In her post “EITC Checklist Expanded” Trish McIntire, thankfully back to blogging at OUR TAXING TIMES after taking some time off, explains that the IRS is getting more out of hand with its “due diligence” requirements for tax preparers who are claiming the Earned Income Tax Credit for clients.
“The current form 8867 not only acts like a check list for each EITC qualification but now asks about what documentation was provided and what follow up questions the tax preparer asked. For example, one new question ask if the tiebreaker rules were explained when the qualifying child could be claimed by more than one taxpayer. The new page wants to know what documentation, if any, the preparer saw to verify EITC issues like residency, business income and child disability.”
Trish correctly points out that “Preparers have always been told that we aren’t responsible to audit the records taxpayers bring in to us.” But this is apparently not the case with the EITC.
Here is the story. The EITC is a welfare program – the largest federal welfare program. Because this particular form of welfare is “distributed” via the Tax Code, and it often “refundable”, allowing a taxpayer to actually make a profit by filing a tax return (and distorting the federal budget and creating a big part of the “47%”), it is, as Trish properly identifies, “a fraud magnet”. Various reports over the years have suggested that as much as 30% or more of all EITC claims are erroneous, resulting in billions of dollars of fraudulent payments.
And because it is “distributed” via the Tax Code, and the resulting huge amount of fraud involved, the tax professional has been forced to become a “social worker” and do the government’s work in verifying that the claimant is truly entitled to the welfare benefit – more so than for any other tax deduction or credit.
Is this fair or proper? Certainly not!
In my specific tax practice it is not too much of a problem. I no longer accept new clients, so I do not have to deal with any new EITC claimants. And most of my existing clients are older with grown children, so I have very few EITC claims to deal with, and with those very few I am well aware of the claimants’ situation as I have been preparing their returns for years.
But if I were still “open to the public” and soliciting new clients I honestly believe that I would refuse accepting any EITC returns. It would not be worth the potential agita or the potential penalty liability.
Trish believes the “EITC is a good program and helps a lot of families”. But in reality it is NOT a good program. The idea of providing financial assistance to the working poor with dependent children is a good one – but doing it via the Tax Code is definitely not.
Clearly the idiots in Congress must deal with this problem when they decide to seriously address the need for substantive tax reform, hopefully early in 2013.