Warning!! In 2010 Obama signed the Improper Payments Elimination and Recovery Act and then in 2012 he signed the Improper Payments Elimination and Recovery Improvement Act . These Acts have tasked the IRS to get control of rampant fraud taking place among Earned Income Tax Credit filers and preparers.
Since its inception individuals have tried to manipulate the system to get their hands on this FREE money that the government has set aside to help low income families struggling to raise their families.
Over the years the amount of abuse has reached staggering proportions. A minimum of $13.3 billion and a maximum of $15.6 billion — billion, not million — is wasted in this one program in a single year.
Last fall, the inspector general estimated that somewhere between $110 billion and $132 billion had been thrown away in improper Earned Income Tax Credit payments in the last decade. Now add somewhere around $15 billion more — with no indication the rate of fraud will be reduced anytime in the future.
Even though the IRS has been lacking in attacking this problem in the past they can no longer ignore the waste, fraud and abused taking place and they are now utilizing a very streamed line and effective audit process to help reduce and stop these abusive practices.
The correspondent audit is perhaps the most pervasive and effective tool that the IRS has perfected and they are is now using it to combat EIC abuse. Just recently the IRS has announced that they are sending letters to millions of taxpayers who they feel may not be entitled to some or all of the EITC that was claimed on their 2014 income tax return.
These Taxpayers will have received a letter 5621, a letter 5621-A, or both, depending on the questions the IRS may have about the return. These letters must be addressed quickly and we highly recommend that you utilize a Tax Professional who has an intimate knowledge of the EIC Audit process.
Failure to address these issues could result in you having to pay back your earned income tax credit that the IRS paid you with penalties and interest added. In addition you could be barred from receiving EIC from anywhere from 2-10 years even if you really do qualify.
If you receive Letter 5621 it is an indication that the IRS has a question about whether all of the children claimed on the return meet the qualifying child rules for the credit.
It normally begins:
“Our records show that you may not be entitled to some or all of the EITC claimed on the _______ return you filed. We’re sending you this letter so you can make sure the children you claimed for the EITC on your _______ tax return are qualifying children for the credit.”
At a minimum the following must be true for each child used to claim the EITC on your return:
- The child is related to you
- The child met the age requirement
- The child lived with you
Once you have received this letter you must have the proper documentation that is acceptable to the IRS that proves your qualifying child meets these conditions. Submitting the wrong documents can create far more problems and that is why you need to work with someone who knows what is acceptable to the IRS and what isn’t
If you receive letter 5621-A , the IRS has a question about whether all the income and expenses reported from self-employment on Schedule C or Schedule C-EZ are complete and correct.
This letter normally begins:
“To report self-employment income as earned income for the Earned Income Tax Credit (EITC), you must carry on a trade or business with a profit motive or receive taxable compensation for performing services on a part-time basis and you must report all your income and expenses.”
The IRS expects you to make every effort to make money in your trade or business. And you must report all of your income and related expenses from your trade or business on your Schedule C – this includes income from all sources, including credit card and PayPal receipts which may be reported on a form 1099-K.
In this case not only do you need the help of Tax Professional who not only understands The EIC Audit process but business deductions especially home based business deductions as well. This is not something you want to tackle on your own.
If you receive one or both of these letters, be sure and have a competent Tax professional review 2014 tax return for accuracy and to check that you have the proper documentation to substantiate your claim.
Do not fail to take action and take it quickly. Once you receive either or both of these letters a countdown clock begins. The IRS has perfected this process so that once it starts it is relentless and they no longer miss any of there mandated deadlines and if you do not act quickly you could lose this audit by default.
This why the correspondent audit is so deadly.. Everything is automated and unless you take immediate action before you know it your audit is over and you could find yourself owing money and being barred from money you l may legitimately qualify for.
If you need more information regarding ETIC, Business deductions or EITC audits call us ta Creative Tax (562) 251-1300