Earned Income Tax Credit – The Earned Income Tax Credit (EITC), sometimes called EIC or Earned Income Credit is a refundable tax credit. Meaning, EITC can reduce the federal tax to zero and any left-over credit is refunded. But, workers must file a tax return to get the credit even if their income is below the filing requirement. To qualify, workers must have taxable income from working for someone or from running a business or farm.
What EITC Due Diligence?
There are certain requirements that paid tax preparers need to understand before they help their clients for for the earned income credit. Paid Preparers who do not follow these due diligence requirements may be subject to penalties and fines for filing incorrect earned income credit forms for their clients.
Earned Income Credit EITC Due Diligence
Internal Revenue Code §6695(g) has four Due Diligence Requirements:
- Complete and submit Form 8867
- Complete and keep all worksheets used to compute the credit
- Apply the knowledge requirement
- Keep records
Paid Preparers filing EITC should:
- Identify EITC due diligence requirements
- Recall the number of EITC returns reviewed in an EITC due diligence audit
- Calculate the amount of EITC due diligence penalty
- Select EITC publications and online resources available to paid preparers
Earned Income Credit Due Diligence Penalties:
The penalties increased in 2012 and are now $500 per incidence of not meeting your due diligence requirements. Again, the fine for not meeting due diligence is $500 for each incidence. There is no maximum on number of penalties issued. There are four due diligence requirements. If you fail to meet any one of them, we can propose a penalty. So, for example, if you fail to complete the Form 8867, fail to submit the Form 8867 with each EITC return, you don’t have copies of the worksheets used, you don’t have a record of additional questions you asked or you don’t keep copies of clientprovided documents that you relied on, any one of those failures could result in a penalty. So, if we find problems on 20 returns, that’s $10,000 worth of penalties.
Failing to Follow EITC due diligence requirement
Depending on the facts and circumstances, the IRS may penalize either the employee or employing firm if an employee fails to comply with the EITC due diligence requirements. In some limited instances, we could fine both the employee preparer and the firm. If warranted in this situation, that would be $20,000 in penalties, and you could also be subject to other consequences, including suspension or expulsion of you or your firm from IRS efile and other disciplinary actions by the IRS Office of Professional Responsibility. And for the extreme cases, you could be barred from preparing tax returns.
Preventing EITC Fraud
Remember, there are four due diligence requirements. You must meet all four requirements for every return. To learn more, see our Tax Preparer Tab on EITC Central, eitc.irs.gov.
EITC Central – A website tax preparers can use to help them correctly prepare returns claiming EITC and other refundable credits, like the American Opportunity Tax Credit and the Additional Child Tax Credit. Among other things, the site includes basic EITC eligibility requirements, tax preparer toolkits, and due diligence learning modules. www.eitc.irs.gov Form 8867, Paid Preparer’s Earned Income Credit Checklist – Only paid preparers have to complete this form. The form must be submitted with the tax return of any taxpayer claiming the EITC if a preparer was paid to complete the return.