The IRS announced that it would no longer hold tax returns that both claimed the Earned Income Tax Credit and had incomplete Forms 8867 attached.

Late last week, published reports indicated that the IRS was devoting special scrutiny -- and so delaying refunds -- to filers who claimed the EITC, typically those taxpayers who needed their refund checks the most. IRS spokesman Terry Lemons, however, said on Monday that the service was paying no special scrutiny to such returns and that any delay in refunds was a “processing” problem caused by incomplete or inappropriate use of Form 8867.

“We were seeing two issues with the 8867 during the early part of filing season,” Lemon said. “In one instance we were seeing the form being filled out incompletely. The other issue was with taxpayers who prepared their own returns and had an 8867 with the return and didn’t need it because the return wasn’t filled out by a preparer. Those two situations created a processing issue for us.”

“We’ve increased scrutiny on fraud in general, but we’re not giving special scrutiny to returns claiming EITC,” he said, adding that the service has “worked through those [early EITC] returns” and that filers in that group should be getting their refunds soon. He also confirmed that fewer than 5 percent of returns submitted claiming the EITC have had refunds delayed and that refunds should generally take one to two weeks if returns were e-filed and direct deposit was selected as a payment option.

“We’re in good shape on this front,” Lemon added, also stressing that the “Where’s My Refund?” site is updated overnight.

The service did acknowledge in a recent Q&A flyer that it was holding returns “submitted with incomplete Forms 8867 and was sending Letter 12C to taxpayers requesting they provide the required missing information. [But] as of February 19, these returns are no longer being held and 12C letters to taxpayers are no longer being issued” and the returns were being processed.

Those who have received a Letter 12C should respond to it, the service said, adding that it would contact preparers about any compliance issues after return process is complete. It also noted that those whose returns were held prior to February 19 should expect their refunds in the next one to two weeks.

 

‘Finding out the hard way’

Some preparers’ experiences are consistent with IRS warnings regarding Child Tax Credit and the EITC before tax season began.

“Some of our clients have had their refunds anywhere from two to 14 days. There doesn’t seem to be a consistent method of processing. It seems like the EITC and college credit returns are taking a little longer to process, however,” said Michael Perkins, EA and president of Larrison’s Tax Service in Terre Haute, Ind.

Preparers on LinkedIn tax prep discussion boards have been reporting a number of delays in refunds for reasons such as failing to indicate that a filer’s family included a disabled child. Some preparers have chosen to refer EITC clients directly to local IRS preparers, and others dislike having to ask clients for such personal information, as well as questioning the appropriateness of the sources the IRS asks for regarding verification.

“Line 26k of the 8867 will accept an ‘Employer Statement’ as proof of residency,” wrote one preparer. “How ridiculous is it to think an employer is better qualified to prove residency than the man who tucks the kids in bed at night?”

“Why would I need to see more than a birth certificate for a client's own child?” wondered one preparer. “ ‘Oh, I'm sorry, I know you gave birth to him and you've been my client for 10 years and he's been on your return every year, but can you please run down to his school and ask for a statement that he is indeed your kid living in your home going to school from your house?’ That is completely ridiculous.”

“For the past several tax seasons, preparers have expressed concern over the amount of information that they are required to obtain from their clients before EITC eligibility can even be determined,” said EA Cindy Hockenberry, manager of the tax knowledge center for Appleton, Wis.-based National Association of Tax Professionals. “Many preparers are finding out the hard way that merely filling out Form 8867 and answering the questions is not sufficient. They need to dig deeper, ask more questions and request to actually see more documentation to determine eligibility. This takes time and creates delays and increased fees. Taxpayers have a difficult time understanding this, especially if they have been coming to the same preparer for years. The days of merely having a dependent and low income to qualify are gone. In many cases, obtaining the necessary information is a burden on the taxpayer.”

Some preparers’ organizations have also reported hearing from members that EITC due diligence can be a maze with the only clear end a $500-per-return penalty should they get it wrong. One culprit: Section 10.34(d) of Circular 230 that says a preparer may “rely in good faith without verification upon information furnished by the client.”

“The least IRS could do is post the returns on its site as being processed, instead of looking like the return has not been e-filed at all,” said preparer Tony Hernandez of Hernandez Enterprises in Ridgecrest, Calif. “Some of my clients have been checking, see nothing, and of course then call me to find out why their return hasn’t been filed.”