Handling the Most Common Errors

In 1975, Congress created the EITC to offset the burden of Social Security taxes and provide a work incentive for low-income taxpayers. Participation in the program is high, but the program experiences a high rate of erroneous claims. IRS estimates that between 23% - 28% of the claims, or between $13 - $16 billion, is paid in error.

As you prepare EITC returns, avoid the three most common EITC errors which count for more than 60% of erroneous claims.

Claiming a child who is not a qualifying child
Married taxpayers who incorrectly file as single or head of household
Income-reporting errors

For other types of errors that are frequently made on EITC tax returns, please refer to the "Handling processing errors" or "Handling common due diligence situations" sections also included within the Tax Preparer Toolkit portion of this website.

1. Claiming a child that is not a qualifying child – This error occurs when taxpayers claim a child that does not meet the age, relationship or residency requirements.

This is the most common EITC error. To be considered a “Qualifying Child”, the child must meet all relationship, age, and residency requirements. Many taxpayers meet one or two of these requirements, but they must meet all three to be eligible to claim the EITC. If two people, filing separate tax returns, claim the same child, tie-breaker rules determine which person has the valid claim.

As an EITC return preparer, you have additional due diligence requirements. The “knowledge” requirement states that you must apply a reasonableness standard to the information you receive from your client. If the information provided by the client appears to be incorrect, incomplete or inconsistent, then you must make additional inquiries of the client until you are satisfied that you have the correct and complete information to prepare the return.

The tax law defining a Qualifying Child can be perplexing. The preparer must ask adequate questions of their client to determine they meet the requirements. To determine a client’s eligibility, the preparer may need to ask probing questions. The document 886-EIC outlines what a taxpayer must document to verify their eligibility. This document may be useful to exhibit the qualifying child requirements to your clients.

Example 1:

A client tells you:

He is 22 years old
He has two sons age 10 and 11

Since the age of the taxpayer and the children seems inconsistent, probing questions might include:

Are these your foster sons, adopted sons…?
Were you ever married to the mother?
Were the children placed in your home for adoption or as foster children?
Did the mother live with you?
How long have the children lived with you?
Do you have any records to prove the children lived with you, such as school or doctor records?

Example 2:

A client tells you:

Last year, she filed single and claimed her child for the EITC.
This year, she asks to claim 2 children for the EITC.

Since there is a change in the facts from the prior year, probing questions might include:

Last year, you claimed one child, what changed?
Did the child live with you?
Do you have any records to prove the child lived with you, such as school or doctor records?

Ultimately, your goal as the preparer is to feel confident that the return you prepare is correct and complete and that you have complied with your EITC due diligence requirements.

There are many tools and references preparers may use to assist in meeting their EITC due diligence requirements. The EITC Assistant is an online tool that preparers can demonstrate with their clients to determine their EITC eligibility. For more information on qualifying child and tie-breaker rules, please visit irs.gov or refer to Publication 596.

2. Married taxpayers who incorrectly file as single or head of household – Married taxpayers sometimes incorrectly claim single or head of household filing status in order to qualify for EITC or increase the amount of EITC.

This is the second most common EITC error. Many taxpayers do not understand the nuances of the head of household filing status. Some married taxpayers intentionally claim single or HOH filing status in order to claim more EITC.

The tax law defining Head of Household (HOH) filing status is complex, and the exception allowing some married taxpayers to claim head of household status is confusing.

The preparer must ask adequate questions of their client to determine that they meet the requirements. This will often require the preparer to ask probing questions of the client. The document 886-H-HOH (also available in Spanish) outlines what a taxpayer must document to support HOH filing status. This document may be useful to demonstrate the requirements of HOH filing status to your clients. Additional examples of probing questions you might ask are included in the following examples:

Example 1:

A client tells you:

She is head of household.
She has a qualifying child.
She earned $4,000.

Probing questions might include:

Are you or were you ever married?
Did your child live with you for more than half of the year?
Did you live with anyone else besides your child?
Do you have records to support that you personally paid more than 50% of the following expenses:
- Property taxes
- Mortgage payments
- Rent
- Utilities
- Household upkeep and repairs
- Property insurance
- Food consumed at home

Example 2:

A client tells you:

She is separated from her spouse.
Her child lives with her.
She wants to claim HOH filing status.

Probing questions might include:

Are you still married?
When did you separate from your husband?
Did you move to separate homes, and if so, when?
Did you live with anyone else?
How long during the year did your child live with you?
If the client is still married-Do you have records to show that you paid more than 50% of the cost of supporting the home where you and your child lived?

Ultimately, your goal as the preparer is to feel confident that the return you prepare is correct and complete and that you have complied with your EITC due diligence requirements.

3. Income-reporting errors – Taxpayers sometimes over-report or under-report income to qualify for or maximize the amount of EITC.

The most common income errors noted are Schedule C’s with large losses to bring income down to qualify for EITC, bogus or inflated Schedule C income to maximize the amount of EITC, and Schedule C’s without expenses. Self-employed taxpayers filing a Schedule C, Profit or Loss from Business, must report the correct gross income and all related deductions on their return.

Clients who claim income from self-employment without a Form 1099 should be asked if they have records to support the computation of their income. This may require the preparer to ask probing questions, particularly if the client claims they have no records to support the numbers they give you. The same is true of Schedule C expenses. In some cases, the client may say they had no expenses when it is not reasonable to conduct the business without incurring expenses, or the expenses may seem unreasonably high. Again the preparer may need to ask probing questions to determine the correct facts.

Example:

A client tells you:

She has no Form 1099.
She was self-employed cleaning houses.
She earned $12,000.
She had no expenses related to the cleaning business.

Probing questions might include:

Do you have records of the amount of money you received from house cleaning?
How much did you charge to clean a house?
How many houses did you clean?
Who provided the cleaning supplies?
If you provided the cleaning supplies, how much did you spend weekly?
Did you provide your own transportation to the houses you cleaned?

Ultimately, your goal as the preparer is to feel confident that the return you prepare is correct and complete and that you have complied with your EITC due diligence requirements.

For other types of errors that are frequently made on EITC tax returns, please refer to the “Handling processing errors” or "Handling common due diligence situations" sections also included within the Tax Preparer Toolkit portion of this website.

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Last Updated: 1/10/2013