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CTC, ACTC, EIC, AOTC


JimTaxes

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I hope I can ask this here because a lot of confusion on other reading that I do..  I used ATX years ago.. still read this board to keep in tune though even though software I moved on..

This has to do with 8867 and due diligence. It is so confusing and so much disagreement as to what is needed I would like to number my questions

1. We need to see documentation to claim the the credits, correct?

2. Do we need to keep copies, paper or electronically of the documents?

3. For EIC, we that proof has to show residency of children, correct?.. so that proof could be medical records, landlord letter, church records, school records,, correct?

4. For AOTC, 1098-T is needed, right?

5. For CTC and ACTC, this is a child test issue.. what could be used here?  birth certificates?  some items used for EIC would not prove CTC and ACTC eligibility.

Do we have to get proof of CTC and ACTC for long time clients.. say, no EIC, just regular CTC.. Do we have to get proof they are really their children?. if so what is the proof.. 

A lot of different views on the above. . I was looking for official answer if there anyone knows.

 

 

 

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The IRS SB/SE had a webinar last week that I attended.  From what the IRS experts said, due diligence has not changed it just now applies to CTC and AOTC.  Basically, they said we have to ask sufficient questions to satisfy a prudent person that the information provided is consistent, correct and complete.  If we have any reason to suspect it is not, we must ask additional questions and for additional documentation.  They cannot tell us what questions to ask because it varies from situation to situation.  If we feel the need to see any documents, we must retain copies of those documents.  We must attach Form 8867 to all returns.  No problem if e-filing; however, if a paper return comes in without the form it is our fault even if we provided the copy to the taxpayer with instructions to send it as part of their return.  Penalties are $510 per return per credit.  So a single return could generate $1530 in penalties if all three credits are involved.

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I'm so confused. I see that some preparers are requiring birth certificates and SS cards, besides the proof of residency. I can see it with new clients or new dependents but with long time clients or relatives, I am already getting pushback when I tell them that I need this additional information. I have an issue with some clients that homeschool their kids, have no health insurance and the kids are born at home. I can get SS cards and birth certificates, but I don't know what to get for proof of residence. The AOTC credit is not an issue to me, because I normally get the bursar report anyway and book receipts. I don't know if I am asking for too much info or not enough. 

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In some cases I suspect we are overthinking this. You still have the option to choose "did not rely on any documents" for all three credits. If I have a new client whom I know nothing about  or if I suspect an existing client who is fairly new is not being honest, then I would ask for the documentation. The reason behind all of this is for us to attempt to determine the legitimacy of the credits the client is claiming in an attempt to prevent EIC and CTC fraud. It only makes sense that a client who has been claiming a dependency for the same kids with identical last names for 10 or more years is not committing fraud. Some folks are just stupid. I had a client once that tried to claim kids on a MFS return (lied about that too) when those same kids did not exist on their MFJ return which I prepared for a couple of years and then supposedly they split. We did not have to do any where near the due diligence then that we do now. I refused to prepare the return simply because I knew. Those are the ones we are to look out for. Personally, I would not ask for the documentation for each and every client in my data base. But, most definitely for a new client whom I have no prior experience. I would like to think that as professionals we know our clients and do not take the attitude to just shove them thru to get the revenue as some of the big corp preparers do.

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2 hours ago, NECPA in NEBRASKA said:

I'm so confused. I see that some preparers are requiring birth certificates and SS cards, besides the proof of residency. I can see it with new clients or new dependents but with long time clients or relatives, I am already getting pushback when I tell them that I need this additional information. I have an issue with some clients that homeschool their kids, have no health insurance and the kids are born at home. I can get SS cards and birth certificates, but I don't know what to get for proof of residence. The AOTC credit is not an issue to me, because I normally get the bursar report anyway and book receipts. I don't know if I am asking for too much info or not enough. 

Agree with you on so many levels // BUT // IRS regulations do not say --- if we know or have known /// they are asking for substantiation for all ? AS IF  each client is new each year //

Disagree with "Terry D" on "did not rely on any documents" (his statement is true as far as MAYBE not getting called on the "due diligence by the IRS --- but I AM ANAL and protective of what little I have). Therefore, to keep the same policy and procedures for clients that fall into the credits we are discussing seems to be the prudent thing to follow.  Some preparers may not and "that's OK" //// we all answer for ourselves  --- again, I want to do what I can to alleviate what I can BEFORE hand. If it is not needed, I lost a bit of time // only.

 

Even the Due Diligence requirements (again from 8867 - some bolding and size increase are mine to empathize):

Document Retention

To meet the due diligence requirements for the EIC, the CTC/ACTC and the AOTC, you must keep all of the following records.

A copy of Form 8867;

The applicable worksheet(s) or your own worksheet(s) for any credits claimed specified in Due Diligence Requirements, earlier;

Copies of any documents provided by the taxpayer on which you relied to determine eligibility for, and the amount of, the credit(s);

A record of how, when, and from whom the information used to prepare Form 8867 and the worksheet(s) was obtained; and

A record of any additional questions you may have asked to determine eligibility for,

--------------------

As to proof records:

-----------------------------

Most might have a Doctor/health care provider; landlord (rental agreements usually specify "kids" allowed or cost more to rent??); church records showing home address; that can share some of the

This is from the 8867 instructions:  

he following are examples of documents that you may rely on to determine taxpayers' eligibility for the credits or the amount of the credit. This list is not all-inclusive.

Residency of a Qualifying Child

School records or statement

Landlord or a property management statement

Health care provider statement

Medical records

Child care provider records

Placement agency statement

Social service records or statement

Place of worship statement

Indian tribal official statement

Employer statement

Disability of Qualifying Child

Doctor statement

Other health care provider statement

Social services agency or program statement

 

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2 hours ago, NECPA in NEBRASKA said:

I have an issue with some clients that homeschool their kids, have no health insurance and the kids are born at home. I can get SS cards and birth certificates, but I don't know what to get for proof of residence.

Those homeschooling the kids need to submit reports and the kids are tested periodically, and your clients should have some sort of records for this. Kids born at home still get an official birth certificate recorded with the state. Also, regarding those born at home, ask if the services of a midwife were used where paperwork may be available. 

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I don't have a definitive answer - even the IRS was not giving definitive answers in the webinar I watched.  My personal opinion is that we should be careful, apply common sense, document what we do and treat all clients the same.  One thing they emphasized was that you need to have office procedures in place regarding due diligence.  If you have employees who prepare tax returns, and they don't ask the questions you have told them to, that is on them as preparer.  But if you have given them any guidance as to how to follow due diligence, that might be on the firm and the firm face its own penalties.  I sometimes seriously think about changing careers.

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13 hours ago, NECPA in NEBRASKA said:

I'm so confused. I see that some preparers are requiring birth certificates and SS cards, besides the proof of residency. I can see it with new clients or new dependents but with long time clients or relatives, I am already getting pushback when I tell them that I need this additional information. I have an issue with some clients that homeschool their kids, have no health insurance and the kids are born at home. I can get SS cards and birth certificates, but I don't know what to get for proof of residence. The AOTC credit is not an issue to me, because I normally get the bursar report anyway and book receipts. I don't know if I am asking for too much info or not enough. 

Or you can can simply send them to the IRS's own FreeFile or TurboTax or Credit Karma etc and they won't be required to show any proof of anything to those services and file their taxes faster than the interrogation we are being asked to give them.  But I digress...

The 8867 and Due Diligence also do not stipulate what dates the documents need to contain  Does the document need to prove more than 6 months of residency of the child in 2016? SO do we need a doctor's statement from January and another from July?   What if the client only has a Jan 2017 document?  It's mind-boggling...

The IRS is slowly driving people to two different types of preparers...  free or low cost online software on which they will probably make mistakes and not get the full refund they deserve, or shady fly-by night operations who will ask not questions and charge extremely high fees, and disappear after tax season.  The honest, moderately-priced tax preparers are being squeezed out.

 

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It's okay to disagree with each other which is what makes this board so good. Why did they put that box (didn't rely on any documents) on the 8867 if you shouldn't use it? I appreciate all of the different positions taken. On the first link below there are examples to follow. The one that mentions the mother who wants to claim an infant does not make any reference to documents needed to prove the infant is her child. The question is rather the mother who lives with her parents is a dependent of her parents and if so disqualifies her for the EIC. The statement regarding the preparer being required to ask for additional information and documentation is based on whether the preparer feels the information received from the TP is accurate. Please understand I feel being completely diligent to protect us is paramount but do asset that common sense plays a role here as well.

https://www.gpo.gov/fdsys/pkg/CFR-2012-title26-vol13/pdf/CFR-2012-title26-vol13-sec1-6695-2.pdf

https://www.eitc.irs.gov/Tax-Preparer-Toolkit/dd/lawandregs

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EITC is always a huge PITA to me just because I resent people getting it, even if they "deserve" it.  And if you have a kid living with you, it should not be such an ordeal to cough up a dated document with the kid's name and your address.  I have learned, however, that this is a Herculean task for some:  "Oh, yes, these is a nice SS card.  Now we can prove this child was born.  Let me plow through this one more time."

I realize my post did not add to the thread, but this just happened to me, and this is how I cope.

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3 hours ago, Jack from Ohio said:

Bottom line...

If there is an error on a return with one of these credits, the preparer is to blame.  We have all just become unpaid IRS auditors under the threat of penalties.

Look at it as a positive.  They long ago forced you to work as their unpaid data entry clerk.  So becoming an auditor is a promotion. 

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18 minutes ago, RitaB said:

EITC is always a huge PITA to me just because I resent people getting it, even if they "deserve" it.  And if you have a kid living with you, it should not be such an ordeal to cough up a dated document with the kid's name and your address.  I have learned, however, that this is a Herculean task for some:  "Oh, yes, these is a nice SS card.  Now we can prove this child was born.  Let me plow through this one more time."

I realize my post did not add to the thread, but this just happened to me, and this is how I cope.

Rita:  I like the way you cope.  

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I look at it this way.

Jack is right, we are the unpaid auditors for the IRS.

We get paid by our clients. 

Has ANYONE on this board ever been subject to one of these compliance audits?  I believe the answer is NO.  Why?  Because, we do the returns right.  Our returns are not getting kicked out by the boat load with bad AOTC, CTC, EITC or other issues on a regular basis. 

I do my due diligence, and I send away those that do not meet my criteria to be my clients.  Sorry, if you have all those above things, and I do not have any idea who you are and you just walked in off the street, you are walking back out.

That is my defense.  I do not believe that the IRS is going to go after a preparer with one bad return.  They are looking for patterns, and if you have a number of stinky ones, then you are much more likely to get the visit.  

IF, for some reason the IRS shows up at my door to do a compliance audit on this issue, I should be in very good shape.  And any issues that might arise?  I pick up the phone and call the client and here comes the missing info.

Rich  

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Here is an example of one PIA. The school forms have her ex's address because his mom pays the tuition, the activity forms have his address because they have his address because that is how his kid's can get into that location's sports and church has his address because they go to school there. I know that the kids live with Mom, because they are closely related to me. She is searching for something to prove that they live with her besides the decree. I have wasted way too much time trying to treat a freebie the same as everyone else. I would love to just use common sense, but I can't trust that no one else will claim the CTC.

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1 minute ago, NECPA in NEBRASKA said:

Here is an example of one PIA. The school forms have her ex's address because his mom pays the tuition, the activity forms have his address because they have his address because that is how his kid's can get into that location's sports and church has his address because they go to school there. I know that the kids live with Mom, because they are closely related to me. She is searching for something to prove that they live with her besides the decree. I have wasted way too much time trying to treat a freebie the same as everyone else. I would love to just use common sense, but I can't trust that no one else will claim the CTC.

The DECREE.  Ah, yes.  The bane of my existence.   I wish I had a nickel for every time I said, "Hey, you know what, the Decree means absolutely zero in my world."

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I'm with Rich.  I've only done two returns so far with CTC (Not ACTC) and the due diligence questions were making me dizzy.  Then I realized, hey I know these clients, been doing their work for years, remember when their kids were born.  I am absolutely sure they are eligible for the CTC and I am not going to take up their or my time attempting to obey the instructions for a million little boxes on the 8867.  If anyone else claims their child, it will be a case of identity theft, not lack of due diligence on my part.  If there is a statement from child care or maybe the child got Soc Sec from a deceased parent, I'll keep that in my records.  But I am not going to torture most of my clients who have children into proving the kids live with them and are indeed theirs.

Of course, we know most of our clients.  New clients with kids will be a different story.  For a few years we have not taken new clients with EITC.  We send them to Block, saying the rules are so complex and we do so few of that type of return that Block preparers are better trained to help them.  But geez, we can't turn away every new client who has children!  Fortunately, we take very few new clients.

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