By Jerry Coon
The world of tax preparation is being thrown into a tizzy by the Tax Cuts and Job Act of 2017 (TCJA2017). Everyone wants to know whether his/her/their tax refund or balance due will be bigger or smaller next year. Well, maybe “tizzy” is too strong of a word and “everyone” is a little overly expansive but there is a lot of interest in how the TCJA2017 will affect all of us in the coming year and years. We are getting some help from our tax preparation software provider, Drake, in that each tax return we run through the system as a finished return will also automatically prepare a comparison worksheet as if the 2017 tax return was prepared using the TCJA2017 rules and showing the taxpayer’s potential 2018 tax refund or balance due under the new rules. That worksheet will be an important topic of conversation. I’m a firm believer that information is knowledge and this information will give us the knowledge to make suggestions if there are adjustments that may be necessary.
The key words, however, in the proceeding paragraph include the statement that the software will help us once we finish the current return. In the next three months, we will be finishing a lot of returns. Since we do have a whole year to talk about the TCJA2017, let’s talk about some of the items that are important on this year’s return. For starters, Form 8867, Paid Preparer’s Due Diligence Checklist will be an important form on this year’s return if three different situations apply. First, Form 8867 has to be completed for taxpayers who have a child or children under the age of 17 and are claiming the $1,000 Child Tax Credit or the Additional Child Tax Credit. Second, Form 8867 has to be completed for taxpayers claiming the Earned Income Tax Credit. Third, Form 8867 has to be completed for taxpayers claiming the American Opportunity Tax Credit. What does the Form 8867 do and why is it so important? Form 8867 is used by tax preparers to demonstrate that the taxpayer is entitled to the Child Tax Credit or Additional Tax Credit, the Earned Income Tax Credit, or the American Opportunity Tax Credit. The tax preparer has to answer a series of questions proving that the preparer has knowledge, and can demonstrate such knowledge, that the taxpayer is entitled to the credit being claimed. Being entitled to the credit in the instance of these three credits involves having qualifying dependents. Several of the questions asked require the taxpayer to provide proof that the dependent lives with the taxpayer or the taxpayer did not release the dependent to another taxpayer. Also, in the case of the American Opportunity Tax Credit, proof must be provided that the expenses claimed were actually billed and paid. In other words, your tax preparer may be asking more questions and asking for more proof this year for the three credits listed above. In addition, each of these credits involves reporting earned income on the tax return. Taxpayers who have a W-2 can provide proof of income via that W-2. However, taxpayers with self-employment income reporting that income on a Schedule C require more due diligence worksheets and are required to provide more substantiation of that self-employment income. That substantiation could include business bank account statements, business cards, stationary, invoices, a federal employer identification number, receipt of 1099’s, operating agreements, accounting records, etc.
What leverage does the Internal Revenue Service have in asking for Form 8867 and the additional due diligence worksheets to be completed? Actually, it has plenty of leverage. First, tax preparers can be penalized $510 per failure to comply with the due diligence rules. If a taxpayer claims the Child Tax Credit, the Earned Income Tax Credit and the American Opportunity Tax Credit and the IRS determines the tax preparer did not comply with the due diligence rules, the tax preparer could be fined $510 times 3 or $1,530 for that tax return. In addition, if the tax preparer has an employer, that employer could also be fined the same amount for a separate $1,530 and both can be banned or suspended from preparing tax returns in the future. The taxpayer can also be banned from claiming the Earned Income Tax Credit for up to 10 years as well as having to pay back the amount claimed. I would call that sufficient leverage to get most tax preparers and taxpayers to play by the rules. This is Jerry Coon signing off.
Jerry Coon is an Enrolled Agent.
He owns Action Tax Service on Northland Dr in Rockford.
Contact Jerry via the website at www.actiontaxservice.com.