Due Diligence Common Errors

1. Claiming a child who is not a qualifying child. 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 relationship, age, joint return and residency requirements. 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. 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 Form 886-H-EIC 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).

 

2. Married taxpayers who incorrectly file as single or head of household. Married taxpayers sometimes incorrectly claim single or head of household filing status 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. And, some married taxpayers intentionally claim single or HOH filing status to claim more EITC. 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 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 they meet the requirements. This will often require the preparer to ask probing questions of the client. The Form 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.

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 loss to bring income down
  • Bogus or inflated Schedule C income
  • Not claiming all business expenses or claiming no expenses
  • Some taxpayers believe it is a choice of which expenses to claim but it isn’t—you must report all income and all allowable expenses.

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.

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.

Updated on September 17, 2018

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