DeFreitas & Minsky Accounting Blog

Explaining EITC Due Diligence Requirements

Posted by admin on Nov 12, 2013 12:21:56 PM

EITC Due Diligence Requirements

Now (mid-November) is about the time that the IRS is going to begin Earned Income Tax Credit (EITC) Due Diligence Audits for 2012 tax returns.

IRS Audits

These audits are an opportunity for the IRS to review three things:

  • The preparer’s due diligence records
  • The questions asked by the preparer, and the client’s responses
  • All questionnaires, checklists, and worksheets used

One of the primary functions of these audits is to prove that tax preparers have adequate tax preparation knowledge, and that they meet the knowledge standard imposed by the IRS.

Tax Preparer Expectations

  • Know the tax laws
  • Be able to ask the right questions, especially when clarifying information that client provides that may be incorrect, inconsistent, or incomplete
  • Maintain proper documentation of the questions they ask and the answers that clients give them
  • Obtain all of the facts to make sure their clients actually qualify for EITC

When preparers fail to meet the EITC Due Diligence requirements, they are penalized after their audits. The IRS has fine-tuned their audit selection process, and report that “using this new process, we penalize over 90% of the preparers audited.” The penalties imposed on tax preparers can range from $100 to $5000, and are usually due to a failure to meet the knowledge standard.

Through the audit process, the IRS may find errors made in your clients’ EITC returns. The consequences of your errors in a client’s returns can affect several parties.

Tax Filing Errors

If your tax filing errors cause the IRS to deny any part of their EITC, your client:

  • Will have to pay back the incorrect amount with interest
  • May need to file the Form 8862, “Information to Claim Earned Income Credit after Disallowance”
  • May not be able to claim EITC for the next two years if the errors found are due to reckless or intentional disregard of the filing rules
  • May be unable to claim EITC for the next ten years if the errors are due to fraudulence

Fail to Meet EITC Due Diligence Requirements

If you fail to meet all of the EITC Due Diligence requirements as a result of the IRS auditing claims prepared by you, you may receive:

  • A $500 penalty per failure to comply with EITC Due Diligence requirements for any returns that had to be filed after December 31, 2011
  • A minimum penalty of $1000 if the discrepancy in taxes owed is due to an “unreasonable position” (see IRC section 6694(a) for further clarification)
  • A minimum penalty of $5000 if the discrepancy of taxes owed is a result of your “reckless or intentional disregard of rules or regulations (see IRC section 6694(b) for further clarification)

Furthermore, your employer may even be liable for your failure to comply with the EITC Due Diligence requirements.

Tax Return Penalty

Lastly, if you are penalized for a tax return you’ve filed, you may also:

  • Lose your Registered Tax Return Preparer designation
  • Be suspended or expelled from the IRS e-file (either individually or in some cases this may happen to your entire firm)
  • Face other disciplinary action by the IRS Office of Professional Responsibility
  • Receive an injunction that bars you from preparing tax returns or imposing conditions on any tax returns that you do prepare

If you’re a tax preparer, and you have questions about the EITC Due Diligence requirements, contact us on Facebook or LinkedIn to pick our brains about tax preparation!


Speak to one of our certified public accounts by scheduling a free consulation today.

Topics: Tax Laws, Tax Planning

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