Tax credits and deductions are helpful in minimizing U.S. taxpayers’ tax burden. In order to claim these deductions/credits, the Internal Revenue Service (IRS) expects taxpayers to fulfill requirements to prevent individuals from taking advantage of the credit. However, the IRS has noticed negligence when claiming deductions such as the Earned Income Tax Credit (EITC), which requires taxpayers claiming this credit to file Form 8867.
On the 20th of December, 2013, the IRS disclosed that it had issued and sent out almost 800 reminders (Letter 4989 warnings) to tax filers and preparers who have claimed the EITC while filing their 2011 and 2012 tax returns but failed to file form 8897 for the claimed EITC.
A.G. Tax professionals have prepared a summary on the EITC and the associated IRS compliance requirements. It is recommended that taxpayers review their previous years’ tax returns and confirm if they have complied with these requirements as the IRS will be conducting audits focusing especially on the EITC.
What is the Earned Income Tax Credit (EITC)?
The EITC is a refundable federal income tax credit that low/moderate income-earning taxpayers (with children) may be able to claim while filing their annual income tax returns. The EITC benefit amount depends on the recipient’s income and number of qualifying children (based on age, relationship to taxpayer, etc.).
IRS Filing Requirement
- Form 8867 (Paid Preparer’s Earned Income Tax Credit Checklist): Taxpayers claiming the Earned Income Tax Credit on their tax returns need to complete and file Form 8867 along with their annual income tax return.
Issuance of ‘Letter 4989’
The IRS modified its regulations beginning in 2011 that any tax return in which an Earned Income Tax Credit (EITC) has been claimed without Form 8867 attached to the return would lead to the issuance of ‘Letter 4989’ to the tax return preparer and/or tax filer, as a notice and warning of this non-compliance.
Under Internal Revenue Code (IRC) Section 6695(g), each tax return that claimed the EITC without attaching Form 8867, will be subject to a $500 penalty with no limit to the number of imposed penalties (I.E. if a taxpayer submitted 10 tax returns claiming the Earned Income Tax Credit (EITC) but with no Form 8867, s/he could be charged a total sum of $5,000 as penalty). Additionally, the taxpayer could also be banned from claiming the EITC for 2 or 10 years.
Recommended ‘Due Diligence’ for Taxpayers Claiming EITC
- Taxpayers should have Form 8867 (Paid Preparer’s Earned Income Tax Credit Checklist) prepared by their tax professional.
- The Earned Income Tax Credit (EITC) worksheet (shows the computation of the claimed EITC; it includes the self-employment income, total earned income, investment income, and adjusted gross income (AGI) amounts) should also be filled in with the appropriate information.
- Records/Copies of the submitted Form 8867, EITC worksheet, and any documents that were submitted along with form 8867 to validate the claimed credit and details of when, how, and from whom the information regarding the particular tax return was received should be maintained for at least 3 years.
- Both parties (taxpayer and tax professional) should maintain records or document the communication between them to avoid any unwelcome situation.
The IRS confirmed that it will be carrying out approximately 1,000 due diligence audits in early 2014 in regards to the EITC. 700 of the audits will be standard and based on 2012 EITC returns, while 300 will be real-time audits performed during the 2014 filing season based on 2013 EITC returns to help clear out any inaccurate claims for EITCs.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
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