EITC Due Diligence Compliance Program
IRS is taking a multi-prong approach to reduce the number of erroneous EITC claims. The agency estimates that 23 to 28 percent of EITC claims filed for tax year 2007 were erroneous and resulted in overpayments of $11 billion to $13 billion.
IRS adopted the EITC Paid Preparer Compliance Program because paid preparers:
- Prepare approximately 70 percent of the returns filed with EITC claims
- Can play a role in helping the IRS reduce EITC errors
IRS developed a tiered EITC Paid Preparer Compliance Program with a range of activities designed to influence behavior and reduce error. Consequences of non-compliance are based on whether the error is determined to be unintentional due to misapplication or misunderstanding of the tax law or an intentional disregard of the tax law. IRS also has a compliance program addressing erroneous EITC claims on taxpayer prepared returns.
For 2009, IRS will:
- Implement a first time paid preparer program. This educational and outreach program is directed to preparers identified as “new” to EITC return preparation. IRS will send these preparers letters outlining their due diligence responsibilities and listing common errors. The agency will closely monitor initial returns signed by these preparers for errors and make follow-up contacts, by mail or phone, if the agency identifies a high error rate.
- Make face-to-face visits to return preparers who file highly questionable EITC returns. An IRS criminal investigator and revenue agent will visit selected return preparers to discuss the identified errors, remedies, preparer responsibilities and possible civil and criminal penalties that could result as a consequence of filing inaccurate EITC returns.
- Continue the due diligence audit program where agents review paid preparers’ due diligence records onsite. These visits can result in penalties assessed against the preparer if they cannot substantiate due diligence, including the knowledge factor and recordkeeping requirements, was exercised on each EITC return. The visits could result in penalties against the employing tax preparation firm if IRS agents determine the business did not provide its employees with sufficient training and guidance to avoid erroneous claims. The selection criteria for these visits are similar to those used to identify returns for examination.
Consequences of non-compliance
EITC return preparers are expected to be knowledgeable in the tax law, prepare accurate returns, and meet their EITC due diligence requirements. Businesses that employ return preparers are expected to provide adequate training, oversight, and quality control to ensure due diligence is met. Return preparers, return preparation businesses and their clients could be adversely affected by incorrect EITC returns.
- Return preparers, or their employers, who fail to comply with EITC due diligence requirements can be assessed a $100 penalty for each failure.
- Return preparers who prepare EITC claims for which any part of an understatement of tax liability is due to an unreasonable position can be assessed a minimum penalty of $1,000.
- Return preparers who prepare EITC claims for which any part of an understatement of tax liability is due to reckless or intentional disregard of rules or regulations by the tax preparer, can be assessed a minimum penalty of $5,000.
- Clients whose returns are examined and found to be incorrect, could be subject to the accuracy or fraud penalties and banned from claiming EITC for a period of 2 or 10 years.
- IRS may assess the return preparer penalties against either the preparer or his/her employer. If the agency finds an employer provided sufficient training and guidance and the preparer failed to comply with that guidance, the penalty is generally assessed against the preparer. If the employer fails to provide adequate training and direction, the penalties are usually assessed against the business.
The assessment of return-related penalties against tax preparers can also result in:
- Disciplinary action by the IRS Office of Professional Responsibility.
- Suspension or expulsion of the preparer’s firm from participation in IRS e-file.
- Injunctions barring the preparer from preparing tax returns.
- Return preparers who intentionally disregard the due diligence requirements and file fraudulent claims could also face criminal penalties.
For additional information, see the resource box below.