Did you know about 27 percent of Earned Income Tax Credit returns are paid in error? According to the IRS, the three most common errors account for more than 60 percent of erroneous claims. Remember, EITC preparers have due diligence requirements, or questions you must ask your client, to determine eligibility for the credit.
Below, we list the three most common errors according to the IRS and some tips for handling them.
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 including relationship, age, joint return and residency requirements. Many meet one or two of the requirements, but not all four that determine eligibility for the EITC.
If you are not confident in the information provided by the client, you are required to make additional inquiries to determine if they meet the requirements. Form 886-H-EIC is a helpful document.
2. Married taxpayers incorrectly file as single or head of household.
Many taxpayers do not understand the head of household filing status or intentionally claim single or head of household to claim more EITC. The tax law defining head of household and exceptions is complex and confusing.
Again, you may need to ask additional questions of your client. Form 886-H-HOH outlines what a taxpayer must document to support head of household filing status.
3. Income-reporting errors.
Taxpayers sometimes over-report or under-report income to qualify for or maximize the amount of EITC. Common errors on Schedule C’s including claiming large loss to bring income down, bogus or inflated Schedule C income and not claiming all business expenses or claiming no expenses.
If you make additional inquiries of the client, be cautious of clients who claim income from self-employment without a Form 1099. Also, a client with a Schedule C may say they had no expenses, which is not reasonable to conduct a business.
For more information on due diligence requirements and examples that can help you determine the facts, visit EITC Central brought to you by the IRS.