The Earned Income Tax Credit (EITC) began in 1975 to offer lower income families some offset for the social security withheld from their pay checks. Since 1975, the credit amount has grown due to inflation indexing and legislation which expanded those eligible to receive EITC. For 2011 tax year, the maximum credit ranges from $464 to $5751. The exact amount depends on if there are qualifying children, how many children and if the return is a married or single return. Think of EITC as a pyramid. It starts at $0 credit and $0 income. Then rises to a high point where the maximum credit is earned and falls back to $0 credit as income continues to rise. The maximum credit and the ending income will depend on the factors I mentioned above. But the income must be earned income. That is wages or self employment income. (Actually, the credit amount is figured twice, once on the return’s earned income and then on the Adjusted Gross Income (AGI) reported on the return and the lower amount is used.)
EITC is a good program and helps a lot of families. Unfortunately, it is a fraud magnet. According to TIGTA’s May 2011 report to the House Ways and Means committee (download), The IRS estimates between 23% and 28% of the EITC payments are improper. In 2009, this resulted in $11 to $13 billion in improper payments. As part of a program to reduce the bad EITC claims, the IRS has begun to put more pressure on the tax professional community. If a paid preparer doesn’t do adequate due diligence to make sure a client does qualify for EITC, they could face a $500 fine for each client they qualify but shouldn’t have. On top of that, the due diligence checklist (Form 8867) must be completed and filed with the return to verify each claim. In response to this, many tax preparers are no longer accepting EITC clients. My worry is where will these clients go if their preparer won’t do EITC?
EITC returns are generally the first returns I see in January. These clients know they will be getting a big refund and too often they have spent the money already. Faced with finding a new tax professional, I’m concerned that they might not due a little research and end up with a really bad preparer or try to do it themselves. If that happens to you, ask your former preparer for a recommendation of a preparer who is still doing EITC returns. Once you find a preparer or decide to do it yourself, I have a few suggestions on how to evaluate the work done by the computer or new preparer before the return is sent.
- Be prepared for a bunch of questions about your income, marital status and dependents. It may seem like the preparer or program is prying, but this is proper due diligence. You should also be asked to sign the due diligence check list to verify the info. If the preparer doesn’t go over it with you, take the time to read it. If you have questions, ask them and get real answers.
- Once the return is done, is there a major change from previous years? Ask why? Don’t assume that the new preparer found a magical source of money. Have they changed your filing status? Missed or added a dependent. Adjusted your income? If they have, be wary and get a second opinion.
- If you’re using a computer program and something doesn’t look right, call their support people and make sure that you didn’t make a mistake. Don’t rely on the advice of your buddy, barber or any non-tax pro because they won’t be the ones facing the IRS if there is a problem.
- If the new preparer charges based on the size of your refund, leave. Not only is it illegal but they could be manipulating your return to fraudulently increase your refund and their fee.
- Be wary of up selling. Many preparers who do EITC returns have refund programs. But you don’t have to use the program if it’s offered. Understand what you sign.
It’s hard on the client when they have to find a new preparer but I understand why tax pros don’t want to mess with EITC. If this happens to you, take a deep breath and spend a little time finding a good preparer. Stay in control because you are the one who will have to deal with any problems.