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William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘EITC’

IRS Checklist of Credits and Deductions for Children

Posted by William Byrnes on February 25, 2015


In Tax Tip 2015-14, the IRS discussed the potential reduction of the amount of taxes owed for a year that tax credits and deductions associated with children may provide to the parents.

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• Dependents.  In most cases, a taxpayer can claim a child as a dependent.  For each dependent, the taxpayer may deduct $3,950 from taxable income.  However, for high income taxpayers, the amount of allowed deduction decreases.

• Child Tax Credit.  A taxpayer may be able to claim the Child Tax Credit for each of the qualifying children under the age of 17. The maximum credit is $1,000 per child.  However, if a taxpayer receives less than the full amount of the Child Tax Credit, then the taxpayer may be eligible for the “Additional Child Tax Credit”.

• Child and Dependent Care Credit. A taxpayer may be able to claim this credit if the taxpayer paid for the care of one or more qualifying persons. Dependent children under age 13 are among those who qualify.  The care must be paid for so that the taxpayer could work or could look for work.

• Earned Income Tax Credit (EITC).  If in 2014 a taxpayer earned less than $52,427 from work, the taxpayer may qualify for the EITC.  The EITC may be worth as much as $6,143.  The EITC is available regardless of whether the taxpayer has children.

• Adoption Credit.  A taxpayer may be eligible to claim a tax credit for certain costs paid for adoption of a child.

• Education tax credits.  An education credit can help a taxpayer with the cost of higher education.  There are two credits that are available. The American Opportunity Tax Credit and the Lifetime Learning Credit may both reduce the amount of tax owed.

If the credit reduces the tax owed to less than zero, the taxpayer may receive a refund of the extra amount.  Even if the taxpayer does not owe any taxes for the year, the taxpayer may still qualify.

• Student loan interest.  A taxpayer may be able to deduct interest paid on a qualified student loan.  This benefit is available even for taxpayers that do not itemize tax deductions.

• Self-employed health insurance deduction.  If a taxpayer was self-employed in 2014 and paid for health insurance, then the taxpayer may be able to deduct premiums paid during the year. This may include the cost to cover children under age 27, even if they are not claimed as a dependent!

Tax Facts on Individuals & Small Business

2014_tf_on_individuals_small_businesses-m_1Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor.  Financial advisors are continually looking for competitive information to help them provide the best answers for their clients and to obtain new clients.  National Underwriter’s Tax Facts series is the only resource written specifically for the financial advisor and producer providing fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts has been famous over 50 years.

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Earned Income Tax Credit (EITC): The IRS Inappropriately Bans Many Taxpayers but a 22.7% Improper Payment Persists Regardless

Posted by William Byrnes on February 11, 2014


The National Taxpayer Advocate provides the following  > report information < on the Earned Income Tax Credit (EITC).

Earned Income Tax Credit and Family Credits

The Earned Income Tax Credit (EITC) is a refundable federal income tax credit for low to moderate income-earning individuals and families. If you qualify, the credit could be a maximum amount of up to $6,044 in 2013. This means you could pay less or no federal tax or even get a refund.

The EITC is based on your earned income and whether or not there are qualifying children in your household. You must file a tax return to claim the EITC and if you have children, they must meet the relationship, age and residency requirements.

What is the EITC?

A taxpayer may qualify for the EITC if you worked any part of last year and made less than $51,000 in 2013.  Read more about the EITC, how to file for it, and how to receive a refund:

IRS Incorrectly Bans Many Taxpayers from Claiming EITC

The National Taxpayer Advocate reported that the IRS Incorrectly Bans Many Taxpayers from Claiming EITC (see > Taxpayer Advocate Report on EITC < )  Excerpted from the National Taxpayer Advocate report…

Section 32(k) of the Internal Revenue Code (IRC) authorizes the IRS to ban taxpayers from claiming the earned income tax credit (EITC) for two years if the IRS determines they claimed the credit improperly due to reckless or intentional disregard of rules and regulations.  This standard requires more than mere negligence on the part of the taxpayer.

According to IRS Chief Counsel guidance, a taxpayer’s failure to participate in an EITC audit does not justify imposing the ban.  Once the IRS imposes the ban, any EITC claimed in the next two years will be disallowed even if the taxpayer is otherwise eligible for the credit.

IRS data shows:

  • The IRS imposed the ban improperly almost 40 percent of the time in 2011;
  • Taxpayers who were (but for the 2011 ban) eligible for the credit in the following two years were deprived of a tax benefit that averaged more than $4,600 for the two years combined.

In a representative sample of two-year ban cases, the Taxpayer Advocate Service (TAS) found:

  • In 19 percent of the cases, the IRS imposed the ban solely because EITC had been disallowed in a previous year;
  • In only 10 percent of the cases did a taxpayer’s response to the audit raise the possibility that he or she had the requisite state of mind to justify the two-year ban;
  • In 69 percent of the cases, the ban was imposed without required managerial approval;
  • In almost 90 percent of the cases, neither IRS work papers nor communications to the taxpayer contained the required explanation of why the ban was imposed; and
  • Taxpayers’ average income was about $15,500.

Low income taxpayers face unique obstacles in learning EITC rules and substantiating their entitlement to the credit, but IRS procedures do not take this into account. Instead, the IRS applies the two-year ban on the basis of unexamined assumptions about the taxpayer’s state of mind or even presupposes reckless or intentional disregard of the rules and regulations, potentially causing significant harm to taxpayers who may be entitled to EITC in a subsequent year.

Treasury > reports < that the other benefit programs results in high administrative costs and low error because of the necessity of the pre-qualification for benefits by a caseworker, whereas the EITC’s program’s administrative costs are less than 1% of the program benefits.  The Treasury report continues that “the IRS screens EITC claims against certain criteria and also conducts approximately 500,000 audits of claims annually.”

Almost a Quarter of EITC Payments are in Error

Yet, considering that the IRS improperly bans taxpayers from the EITC program and performs 500,000 audits of EITC claims annually, 22.7% of the EITC is improperly paid.  A challenging problem to be addressed.  Low administrative cost but high rate of improper denial of eligibility and high rate of improper payment.  Send me (or use comments below) suggestions of how these problems may be mitigated.

2012: $55.4B Total Payments (Outlays) with $12.6B Improper Payments = 22.7% Improper Payment Rate

FISCAL REPORTING YEAR IMPROPER AMOUNT (IN BILLIONS) IMPROPER RATE
2010 $16.9 26.3%
2011 $15.2 23.5%
2012 $12.6 22.7%
2013 $13.2 22.8%
2014 $11.8 22.8%

Treasury’s EITC Program Comments

A number of factors unique to the EITC program trigger errors.  The complexity of the law contributes to confusion around eligibility requirements, mainly qualifying child relationship and residency rules.  Other factors include high program turnover of one-third annually, return preparer errors, and fraud.

The IRS will continue to address EITC noncompliance through its aggressive compliance program which includes examinations, reviews of income misreporting, systemic corrections during tax return processing, and an enhanced focus on paid return preparers.  Because tax return preparers handle two-thirds of returns claiming the EITC, the Department of the Treasury expects the implementation of new preparer requirements for registration, competency testing, continuing education, and compliance checks will improve EITC compliance, decrease fraud, and reduce overall program noncompliance.

Additional information on the program is also provided annually in the department’s Performance and Accountability Report

For more than half a century, Tax Facts has been an essential resource designed to meet the real-world tax-guidance needs of professionals in both the insurance and investment industries.

2014_tf_on_individuals_small_businesses-m_1Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor. Financial advisors are continually looking for updated tax information that can help them provide the right answers to the right people at the right time. This brand-new resource provides fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts is famous.

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Earned Income Tax Credit (EITC) for Low- and Moderate-Income Workers: a Significant Tax Benefit

Posted by William Byrnes on February 10, 2014


Last Friday (January 31, 2014) the IRS opened the tax filing season for 2013 taxes.  In Newswire (IR-2014-9 and -10), also released January 31, the IRS seeks to reach out to low and moderate income workers to alert them to take advantage of the Earned Income Tax Credit, known as the “EITC”.  The IRS stated that the EITC is often overlooked by the low and moderate workers, many whom do their own tax filing.

This year, taxpayers have until Tuesday, April 15, 2014 to file their 2013 tax returns and pay any tax due.  The IRS expects to receive more than 148 million individual tax returns this year, and more than 80% of tax returns are now filed electronically.

Approximately 75% of tax filers typically receive refunds, 90% of these refunds issued in less than 21 days.  Last year, taxpayers received an average refund of $2,744.  The IRS stated that “E-file” when combined with a direct deposit is the fastest way to receive a refund.  75% of refund recipients now choose direct deposit.

The Earned Income Tax Credit (EITC)

The IRS estimates that 20% of eligible low and moderate income workers miss out on taking advantage of the the EITC, and thus lose any potential refund generated by it.  Either the taxpayer does not claim the EITC when filing or does not file a tax return at all because their income is below the filing threshold.   The IRS further stated that one-third of the taxpayers eligible for EITC changes each year as their personal circumstances, such as work status or family situation, changes, affecting eligibility. 

The EITC varies depending on income, family size and filing status.  Last year, over 27 million eligible workers and families received more than $63 billion total in EITC, with an average EITC amount of $2,300.

Workers, self-employed people and farmers who earned $51,567 or less last year could receive larger refunds if they qualify for the EITC.  That could mean up to $487 in EITC for people without children, and a maximum credit of up to $6,044 for those with three or more qualifying children. Unlike most deductions and credits, the EITC is refundable. In other words, those eligible may get a refund even if they owe no tax

Common EITC Mistakes

Taxpayers are responsible for the accuracy of their tax return regardless of who prepares it.  The rules for EITC are complicated.  The IRS urges taxpayers to seek help if they are unsure of their eligibility (read about Taxpayer Clinics below).

There are several requirements to consider:

  • Your filing status can’t be Married Filing Separately.
  • You must have a valid Social Security number for yourself, your spouse if married, and any qualifying child listed on your tax return.
  • You must have earned income. Earned income includes earnings such as wages, self-employment and farm income.
  • You may be married or single, with or without children to qualify. If you don’t have children, you must also meet age, residency and dependency rules.
  • If you are a member of the U.S. Armed Forces serving in a combat zone, special rules apply.

Some common EITC errors are:

  • Claiming a child who does not meet the relationship, age or residency tests
  • Filing as “single” or “head of household” when married
  • Over or under reporting of income and or expenses to qualify for or maximize EITC
  • Missing Social Security numbers or Social Security Number and last name mismatches for both taxpayers and the children

Online Tools at IRS.gov Available to Help

People can find out if they qualify for the EITC by answering a few questions about income, family size and filing status, among other things using the EITC Assistant, a special online tool.  The EITC Assistant will help determine eligibility and will figure an estimated EITC refund.  A taxpayer can even get a printout explaining why he or she qualifies or has been denied.

Free Taxpayer Clinics Help Taxpayers File – Located Around the USA

Eligible taxpayers can also use another helpful online resource, the VITA Site Locator tool to locate one of nearly 13,000 community-based volunteer tax sites consisting of over 90,000 volunteers that can help them file their return for free.  (In San Diego, Thomas Jefferson School of Law has an active VITA program).

Tele-Tax, for example, help taxpayers see if they qualify for various tax benefits, such as the Child Tax Credit and Additional Child Tax Credit for eligible families, the American Opportunity Tax Credit for parents and college students, the saver’s credit for low-and moderate-income workers saving for retirement and energy credits for homeowners making qualifying energy-saving home improvements. The automated IRS services can also help home-based businesses check out the new simplified option for claiming the home office deduction, a straightforward computation that allows eligible taxpayers to claim $5 per square foot, up to a maximum of $1,500, instead of filling out a 43-line form (Form 8829) with often complex calculations.

Free Online Tax Software for Filing

When taxpayers are ready to fill out and file their returns, another online option enables anyone to e-file their returns for free. Free File offers two free electronic filing options: brand-name tax software or online Fillable Forms. Taxpayers who make $58,000 or less can choose free options from 14 commercial software providers. There’s no income limit for the second option, Free File Fillable Forms, the electronic version of IRS paper forms, which is best suited to people who are comfortable preparing their own tax return.

Online Refund Tool

Even after taxpayers file, there are more online tools that can provide them with valuable assistance long after tax season ends. One of the most popular is Where’s My Refund? a tool available on IRS.gov that enables taxpayers to track the status of their refund. Initial information will normally be available within 24 hours after the IRS receives the taxpayer’s e-filed return or four weeks after the taxpayer mails a paper return to the IRS. The system updates every 24 hours, usually overnight, so there’s no need to check more often.

Can’t Afford to Pay the Tax Bill by April 15th?  Use the Online Payment Agreement Tool 

For taxpayers whose concern isn’t a refund, but rather, a tax bill they can’t pay, the Online Payment Agreement tool can help them determine whether they qualify for an installment agreement with the IRS. And those whose tax obligation is even more serious, the Offer in Compromise Pre-Qualifier can help them determine if they qualify for an offer in compromise, an agreement with the IRS that settles their tax liability for less than the full amount owed.

Are You Withholding Enough or Too Much Tax During the Year?

Another useful year-round tool, the IRS Withholding Calculator, helps employees make sure the amount of income tax taken out of their pay is neither too high nor too low. This tool can be particularly useful to taxpayers who, after filling out their tax returns, find that the refund or balance due was higher than expected.

Beware of EITC Scams and Frauds

Scams that create fictitious qualifying children or inflate income levels to get the maximum EITC could leave taxpayers with a penalty.  If an EITC claim was reduced or denied after tax year 1996 for any reason other than a mathematical or clerical error, taxpayers must file Form 8862, Information To Claim Earned Income Credit After Disallowance, with the next tax return to claim the EITC.

Tax Help Through YouTube, Twitter, Tumblr

The IRS also offers more than 100 short instructional videos, tax tips and other useful resources year-round through a variety of social media platforms. They include:

2014_tf_on_individuals_small_businesses-m_1The newest addition to the Tax Facts Library, Tax Facts on Individuals & Small Business focuses exclusively on what individuals and small businesses need to know to maximize opportunities under today’s often complex tax rules.  It is the essential tax reference for financial advisors, & planners; insurance professionals; CPAs; attorneys; and other practitioners advising small businesses and individuals.  See http://www.nationalunderwriter.com/tax-facts-on-individuals-small-business.html

Organized in a convenient Q&A format to speed you to the information you need, Tax Facts on Individuals & Small Business delivers the latest guidance on:
» Healthcare
» Home Office
» Contractor vs. Employee — clarified!
» Business Deductions and Losses
» Business Life Insurance
» Small Business Valuation
» Small Business Entity Choices
» Accounting — including guidance on how standards change as the business grows
» Capital Gains
» Investor Losses
» New Medicare Tax and Net Investment Income tax
» Individual Income Taxation

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