IRS To Crack Down On False EITC Claims

by Leroy Baker, Tax-News.com, New York

06 January 2009

The United States Internal Revenue Service (IRS) has announced that it is taking a multi-pronged approach to reducing the number of erroneous Earned Income Tax Credit (EITC) claims received by the agency.

The IRS estimates that 23 to 28% of EITC claims filed for tax year 2007 were erroneous and resulted in overpayments of USD11bn to USD13bn.

The IRS has created the EITC Paid Preparer Compliance Programme because paid preparers prepare approximately 70% of the returns filed with claims for the tax credit. However, for 2009, the IRS intends to beef up the programme, by, among other things, targeting preparers new to the EITC claims process, and visiting certain other preparers at their premises.

The 'first-time paid preparer program' will be an educational and outreach program directed to preparers identified as “new” to EITC return preparation. The IRS will send these preparers letters outlining their due diligence responsibilities and listing common errors. The agency will closely monitor initial returns signed by these preparers for errors and make follow-up contacts, by mail or phone, if the agency identifies a high error rate.

Those preparers deemed to have filed "highly questionable" EITC claims can expect face-to-face visits from an IRS criminal investigator and revenue agent, who will discuss the identified errors, remedies, preparer responsibilities and possible civil and criminal penalties that could result as a consequence of filing inaccurate EITC returns.

The IRS also intends to continue the due diligence audit program where agents review paid preparers’ due diligence records onsite. These visits can result in penalties assessed against the preparer if they cannot substantiate due diligence, including the knowledge factor and record keeping requirements, was exercised on each EITC return. The visits could result in penalties against the employing tax preparation firm if IRS agents determine the business did not provide its employees with sufficient training and guidance to avoid erroneous claims. The selection criteria for these visits are similar to those used to identify returns for examination.

"EITC return preparers are expected to be knowledgeable in the tax law, prepare accurate returns, and meet their EITC due diligence requirements," the agency states. "Businesses that employ return preparers are expected to provide adequate training, oversight, and quality control to ensure due diligence is met."

Under the current system of penalties:

• Return preparers, or their employers, who fail to comply with EITC due diligence requirements can be assessed a USD100 penalty for each failure.
• Return preparers who prepare EITC claims for which any part of an understatement of tax liability is due to an unreasonable position can be assessed a minimum penalty of USD1,000.
• Return preparers who prepare EITC claims for which any part of an understatement of tax liability is due to reckless or intentional disregard of rules or regulations by the tax preparer, can be assessed a minimum penalty of USD5,000.
• Clients whose returns are examined and found to be incorrect, could be subject to the accuracy or fraud penalties and banned from claiming EITC for a period of 2 or 10 years.

The IRS may assess the return preparer penalties against either the preparer or his/her employer. If the agency finds an employer provided sufficient training and guidance and the preparer failed to comply with that guidance, the penalty is generally assessed against the preparer. If the employer fails to provide adequate training and direction, the penalties are usually assessed against the business.

The assessment of return-related penalties against tax preparers can also result in: disciplinary action by the IRS Office of Professional Responsibility; suspension or expulsion of the preparer’s firm from participation in IRS e-file; and injunctions barring the preparer from preparing tax returns.

Return preparers who intentionally disregard the due diligence requirements and file fraudulent claims could also face criminal penalties, the agency warned.

Recommended