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 claims paid out in error—estimated to be around 25 percent of the claims. Additional information can be found in Dep't of the Treasury, Agency Final Report, FY 2018PDF, page 45:

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

 

1. Claiming a child who is not a qualifying child for the EITC – This error occurs when taxpayers claim a child who does not meet all four tests for a qualifying child.

 This is the most common EITC error. To be considered a qualifying child, the child must meet all four requirements; relationship, residency, age and joint return tests. Many meet one or two of these requirements, but they must meet all to be a qualifying child for 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. These inquires along with the client responses must be documented and kept in your files or within your software.

The tax law defining a qualifying child can be perplexing. The preparer must ask adequate questions of their client to determine that the child(ren) meet the requirements. To determine a client’s eligibility, the preparer may need to ask probing questions. The Form 886-H-EICPDF outlines what a taxpayer must document to verify their eligibility. Use this document to show your clients what they need to prove their claims if they are audited by IRS. There is a Spanish version of the Form 886-H-EIC (SP)PDF.

Example 1:

A client tells you:

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

 The age of the taxpayer and the children seem inconsistent, you may want to ask:

  • Are these your foster sons, adopted sons…?
  • Were you or are you 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.

Because there is a change in the facts from the prior year, you might ask:

  • 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 due diligence requirements. 

There are many tools and references preparers may use to assist in meeting their due diligence requirements. The EITC Assistant is an online tool that preparers can show their clients that they are eligible for EITC or why they aren't. For more information on qualifying child and tie-breaker rules, please visit  our Do I Qualify for EITC? page. 
 

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2.  Married taxpayers claiming the EITC without filing a joint return or meeting additional rules for separated spouses to claim the EITC.

Married taxpayers improperly claiming the EITC without filing a joint return is the second most common error. Starting with tax year 2021, married taxpayers who don't file a joint return with their spouse qualify to claim the EITC only if they lived with a qualifying child for more than half the year and either lived apart from their spouse for the last 6 months of the year or were legally separated according to their state law under a written separation agreement or a decree of separate maintenance and did not live in the same household as their spouse at the end 2021. These requirements apply to married taxpayers filing under the head of household filing status or as married filing separately. And, married taxpayers should never file as single to claim the EITC.

As a 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 preparer must ask adequate questions of their clients to determine whether they were legally married at the end of the tax year and, if so, whether they meet the requirements to claim the EITC without filing a joint return. 

Example:

A client tells you:

  • She is separated from her spouse. 
  • Her child lives with her.
  • She wants to claim EITC.

Probing questions might include:

  • Are you still married?
  • When did you separate from your spouse?
  • Did you move to separate homes, and if so, when?
  • Did you live with anyone else?
  • Are you legally separated according to your state law under a written separation agreement or a decree of separate maintenance?
  • How long during the year did your child live with you?

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 due diligence requirements. 

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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 on Schedule C’s to qualify for EITC or to maximize the amount of EITC:

  • Claiming large losses to bring income down 
  • Bogus or inflated Schedule C income
  • Not claiming all business expenses or claiming no expenses

Some believe it is a choice of which expenses to claim but it isn't—you must report all income and all allowable expenses.  

As a paid 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. You need to keep a copy of the inquires and client responses in a client file or within your software.

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 and document those 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.

 You might ask:

  • 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 EITC due diligence requirements.

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