EITC Audit horror story

 

I clipped this from another message board. Thought about taking liberties by doing this, but I see nothing in the post that would identify the poster in any way, and a great deal of benefit for all of us to know this. The poster had an EITC Compliance audit. Here are the results posted.

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"The auditor was at my office on 5 separate days to conduct his examination.
On 1/7/2010 he conducted his interview (2 1/2 hours) and reviewed 11 files.
1/25 he reviewed 22 files, 2/16 he reviewed 24 files, on 3/23 he reviewed 30 files, on 3/24 he reviewed 29 files. That's 116 files in total.

He asked to see the 1040 or 1040A, whichever was filed, Form 8867, EIC Computation Worksheet, DOB of Taxpayer and Dependents, Schedule C income/expenses, as well as any comments and notes in the files.

The Closing Conference was today. His findings were that I was lacking with regards to my documentation on 108 files. The fine $10,800.

I told him I plan to appeal and he said the IRS wants to settle this at the lowest possible level so he can give me til noon Friday to pull the files, look them over. We'd talk then and if I think he missed something or if I wanted to point out something to him I could at that time. If we still can't settle then I could request a Managerial Conference. At which time I will need to site regs or code. If no settlement after that conference then I can Appeal. At which time I will get a 30 day letter and a copy of his report. I asked why I couldn't get a copy of his report now. His answer was that's the way we do things.

Files he quoted:

HH, male, 32yrs old, W-2 wages, 2 dep. his daughters. Maximum EIC received. I have birth certificates that list him as father and asked about who else he lived with. No one. That's all that was in the file.

Lack of DocumentationThese are his words)
You should have either divorce decree/ custody papers showing he entitled to claim his kids. There was no child care credit, you need to document who watched the kids while he was at work. There was no documentation showing he was qualified to claim HH status. Where were copies of his lease and utilites receipts?

After I asked what did HH status and have to do with EITC. He seemed aggravated with all other questions.

The long and the short of it is: asking and documenting questions isn't good enough. This IRS Agent informed me that I needed to audit every client that walked in my door. I need to prove everything I put on the tax return.

If the kids are 18 -24 and go to school, I need to have a copy of proof ie: their transcript, in my file. If they qualify to use HH status I need a copy of proof ie: lease agreement, utility bills, grocery receipts in my files.

If they have Schedule C income with EITC then I need proof of income and expenses ie: copies of their records in my file.

I will agree that I didn't document all of my questions and the clients answers, I generally spend around 45 min - 1 hours per client and do their return during that one visit. And if really being honest that total would probably be close to 45 -50 files the notes were really scarce. I asked and made my determination, just didn't write it down anywhere."

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Alright folks. Here is a long story update about my audit. Fellow preparers, I hope this will give you some insight and assistance. I wish we can come together as a community to lift each other up, and come together as one. I honestly feel that the new rules and regulations imposed by the IRS is just purely bullying. They want us to do their jobs-- audit the customers for them -- without compensation. Who is going to pay for my time prying these things out of the customers-- only to have the customer go down the street to some crook who isn't going to sign their tax preparation?

 This process is making small businesses like myself lose business, and that I have to abide by the IRC rules or else I still lose (pay penalties). Sigh. I've lost a whole week of sleep deprivation in preparation for the audit.. and to mention the worries that were running in my head. "What if I get fined?" "What if they stop me from doing my job?" "How do I phrase things the right way?" Etc.. etc..

Here is a short sum up of the audit (sorry it had been so nerve wrecking, I might have left out some small details):

Friday, the examiner showed up and tells me his superiors picked out 44 files to review. We will only do 20 today. 22 Monday.

I've done about (estimating) 650 files. Over 60% of my clientele met the eligibility requirements of claiming EITC. I work in a low-income area. My clients are 98% newly arrived refugee immigrants. (Most have arrived within the past 5 years).

Before beginning, he had about 3 sheets of questionaires. The questions were like an interview, testing my knowledge of EITC and how I handle clients with EITC. (What would I do if I didn't feel that the client did not have enough information to meet EITC eligibility, etc).

The examiner asked for my price list. I cannot figure out why this would be relevant to the scope of my audit.

Importantly: you must get an EITC checklist for your office! I've had it for a few years now, and this certainly saved me.

Also, you MUST keep original copies of client W2's, 1099's... unemployment compensation.. I did an honest mistake and failed to keep these things for a few of my clients, and the examiner says that my virtual copy on my tax software is not enough.


The 44 files that were picked out, had a trend. Maybe it is me, trying to piece it together. The HH files that were picked out, were either single FATHERS/MOTHERS.. some were MFJ.. Sibling claiming siblings. They all seem to have the ideal income that meets the maximum eitc..

While reviewing the individual files, the examiner goes through and compared my version of the 1040's.. to make sure they are the same. He would take notes and looked at my filed paper copies of the documents for which I've relied on for eitc eligibility. He would want some copies, here and there (not for all client files we've reviewed).

The examiner was sweet, he was completely opposite from the horror story of this featured thread. He told me that I seem to be doing good, the only thing I need to stress about is, writing more notes. Write notes on what I've questioned the taxpayers. Write notes that I questioned these low-income taxpayers about public assistance (this is what I did not write notes on.. simply because I knew these taxpayers in person). The sensitivity here is high, but I need to keep good notes. And I also risk losing these clients (whom are close family friends) whom may take it offensive that I've pried on their personal lives.

Today is Monday. We finished the audit. She will be mailing the results in 2-3 days. I am crossing my fingers that I did everything right, and that I've said the right things the right way. Hoping that she does not misinterpret my words. My worries are still lingering. If this audit does not go well, I am thinking of just quitting tax preparation. It's too difficult to compete. 3 out of 10 clients, I'm already doing it for free. I've signed the papers because my tax software would not send the e-file if I don't sign it. If I get fined $500/file, I won't have anything left. I can't even afford a lawyer.

I will update more once I get my results letter in the mail.
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