Tax Preparers Beware of New IRS Rules
The IRS is cracking down on earned income tax credit (EITC) fraud. It is a very serious problem. Many tax payers file phony returns claiming the credit on children that did not exist or did not qualify. The new Tax Preparer rules hold each tax preparer liable for errors and mistakes.
Accounting firms can now outsource tax preparation and share clients’ Social Security numbers with foreign tax preparers. Clients must give their approval and the firms must ensure data safeguards.
Each preparer in a firm is now liable for his/her own errors on returns. Previously, only the preparer who signed the return was responsible for positions rejected by the IRS. Preparers often get advice on issues from colleagues with more technical expertise. Now, the expert is liable for penalties assessed by the IRS on positions it rejects.
Preparers must inform clients about questionable positions taken on returns. This only applies when there is less than a 40% chance that the position will be upheld by the IRS.
IRS’s war on earned income tax credit (EITC) fraud in ’09 will target the returns filed by new preparers of the earned income credit. These returns will receive extra scrutiny this year, and the IRS will contact those who made a lot of errors.
The EITC is a refundable federal income tax credit for low to moderate income WORKING individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit. You must have earned income from employment or from self-employment and you or your dependent children must qualify.
The IRS will keep the heat on veteran preparers who file questionable returns claiming the earned income credit. They will be visited by IRS criminal investigators as well as from revenue agents. IRS is looking for preparers who fail to carefully document their claims. It can assess violators $100 per return. Violators who recklessly disregard rules can be fined $5,000 or more. Client’s who file phony returns can be barred from taking the credit for up to 10 years.
IRS audited 1.01% of personal returns in fiscal ’08, one out of every 99 returns. The audit rate for fiscal ’07 was 1.03%. Look for the audit rate to increase for ’09. The main focus will be on the EITC.
Please read my October 13 article Two Important, But Often Confusing Issues You Must Understand to Prepare Your Federal Tax Return for information about dependents and qualifying children.
14 Comments
Thanks for the information! This is well organized and presented. Honesty is the best policy (with the IRS along with everything else!).
This is clearly your domain, Wess. A very detailed article with important info.In this currant economy crisis everyone should educate themselves on their taxes and be totally honest.
I don’t live in the US so this doesn’t apply to me, but I still think it is a very informative and well written article.
very informative and well presented
This is a great article for tax time. Part of the problem is that some people will agree to file however the preparer says to. If something they say you can claim is new or doesn’t feel right, ask them to hold off on filing and get a second opinion from another agency or look up the tax rule yourself. Don’t claim something that you aren’t comfortable with just to get a bigger refund, it may haunt you later.
Great article and very useful information. Thanks for sharing it.
Great article. I thought the irs was suppose to be cracking down on them before now… well, they should have been. Fraud of any kind is just wrong.
Thank you, good to know.
Nicely done! I’m assuming step-families are often the parties involved? Makes me glad that part of my tax prep is well behind me!
Daisy, When claiming children for the earned income tax credit, step children are not treated differently than blood relatives. That is not a problem. The primary problem is children are being claimed who did not qualify or did not live in the home. Please click on and read my article that I mentioned at the bottom of this article. That article provides the rules for qualifying children and dependents.
M Stokes, The IRS has been slowing accelerating their crack down on EITC fraud. Look at the audit rates that I mentioned at the bottom of my article. The rate is very low. IRS is committing to being much more aggressive this year on this kind of fraud. You would be surprised at how many low income single moms or guardians cheat to get this credit.
Denise, If you use a tax preparer in an established company, there is a very low chance that they will guide you wrong in how to file. I am assuming you are saying filing status, such as Married Filing Jointly, Married filing Separately, Qualifying Widow, single. The rules are quite clear in this area. Now, there can be different thinking on everything else. Taxes can be very complicated and not all tax preparers are at the highest knowldge base. You can ask the preparer what kind of training he/she has and how much experience they have. A qualified one will be glad to tell you. I can tell you that H&R Block preparers must undergo extensive training (three to four months) and testing to begin the career. Then they must train on the new laws before each season. People who cannot cut the muster do not get hired During and after training, each preparer must practice weeks on mock cases. The cases start out fairly straight forward and progresively get very tough.
very wise, my friend!
Great article. I used to know this couple who would both not only claim their children but claim additional children that they did not have.
Great article.
How did I miss this one? Great article with in depth information.
Thanks for sharing.