prevention is worth a pound of cure. You don't
want to be in front of an Internal Revenue Service agent
frantically trying to figure out how you are going to come up
with the due diligence proof for the 2,000 tax returns you
prepared last year. Imagine two thousand tax returns times $500?
That is a million dollars that you would owe the Internal
Revenue Service. Let's say you can
negotiate the million dollars with the IRS. The negotiated
figure is still a lot of money.
You must file Form 8862 if your EIC for a year
after 1996 was reduced or disallowed for any reason other than a math or
clerical error. File Form 8862 if for 2 years after the most recent tax year
for which there was a final determination that your EIC claim was due to
reckless or intentional disregard of the EIC rules. Also file Form 8862 if
the reason your EIC was reduced or disallowed in an earlier year was because
it was determined that a child listed on your Schedule EIC was not your
qualifying child. Additionally, if your EIC credit was denied for 10 years
due to fraud, then you must file Form 8862 along with your tax return.
You must abide by the four due
diligence rule requirements. As a tax professional, you must ask all the
questions required on Form 8867. Form 8867 must be used as an interview
worksheet and no question should go unasked. Not asking the questions on
From 8862 would be a very dangerous task for you as a tax preparer. Please
don't think that this is not going to happen to you or that the Internal
Revenue Service will only go after the big guys such as H&R Block and
Jackson Hewitt. The rules apply to every tax professional even if that tax
professional only prepared two tax returns. Remember! Use Form 8862 as a
worksheet in your interview and when allowing your clients to take the
Earned Income Credit.
Let's take an example when you must use Form 8862
in preparing a tax return for your client. In 2014, your client was
age 24, single, and living at home with his parents. He worked and he was
not a student and earned $7,500. His parents cannot claim him as a
dependent. When he files his tax return, he cannot claim the Earned Income
Credit because he is not at least age 25.
Your tax preparation software
would most likely catch this mistake because your client is not at least age
25. However, let's say you not only did not fill out the Form 8862 diligence
worksheet, but you also did not fill out the correct age in you tax
software. As a result, you give your client the Earned Income Credit. This
is a tax preparation mistake an also a negligent disregard of the EIC due
diligence rules. When the Internal Revenue Service asks for the due
diligence requirement record, they will fine fine you $500 for that client
if you fail to provide it.
Remember that any refund you receive as a result of taking the EIC will not be used to determine if you are eligible for
temporary assistance for needy families, Medicaid and SSI, or
supplemental Nutrition Assistance Program and low income
housing. The refund you receive because of EIC cannot count as an
asset to determine qualification for these benefits.
Everyone must do their part and provide
documentation for everything that has transpired. There are steep penalties
for everyone for failing to comply. Your employer must provide or send Form W-2 to
you no later than January 31, 2015. If you do not get a Form
W-2, you still have to report your earnings on your tax return.
