IRS is Sending EITC Due Diligence Warnings

During October the IRS will send warning letters to preparers who appear not to be complying with due-diligence requirements for the Earned Income Tax Credit.

IRC Section 6695 stipulates that preparers failing to comply with due-diligence requirements to determine a tax prep client’s eligibility for, or the amount of, the credit face a $500 fine for each failure.

Preparers must fulfill four due-diligence requirements. Generally, if you prepare EITC claims, you must not only ask all the questions to get the information required on Form 8867, Paid Preparers' Earned Income Credit Checklist, but also additional questions when the information your client gives you seems incorrect, inconsistent or incomplete.

The IRS estimates that from 22 percent to 26 percent of all EITC claims contain “some type of mistake” that altogether cost the government a total of $13.3 billion to $15.6 billion in 2013. Some errors are caused by misinterpreting the law, some because the preparer accepted client-provided information at face value and others are blatant fraud.

The IRS finds about 60 percent of EITC errors in three key categories: claiming a child who does not meet the age, relationship, joint return or residency tests; filing as single or head of household when legally married; and over- or under-reporting income or business expenses to maximize the credit.

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