Targeted Compliance Aims to Improve Accuracy
EITC return preparers may get letters or personal visits from the IRS starting this fall. The focus is reducing EITC errors by:
- Helping new EITC preparers get off to a solid start;
- Ensuring experienced preparers who filed questionable EITC claims understand the law and their due diligence requirements;
- Conducting on-site due diligence audits of preparers filing returns with high probability of EITC errors; and
- Barring egregious preparers with a history of non-compliance from return preparation.
IRS estimates one in four EITC claims contain some type of mistake, costing the government $10 billion to $12 billion per year in erroneous payments. Since the tax professional community prepares more than 70 percent of EITC claims, the quality of their work has a significant impact on reducing erroneous claims.
Errors occur for many reasons, including:
- Lack of knowledge of EITC tax law
- Honest preparer mistakes
- Intentional or unintentional client misrepresentation of facts
- Disregard for EITC due diligence requirements
- Blatant disregard of tax laws to garner erroneous refunds
IRS is tailoring its compliance program to the degree of risk for future errors. This targeted treatment is less invasive, less time consuming and more cost-effective for both the preparer and IRS. It also aligns with the agency’s overall effort to boost taxpayer compliance and strengthen industry standards in the tax professional community.
Reaching out to new EITC preparers
IRS is educating first-time return preparers whose returns reflected EITC errors. Using a scoring system to determine the degree of future risk, the agency is sending informational letters and in some cases sending stronger compliance letters. The contacts:
- outline due diligence responsibilities;
- highlight recurring errors made by other EITC return preparers to help avoid common pitfalls;
- point to tools, information and other resources here and on EITC Central; and
- remind preparers that tax software is a tool, not a substitute for knowing and correctly applying the tax law.
Educating experienced preparers by mail
A similar scoring system is identifying experienced preparers whose 2009 returns contained errors and questionable claims. These preparers also will receive letters from the agency. This outreach effort also is focused on educating preparers and helping them prepare accurate claims.
Visiting preparers filing questionable returns
Preparers filing returns with highly questionable EITC claims may find IRS revenue agents and Criminal Investigation special agents at their door. During these outreach and education visits, agents will:
- discuss the identified errors;
- offer advice and solutions;
- answer questions to help preparers comply; and
- explain the potential consequences of non-compliance.
Verifying due diligence on-site
Preparers who file high percentages of questionable EITC claims and/or returns with a high risk of EITC error could be subject to on-site audits. IRS agents will review preparer records to verify due diligence compliance, including whether they are meeting the knowledge standard. Penalties are assessed when noncompliance is identified.
The knowledge standard requires preparers to:
- know the law;
- ask the right questions, especially when client furnished information appears;
incorrect, inconsistent, or incomplete;
- document the questions asked and taxpayer responses; and
- get all the facts to make accurate eligibility determinations.
More than 90 percent of the due diligence penalties assessed during these audits result from failure to comply with the knowledge standard.
Preparers making fraudulent EITC claims face serious consequences
IRS is streamlining its procedures for faster referrals to the U.S. Department of Justice to enjoin preparers making flagrant and fraudulent EITC claims. These preparers could be permanently or temporarily barred from any type of federal tax preparation.
These are preparers with a demonstrated history of non-compliance, including:
- previous due diligence and other preparer penalties;
- prior e-file warnings or suspensions;
- high percentage of clients with denied EITC claims; and/or
- non-compliance related to personal or business tax returns.
These preparers also could face criminal prosecution and/or additional penalties.
Recent U.S. Department of Justice news releases announcing injunctions against return preparers include:
Consequences of non-compliance
EITC return preparers who fail to meet the knowledge standard and other due diligence requirements, are subject to an array of civil penalties. Their clients whose returns made false EITC claims also could face penalties, in addition to repayment and interest on any erroneous refunds received.
Penalties include:
- a $100 penalty for each due diligence failure to comply assessed against return preparers or their employers;
- a minimum $1,000 penalty against return preparers who prepare EITC claims for which any part of an understatement of tax liability is due to an unreasonable position;
- a minimum $5,000 penalty against return preparers who prepare EITC claims for which any part of an understatement of tax liability is due to reckless or intentional disregard of rules or regulations by the tax preparer;
- accuracy and/or fraud penalties, plus a ban from claiming EITC for 2 or 10 years, assessed against taxpayers whose returns are found to be incorrect.
Return-related preparer penalties can also result in:
- Disciplinary action by the IRS Office of Professional Responsibility
- Suspension or expulsion of the preparer’s firm from participation in IRS e-file
For more information, see:
Due Diligence Requirements
Key Facts about Due Diligence Audits
What to expect if you are selected for a Due Diligence Audit
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