Applications and Due Diligence of the Earned Income Credit
Speaker Notes
1-3. This presentation in a box is designed to be a 2-hour (100 minute) presentation. The first part on Applications of the Earned Income Credit should take 60-65 minutes and the second part on Due Diligence should take 35-40 minutes. If possible, do not pass out the background material to the participants until after Slide 5. This provides for focus of the opening material.
If you wish to give this presentation as two separate one hour presentations, here is how best to split it up.
Hour 1: Slides 1-4, 8 – 43 Handout: pages 1 – 7 (skip opening scenario)
Hour 2: Slides 5 – 7, 44 – 70 Handout: pages 8 - 14
Hour 1 focuses on applications of the EIC only without the opening example and its four variants. Hour 2 reviews the applications through the long example and then gives all the due diligence requirements.
4. All content on the slides should be read aloud. The objectives on this and the next slide of the presentation will help you and the participants know what is coming and provides context for the presentation. This slide gives the main two objectives for Applications of the Earned Income Credit.
5. This slide gives the main two objectives for Due Diligence of the Earned Income Credit. Before the next slide, ask how many participants fill out EIC returns? How many do more than 10? More than 20? More than 50? It shows the participants who are the experts in the room.
6. Here is an opening scenario. Try to get your audience to write down for themselves what the answers are. They do not have to share them; in fact, you do not want discussion here.
7, Also have the audience write down for themselves the answers to these variants. The point of this participation is to get “buy-in” from the audience and to have them pay attention to the points where they are unsure.
8. At this point, hand out the background material. This Slide begins the presentation of the 15 rules for determine the eligibility for the EIC.
9. Rule 1. These figures change every year. AGI is Line 38 (1040) or Line 22 (1040A) or line 4 (1040EZ).
Rule 2. The qualifying children must also have valid social security numbers. If clients have ITIN’s instead of social security numbers, they do not qualify for the EIC. If the social security numbers are expected to be official after the filing deadline, either (a) file an extension and wait or (b) file an amended return claim the EIC once the numbers arrive.
Rule 3. Head of household status may be available to a married taxpayer of they did not live with their spouse for the final six months of the year. If the taxpayer qualifies for this and is in a community property state, then the taxpayer’s AGI includes that portion of both the taxpayer’s and the spouse’s wages that are required to be included in gross income.
Rule 4. An exception is if one spouse of a married filing jointly return is a U.S. citizen or resident alien and they choose to treat the nonresident spouse as a U.S. resident. If this choice is made, the couple is taxed on their worldwide income.
10. Rule 5. These forms qualify taxpayer for the Foreign Earned Income Exclusion.
Rule 6. Investment income is interest (both taxable and tax-exempt), dividend, and capital gains. For a married filing jointly return, the combined investment income must be $3300 or less (for tax year 2013).
Rule 7. Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, is not earned income. But there is an exception for nontaxable combat pay, which you can choose to include in earned income.
11-15. Here is the crux of what makes a qualifying child for the EIC. Go through these slides deliberately. There will be examples starting at slide 16 to help clarify these four tests.
16-19. Here are the first 2 examples of the presentation. You might have your audience write down the answers. You might have the tables discuss them and come to agreement. You might want to see a show of hands. It is probably best to mix up the approaches throughout the presentation. It is always preferable to get some participation instead of just reading Example-Solution-Example-Solution.
20. After the intricacies of the qualifying child, these slides go into the intricacies of who can claim the children.
21 Divorced or separated parents can split these benefits up under certain guidelines, but they are the only exceptions. For parents who were never married, only one parent can take these 6 benefits for any individual qualifying child.
22. Note that on point 1, parents can choose – the IRS does not dictate. Only when both claim the same qualifying child will the IRS come down and make the choice.
23. Read point 4 slowly. The first aspect is that the parent can give up the EIC only to someone with a higher AGI. The second aspect is that each spouse takes ½ the joint income for this calculation.
24-29. Here are 3 Examples to illustrate the tiebreaker rules and who can claim children for the EIC.
30. If the taxpayer meets all the requirements of being a qualifying child of someone else, the taxpayer cannot claim the EIC, even if the person the taxpayer qualifies for does not claim the EIC. However, just like the joint return test, if the person the taxpayer qualifies for does not need to and doesn’t file a tax return or only files a return for a claim of refund, then the taxpayer may take the EIC.
31-34. Here are 2 Examples to further illustrate who can claim children for the EIC.
35. For MFJ, only one spouse needs to meet this requirement. If a spouse dies during the year, their age is the age on the date of death
36-37. Here is brief example to clarify ages with a married couple.
38. Similar to Rule 10, if the taxpayer meets all the requirements of being a dependent of someone else, they cannot claim the EIC, even if the person they qualify for does not claim them as a dependent.
39-40. Another brief example to explain the relationship between being a dependent and claiming EIC.
41. Rule 13. As in Rule 10, if the taxpayer meets all the requirements of being a qualifying child of someone else, they cannot claim the EIC, even if the person they qualify for does not claim the EIC.
Rule 14. For this rule and the residency test, the US is considered only the 50 states and the District of Columbia. It does not include Puerto Rico or US Possessions.
42. These limitations are the exact same as the AGI limitations, but the IRS has decided to have them be their own rule. Earned Income is defined with Rule 7.
43. These are very important points to emphasize: The rules for exemptions are separate from the rules for EIC qualification. There is no calculation of support or income earned by the qualifying child in determining eligibility for the EIC. The rules for filing status are separate from the rules for EIC qualification. There is no calculation of support in determining eligibility for the EIC.
44.-53. These slides go through the opening scenario and all its variants. Participants should see if their original answers are the same or have changed. It is really fun to have actual evidence of learning something! This completes the applications part of the presentation.
54. This slide begins the due diligence part of the presentation. These points serve as the motivation for the IRS to examine the due diligence of tax preparers in regards to the EIC.
55-56. The IRS has announced 4 tiers of enforcement of due diligence penalties for tax return preparers. These slides gives the more educative part of this enforcement effort.
57. This slide gives the more serious tiers of enforcement of due diligence among preparers.
58-60. These slides show in detail the common due diligence errors among tax return preparers. It is in these areas that effort must be made in your practice to ensure that you are doing your due diligence.
61. 90% of penalties assessed on paid preparers are for failure to comply with the knowledge requirement. Ask yourself: Would a reasonable and well-informed tax return preparer, knowledgeable in the law, conclude the client-furnished information is questionable? The IRS expects you to recognize incomplete or inconsistent information, not to rely on tax software, and ensure that the EIC worksheet is complete.
62. The penalty has now increased, so it is $500 a return that the IRS can collect from you. Some of these errors in due diligence could apply to all returns, so it is important that you have procedures in place to adhere to these requirements.
63-67. These Best Practices come directly from the IRS. Most of the professional software programs now include questionnaires and other due diligence forms and documents that you can fill out. Always record responses from clients in such a way that you could show it to an auditor in a couple of years.
68. The IRS website devoted to EIC is quite good and contains many resources. They really would rather have good compliance than go after noncompliant preparers.