Opportunity and obligation for tax professionals for EIC

The earned income tax credit (EIC) is a powerful anti-poverty tool. For more than 26 million working families, it represents more than just a line on a tax return; it’s a crucial financial lifeline. In 2019 alone, the IRS issued over $63 billion through the EIC, providing an average refund of nearly $2,500 per family. That kind of impact can’t be overstated. 

Yet, for all its good, the EIC is also a magnet for mistakes and fraud. When something goes wrong, the IRS rarely points the finger at the taxpayer. Instead, it turns squarely toward the preparer. As tax professionals, we’re not just filing returns. In the eyes of the IRS and Congress, we’ve become the front-line defense in preventing improper EIC claims.

Big benefits, big scrutiny 

The EIC is unique among tax credits. As a refundable credit, it can generate a refund even when no tax is owed, making it especially valuable to low- and moderate-income earners. Eligibility is based on earned income, so clients who are employed or self-employed may qualify, depending on their income and family size. However, these same features make the EIC susceptible to abuse. Common issues include fabricated dependents, misstated self-employment income, and incorrect filing statuses, all of which can trigger IRS audits. 

The IRS has long recognized the EIC’s vulnerability to error and fraud. Error rates for refundable credits remain high, costing the United States Treasury billions each year. In response, enforcement efforts have intensified, and tax professionals are now on the front lines of compliance. 

Congress put you in charge

To combat improper EIC claims, Congress enacted IRC §6695(g), which places due diligence obligations squarely on tax preparers. The law is clear: If a preparer fails to meet these requirements, the IRS can assess penalties for each violation, per credit. For 2024, the penalty was $635 per failure. This can add up quickly; misapplying both the EIC and Child Tax Credit (CTC) on 10 returns could result in $12,700 in penalties. 

The message from the IRS is unmistakable: It’s easier to penalize a preparer than to pursue a taxpayer. Tax professionals are now the gatekeepers, responsible for ensuring compliance and protecting the integrity of the EIC. 

Common EIC traps for taxpayers

As you review client information, these are the taxpayer-related issues that most often trigger problems with the EIC: 

• Missing or invalid Social Security numbers
• Filing status errors, especially when married taxpayers claim Head of Household (HOH) or Single
• Unqualified children, particularly those who fail the relationship or residency tests 
• Overstated business income or expenses on Schedule C to maximize the EIC
• Excessive investment income (must be under $11,600 in 2024)

To qualify, taxpayers must have earned income, cannot file as Married Filing Separately, and must not be claimed as a dependent by another taxpayer. Adjusted Gross Income (AGI) must fall within strict thresholds, which vary based on the number of qualifying children. For 2024, the maximum credit amounts are: 

• $632 (no children)
• $4,213 (one child)
• $6,960 (two children)
• $7,830 (three or more children)

Top errors made by preparers

While taxpayer mistakes are common, many EIC issues originate with preparers. The most frequent errors include:

• Failing to maintain documentation in the current year file
• Not making or recording necessary inquiries
• Lacking written due diligence procedures
• Inadequate evidence of staff training

These are not minor oversights; they are violations that can result in significant penalties. 

Your professional duty

To remain compliant, preparers must adhere to the requirements of Regulations §1.6695-2. This includes:

• Completing and submitting Form 8867 for every EIC claim, documentation is the basis for the credit, using information you have or reasonably should know. 
• Computing the credit properly, using IRS worksheets or documenting your calculations.
• Exercising your “knowledge” responsibility, don’t ignore suspicious information. Ask questions and document both your inquiries and your client’s responses. 

Maintaining records for three years, including: 

• The completed Form 8867
• Worksheets and notes on how and when information was collected
• The identity of individuals providing information 
• Copies of any documents relied upon

EIC: A nonnegotiable requirement

The IRS expects annual EIC training for you and your staff. It’s not enough to conduct training; you must retain certificates and verify employee understanding through quizzes or checklists. If the IRS audits your practice, they will ask for proof of training and compliance. 

Remember, even if you’re not directly preparing returns, as a firm owner or manager, you can be held responsible if office procedures are lacking or ignored. 

A culture of compliance

To foster compliant practice, consider these steps: 

1. Review and document your internal procedures.
2. Conduct annual EIC training and test employee knowledge.
3. Regularly review tax files for documentation completeness. 
4. Ensure all Form 8867s are complete and signed.
5. Monitor client income sources: Does Schedule C reflect a real business?

The goal is not just to protect your clients but also your business and professional standing.  

Final thoughts

The EIC is a win-win when applied properly: Families receive meaningful help, and preparers serve their clients well. But with great opportunity comes serious responsibility. The IRS has made its position clear: Compliance isn’t optional, and errors, intentional or not, can lead to severe penalties, reputational damage, and even loss of licensure. 

As tax professionals, we are entrusted not just with knowledge of the tax code but with the vigilance to uphold it. By embracing our role as gatekeepers, we ensure EIC continues to serve those who need it most, while safeguarding our clients and our profession.