IRS Tightens Tax Credit Compliance Checks

by Leroy Baker, Tax-News.com, New York

07 October 2011

The United States Internal Revenue Service (IRS) has announced that it is issuing proposed regulations that would require paid tax return preparers, beginning in 2012, to file a due diligence checklist with any federal return claiming the Earned Income Tax Credit (EITC).

The due diligence requirement, enacted by Congress over a decade ago, was designed to reduce errors on returns claiming the EITC, most of which are prepared by tax professionals. It was pointed out that the form to be filed is the same form that is currently required to be completed and retained in a preparer’s records, and which was created by the IRS to help preparers meet the requirement by obtaining eligibility information from their clients.

Preparers have been required to keep copies of the form, or comparable documentation, which is subject to review by the IRS. To help ensure compliance with the law and that eligible taxpayers receive the right credit amount, the proposed regulations would require preparers, with effect from January 1, 2012, to file the form with each return claiming the EITC.

The EITC benefits low-and moderate-income workers and working families, and the tax benefit varies by income, family size and filing status. Unlike most deductions and credits, the EITC is refundable - taxpayers can get it even if they owe no tax. For 2011 tax returns, the maximum credit will be USD5,751.

Although as many as one in five eligible taxpayers fail to claim the EITC, some of those who do claim it either compute it incorrectly or are ineligible. The IRS is proposing this new regulation as part of its efforts to ensure that the credit is afforded to taxpayers who qualify. For 2009, over 26m people received nearly USD59bn through the EITC, and tax professionals prepare close to 66% of these claims.

Comments on the proposed regulations are due by November 10, 2011.