Due Diligence and Schedule C Income Reporting
IRS is addressing the first two issues by having the same training delivered to all due diligence audit examiners. It is also recorded and available for all review by all examiners. IRS also developed a template for the Due Diligence Audit Explanation which included details surrounding any assessed penalty. The explanation will provide valuable insight into understanding how the examiners made the determination. This information is helpful in understanding what additional questions should be asked to meet due diligence.
The group agreed to address the third recommendation and develop the scenarios during 2012.
The group recommended modifications to the Form 8867 that provides additional guidance on documentation to substantiate eligibility and prepared two versions of Form 8867 for IRS's consideration.
The group recommended IRS develop a FTHBC Web Look-up Tool to replace mailing reminder notices. IRS developed the tool. The tool provides information for all FTHBC recipients and helps taxpayers accurately determine their repayment amount.
Early in the 2011 filing season, IRS recognized that a high percentage of taxpayers were not attaching adequate supporting documentation to the paper return claiming the Adoption Credit. The group helped IRS develop and execute a communication effort which included a Tax Tip, email blasts to adoption organizations, e-News to Tax Professionals, a YouTube video, and an updated FAQ on Adoption Credit for documentation requirements for special need adoptions. The group also helped IRS revise the Form 886-H-Adopt. Also, IRS leveraged its relationship with some of the Working Group members to request immediate software changes to support Adoption Credit documentation requirements. These software updates resulted in improved processing of returns claiming the Adoption Credit.
The group again expanded its scope to address issues of more refundable credits, the American Opportunity Tax Credit (AOTC) and the Additional Child Tax Credit (ACTC). Each has unique challenges when addressing compliance for both preparers and taxpayers, but the population claiming the two credits frequently intersects with the population claiming EITC.
Several factors serve as barriers to reducing improper claims for the AOTC. The lack of sufficient Math Error Authority and inaccurate third party data (1098-T) led IRS to:
The group suggested the following enhancements to these IRS initiatives:
IRS identified two main risk areas with ACTC:
As part of its ACTC strategy, IRS will educate the taxpayers and preparers on the CTC/ACTC eligibility requirements in forms, publications and software by improving both written instructions and software features/prompts regarding eligibility for the CTC/ACTC. To help IRS with its ACTC strategy, the group proposed that IRS: