New due diligence requirements add to tax season burden

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Conscientious preparers always want as much as possible about clients’ financial situations, but new mandates regarding tax credit due diligence mean preparers must learn more than ever this season.

“It will definitely add time to our procedures, especially this first year,” said Enrolled Agent Laurie Ziegler at Sass Accounting, in Saukville, Wis. “Since the Earned Income Tax Credit has already required us to do due diligence, we’ll be expanding those practices to the Child Tax Credit and American Opportunity Credit. Fortunately, we’re well-established so we personally know many of our clients. That will greatly reduce the number of returns that need more in-depth due diligence.”

“It’s going to be a difficult and time-consuming task for preparers to educate the taxpayers of these requirements,” said EA Twila Midwood of Advanced Tax Centre in Rockledge, Fla., who sent newsletters to clients in early December “informing them of the new requirements for tax professionals regarding these credits.”

“I’ve also updated my questionnaire to include verbiage on the requirements and dependents’ proof of residency,” Midwood said. “Taking it a step further, I’m training my front office staff to ask clients if they have this information when they drop off their tax documents or come in for an appointment.”

The ‘big stick’

The IRS established a tiered EITC Compliance Program to ensure preparers’ proper due diligence; the agency begun inspecting preparers who continue to have problems verifying clients’ eligibility for claiming the EITC.

“We look at the characteristics of returns claiming the EITC, the CTC and the AOTC completed by the same preparer and focus on questionable claims,” reads the IRS Web page “EITC & Other Refundable Credits.” The IRS has also alerted preparers who filed two or more tax year 2015 e-filed returns claiming the EITC without submitting a Form 8867, Paid Preparers’ EITC Checklist. The penalty is $505 per return.

“The IRS has been scaring the industry for the last three years, beating tax professionals with a big stick,” said EA Kerry Freeman at Freeman Income Tax Service in Anthem, Ariz.

Most preparers seem to turn mostly to one safeguard: “For the few taxpayers I help with these reporting responsibilities … documentation, documentation, documentation,” said John Dundon, an EA at Taxpayer Advocacy Services in Englewood, Colo.

“We’ve always copied all Social Security cards and driver’s licenses for all of our clients,” said Terri Ryman, an EA at Southwest Tax & Accounting, in Elkhart, Kan. “These documents are kept in the client permanent files. And we always ask clients all of the due diligence questions, and get copies of the claimed children’s school or medical records each year. Additionally, we get copies of utility bills, mortgage interest statements or landlord or school or minister statements regarding the children’s place of residence. This year we plan to request copies of the children’s birth certificates to additionally prove parentage.”

Both sides learning

Most clients seem vaguely aware of new due diligence requirements. Preparers say they’re learning fast – sometimes helped along by higher fees.

“Clients may feel that I have done these in the past without asking many questions. Now I have to explain the requirements needed to process their tax returns especially for e-filing,” said Andrew Piernock, of Piernock Accounting and Tax Services, in Philadelphia. “I need to review clients’ files for info that I received in prior years, and I need to contact my clients who use [the credits] and request certain materials to verify their dependents.”

“[We’re] including the requirements in our engagement letter, informing clients when they make the appointment, a video presentation to run in waiting room and additional pages in our organizer,” said Sharron Cirillo, an EA at SC Associates in Middletown, Del.

“All clients are filling out and signing an interview worksheet for each of these three credits,” said EA Andrew Stadler in Terre Haute, Ind. “We’re also verbally interviewing the clients. This does increase the amount of time we’re spending with clients, which means they’re incurring a fee increase.”

‘Lots more clarification’

For some preparers, the change is minimal. “I’ve always maintained high due diligence standards for those who qualify for [these] credits,” said EA Manasa Nadig, owner of MN Tax And Business Services and partner at Harris Nadig LLC, in Canton, Mich., who has always asked for 1098-Ts and receipts for other college expenses for clients who qualify for AOTC.

“My additional preparation has mostly been to send out information to my clients regarding delayed refunds,” Nadig added. “My questionnaire this year will also include a section for those who apply for an ITIN and let them know about the changes made by the PATH Act.”

Sometimes preparers are less rigorous for some clients – and sometimes not. “On new clients, we ask the list of questions to meet the IRS requirements. Return clients have it much easier and will breeze through the interview,” said Arizona’s Freeman.

“Document and require paper support even from long-time clients,” advised Morris Armstrong, an EA and registered investment advisor at Armstrong Financial Strategies, in Cheshire, Conn. “We’re requiring complete college financial transcripts, notices of scholarships and the 1099Q. For the EITC, we follow the guidelines and if during the interview things seem to cross, require lots more clarification – in writing.”

“EITC is a nice program and I dislike that so much of the money goes to fraudulent claims,” Armstrong added. “I’d like to see criminal prosecutions.”

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