We improved our refundable credit paid preparer compliance program and expanded it to include more preparers and more credits. It now includes the earned income tax credit (EITC), the Child Tax Credit (CTC), the refundable part of the CTC, the additional child tax credit (ACTC), and the American opportunity tax credit (AOTC).
|We look at the characteristics of returns claiming the EITC, the CTC and the AOTC completed by the same preparer and focus on questionable claims. We focus on a combination of characteristics that we know indicates the returns have a high likelihood of error and assign a risk level.|
We assign an appropriate compliance treatment in line with the preparer’s risk level. We consider what may be the cause of the errors:
The Refundable Credit Paid Preparer Compliance program takes a tiered approach depending on what category best fits the preparer. Our tiered approach includes educational letters and visits, audits, penalties and may result in barring preparers from filing tax returns in extreme cases.
Why Have a Preparer Compliance Program?
We estimate the error rate to be around 27 percent of all EITC claims have some type of mistake which cost the government roughly $18 billion in 2014. We are completing a study for the ACTC and AOTC error rates and will have that information soon.
Some errors are caused by misinterpreting the law; some because the preparer accepted client-provided information at face value and others are outright fraud. You, as part of the tax preparation community, are crucial in stemming these errors because paid preparers create the majority of refundable credit claims.
We know most paid preparers practice due diligence and prepare accurate refundable credit claims. But, we developed this preparer compliance program to ensure you compete on a level playing field.
Where Do we Find Most Refundable Credit Errors?
About 60 percent of EITC errors fall into three key categories:
- claiming a child who does not meet the relationship or residency tests,
- over-or under-reporting income or business expenses to maximize the credit, and
- filing as single or head of household when legally married.
The most common CTC/ACTC errors are:
- claiming the CTC/ACTC a child who does not meet the age requirement (the child must be under the age of 17 at the end of the tax year),
- claiming the CTC/ACTC a child who does not meet the dependency requirements, and
- claiming the CTC/ACTC a child who does not meet the residency requirement. The child must be a U.S. citizen, U.S. national or a U.S. resident alien and the child must have lived with your client for more than half the year. If the qualifying child uses an ITIN, Individual Taxpayer Identification Number, the child must meet the substantial presence test to qualify.
The most Common AOTC Errors are:
- claiming AOTC for a student who didn’t attend an eligible educational institution,
- claiming AOTC for a student who didn’t pay qualifying college expenses, and
- claiming AOTC for a student for too many years.
What are the Refundable Credit Return Preparer Compliance Treatments?
Preparers filing returns with questionable EITC claims may receive any of the tiered treatments listed below:
- Reaching Out to Preparers
- Knock and Talk Visits
- Auditing for Due Diligence Compliance
- Barring Non-Compliant EITC Preparers from Completing Tax Returns
- Additional Forceful Actions Taken Against Return Preparers Filing False Refundable Credit Claims
The IRS assesses a $500* (indexed for inflation) penalty per return to preparers who do not submit the Form 8867, Paid Preparers Due Diligence Checklist, with all EITC, CTC/ACTC and AOTC claims. The penalty for all returns filed beginning in 2016 and in 2017 is $510. The form must be submitted electronically or attached to each EITC claim you mail in or give directly to your clients for filing. Find out more about the Form 8867 and the consequences of not completing or submitting it.
Find out more about the Consequences of Failing to Meet Your Refundable Credit Due Diligence Requirements
Educational Opportunities for Avoiding EITC Error
We reach out to preparers and provide education and other resources to help you avoid refundable credit errors and help you practice due diligence. This Tax Preparer Toolkit has a wealth of resources:
- Take the online Due Diligence Training Module, to help you refresh your refundable credit tax law and due diligence knowledge. The training is available in English and Spanish and may qualify you for one continuing education credit.
- Learn how to meet your due diligence requirements while preparing returns with self-employment income using our Schedule C and Record Reconstruction Training. Plus, get tips on helping your clients reconstruct their business records.
- View the popular Due Diligence Videos to help you avoid common error situations and improve your due diligence interview process.
- Attend our Refundable Credit Due Diligence seminar or view archived sessions from the Nationwide Tax Forums.
- Visit the Frequently Asked Questions for guidance on similar questions you might have.
- Use the headings on the left navigation bar for more tips and tools to help you avoid refundable credit error.