats]

In cases of this type, It isn't a matter of IRS paying you to be a detective.

It's a matter of the IRS charging you a pretty hefty fine if you refuse to be their detective.

You've just illustrated one of the many reasons I simply don't prepare returns eligible for EIC.

Yeah....and I've just illustrated why I might not bother with EITCs anymore.

I mean...with this guy specifically....it really makes no sense. (How did he ever get a mtge is my question!!!!)

But, technically...the paper work is all legit and bona fide. It's not even like he's doing a Schedule C and adjusting the income to get the max credit.

I always thought of myself as "working for the client" because, after all, the client pays me.

But the IRS is making as if "I work for them". And I don't.

If the IRS cannot put 2 and 2 together.....ugh!

[Guest Taxed]

I think JohnH put it correctly.

"You've just illustrated one of the many reasons I simply don't prepare returns eligible for EIC."

If you don't agree with IRS directives regarding EITC return, you don't have to do them. You can refer them to VITA or Liberty or HRB. I do that all the time when I feel i will not be able to do the return correctly for any # of reasons.

[Mr. Pencil]

technically...the paper work is all legit and bona fide.

No--technically it is NOT in order. There is a 1098 that says he spends more money than he has. That discrepancy MUST be resolved before the return can be signed. Maybe he feeds his family at the restaurant. That's a good answer, and I probably wouldn't question whether that constitutes a taxable fringe benefit on the W-2. But that still wouldn't explain the cash flow problem. Maybe he gets gifts from overseas. That one I probably would question a bit more to see if it is taxable income or subject to FBAR, etc.

That is not violating anyone's privacy, but rather understanding the context of information already provided. If the client doesn't want to answer the questions, he doesn't have to! The questions are identical whether EIC is involved or not, and in neither case does he need records if his answers are otherwise consistent and complete. Records of course are usually the easiest way to get there, and I scan any records EIC or not. So the only difference in terms of due diligence is that I am required to keep records that I copy anyway.

Somebody wondered if my clients tell 100% truth. Well, I'm sure they do and it's just a coincidence that not a single one has ever been called to jury duty! I have no reason to know that they sold something for $50, though I daresay I've had a few discussions about theoretically selling things. But bank interest, yes, if they had an account last year it will be on their organizer and I will always ask and annotate. So I'm not a detective but I don't ignore the implications of information they give me. Karen Hawkins seminars notwithstanding, it's really not that big a deal.

[Richcpaman]

In answer to the bold above:

Yes, it is.

Yes, it is.

No, the job of a preparer is more involved than that.

That's not good enough.

No, that's not true.

Please review the EITC due diligence requirements, specifically the bullet points in the "Knowledge" section: http://www.eitc.irs.gov/Tax-Preparer-Toolkit/dd/lawandregs

and Circ 230, and review the meaning of the jurat you sign on each Form 1040 that you prepare.

Maybe you should lay off those chill pills for a while.

Tabby:

In this particular case, you are opening yourself up to preparer penalties.

The term is "reasonable belief" and it does not appear reasonable to me from the facts that you have presented that the taxpayer is reporting enough income. I would ASK him for verification of "gifts" or other amounts that help cover the mortgage, or SOMETHING that would make sense to ME. Otherwise, his return isn't passing the smell test.

I have fired clients for less.

You mentioned that the IRS should do some legwork. When they do, they WILL target the taxpayer. But then they will look at what you have done, and then make a decision.

If this is the only client that you have like this, then, you have one problem. If you have several that are slippery, then things get tougher for you. As quoted during a seminar, sometimes when we start preparing returns, if the client has a pulse, they are in. Later we can get more selective.

That is why some of my clients have gone out the door, never to return.

Please be careful.

Rich

[MsTabbyKats]

Tabby:

In this particular case, you are opening yourself up to preparer penalties.

The term is "reasonable belief" and it does not appear reasonable to me from the facts that you have presented that the taxpayer is reporting enough income. I would ASK him for verification of "gifts" or other amounts that help cover the mortgage, or SOMETHING that would make sense to ME. Otherwise, his return isn't passing the smell test.

I have fired clients for less.

You mentioned that the IRS should do some legwork. When they do, they WILL target the taxpayer. But then they will look at what you have done, and then make a decision.

If this is the only client that you have like this, then, you have one problem. If you have several that are slippery, then things get tougher for you. As quoted during a seminar, sometimes when we start preparing returns, if the client has a pulse, they are in. Later we can get more selective.

That is why some of my clients have gone out the door, never to return.

Please be careful.

Rich

Let's see....there is this client AND his 4 brothers and his father. All make a low W-2 and all have non- working wives and 2-3 kids. But only one has them has a mtge.

The only other ridiculous one is the guy who makes about $15,000 on a W-2 from the deli.....yet has about $250,000 in stock trades (losses).

I've been doing all of these for about a decade.

I've been seriously thinking of just saying I don't do EITCs anymore.

It's not that I'm afraid of Karen Hawkins.....or getting penalties.

It's really that I'm sick and tired of people getting $$$ that they are not entitled to......while others who really could use money pay tax and subsidize these deadbeats.

I have a few single mothers who are legit......and I'm not going to demand anything from them as proof.

[Jack from Ohio]

Let's see....there is this client AND his 4 brothers and his father. All make a low W-2 and all have non- working wives and 2-3 kids. But only one has them has a mtge.

The only other ridiculous one is the guy who makes about $15,000 on a W-2 from the deli.....yet has about $250,000 in stock trades (losses).

I've been doing all of these for about a decade.

I've been seriously thinking of just saying I don't do EITCs anymore.

It's not that I'm afraid of Karen Hawkins.....or getting penalties.

It's really that I'm sick and tired of people getting $$$ that they are not entitled to......while others who really could use money pay tax and subsidize these deadbeats.

I have a few single mothers who are legit......and I'm not going to demand anything from them as proof.

Famous last words. When the compliance auditor visits, let us know how that defense works.

[jshtax]

Famous last words. When the compliance auditor visits, let us know how that defense works.

It will be a slap on the wrist and move on. Last year I got a visit about the 8879 and was not in compliance but the agent told me what needed to be done going forward and did not access the penalty. Our issue was not having both spouses sign the form not getting a signature from out of town clients. This has since been corrected and I am sure on a first offense of the EITC compliance visit you would get the same results.

[jshtax]

Famous last words. When the compliance auditor visits, let us know how that defense works.

The main issue the IRS has is with preparers falsifying income/expenses to get the credit for clients.

[Guest Taxed]

>> Our issue was not having both spouses sign the form not getting a signature from out of town clients.

I am curious what the agent wanted to see done right?

I e-mail, or fax or snail mail the 8879 to out of town clients and wait for them to send a copy back. I do NOT e-file until a response is received. Lately a lot of them take a picture with their iphone of the 8879 with signature and send that back to me. I wonder if IRS would have any issue with that "picture" as valid 8879 signed document.

[jshtax]

>> Our issue was not having both spouses sign the form not getting a signature from out of town clients.

I am curious what the agent wanted to see done right?

I e-mail, or fax or snail mail the 8879 to out of town clients and wait for them to send a copy back. I do NOT e-file until a response is received. Lately a lot of them take a picture with their iphone of the 8879 with signature and send that back to me. I wonder if IRS would have any issue with that "picture" as valid 8879 signed document.

They just wanted to make sure both parties had a signature on there either original or copy and mainly they wanted to make sure the AGI/Taxable income on the form matched the amount on the return the IRS had on file.....making sure taxpayer was aware of amount on return and preparer was not altering return after being signed by taxpayer.

[Mr. Pencil]

I wonder if IRS would have any issue with that "picture" as valid 8879 signed document.

Live signature is not required. According to the Instructions for Form 8879, "Return the completed Form 8879 to the ERO in person, or by U.S. mail, private delivery service, fax, email, or an Internet website."

[Mr. Pencil]

the guy who makes about $15,000 on a W-2 from the deli.....yet has about $250,000 in stock trades (losses).these deadbeats.

Can you believe there are preparers who aid and abet these tax cheats? Sometimes they keep filing for about a decade, even though they think the situation is ridiculous. Sometimes they just like the clients, so they aren't going to demand anything from them as proof. For a fee of course.

Such preparers give the whole industry a bad reputation. They're the reason we have Form 8867 in the first place, and the big push to regulate tax preparers. The only alternative would be self-regulation, so it's heart-warming when a preparer is seriously thinking about it.