Thursday, February 2, 2012

Taxpayers Must Attach Checklist to All 2012 Returns with Earned Income Credit Claims

The IRS has issued proposed regulations that require paid tax return preparers to file a due diligence checklist with any federal return claiming the Earned Income Credit (EIC), beginning in 2011.

As a preparer, I have been required to complete this form and retain it in my client records. However, now it must be sent in with the tax return. To fill out the checklist, I am required to ask questions about a client’s dependents, sources of support, living situation, and family relationships. Requiring that this checklist be submitted as part of the tax return raises its legal significance and subjects it to much greater scrutiny by the IRS.


At this point, it also is unclear to what extent my clients will need to prove to me the accuracy of the information they are conveying. The IRS regulations state that I must “make reasonable inquiries if the information furnished appears to be incorrect, inconsistent, or incomplete.”

The significance of this change for you is that your tax return will be more complicated to complete and you can expect the IRS to more closely investigate your eligibility for the earned income credit.

EIC by the Numbers

The earned income credit is targeted to 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 EIC is refundable — taxpayers can get it even if they owe no tax.

For 2011 tax returns, the maximum credit will be $5,751.

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