When the IRS comes knocking

For tax professionals, the Earned Income Tax Credit (EIC) is both a powerful tool for helping clients and a potential minefield of compliance risk. The EIC’s complexity and the IRS’s intense scrutiny mean that even well-intentioned preparers can find themselves in trouble. If you think it can’t happen to you, consider the cautionary tale of “Tom,” a story that underscores why checklists and software alone are never enough.

Meet Tom: A well-meaning preparer in the IRS crosshairs

Tom ran a busy tax practice in Connecticut, preparing about 850 returns in a single season. Of those, 79 claimed EIC. Like many professionals serving working-class families, Tom wanted to maximize the benefits his clients received. But that very mission put him on the IRS’s radar.

It started with a handful of EIC audits, five returns, then ten more. Soon, the IRS issued an Information Document Request (IDR) for 15 additional EIC returns. Before long, Tom was facing a comprehensive audit of all 79 EIC returns he had prepared that year.

What the IRS found (and didn’t find)

At first glance, Tom’s files seemed in order. Every EIC return had a signed Form 8867, and his tax software showed the checklists were completed. But as the IRS examiner dug deeper, the cracks in Tom’s compliance became clear:

• No written due diligence procedures for the EIC or other credits
• No documentation of additional inquiries; no evidence that Tom or his staff asked follow-up questions when information was unclear or inconsistent
• No current-year supporting documents; most files relied on prior-year information to substantiate dependents
• No records of EIC training for Tom or his employees
• Tom’s own admission: “I rely on the software to handle it.”

In short, Tom had the paperwork, but not the process. The IRS expects more than just completed forms. They want to see the professional judgment and due diligence behind every EIC claim.

The consequences: $49,530 in penalties and an OPR referral

The outcome was swift and severe. Tom was cited for 78 violations of the due diligence requirements (one return was excluded for reasons not specified). At the current penalty rate of $635 per violation, Tom faced $49,530 in fines. But the financial hit was just the beginning.

The IRS also referred Tom to the Office of Professional Responsibility (OPR), which has the authority to:

• Issue reprimands or censure letters
• Suspend or disbar tax professionals from practice before the IRS
• Seeking injunctions to bar individuals from preparing returns 

For Tom, the real cost was the threat to his license, his livelihood, and his professional reputation. 

What went wrong with Tom?

Tom made a common mistake: Assuming that filling out forms and trusting software was enough. It isn’t. Here are the critical failures in his approach:

• No written procedures: Every office should have documented steps for verifying eligibility for the EIC and other refundable credits. The IRS expects that you have these procedures and that your employees know and follow them.
• No documentation of inquiries: Form 8867 is just one piece. When a taxpayer provides unclear or questionable information, you must ask follow-up questions and document both the questions and the answers.
• No current-year documents: Using last year’s support to justify this year’s claim? That’s a nonstarter. You need fresh, relevant documentation for every tax year.
• No training records: The IRS requires you and your staff to undergo annual EIC training. Not only must you complete the training, but you must also retain certificates or proof of completion. 

Tom’s dilemma: Fight or settle?

After the audit, Tom had a choice:

• Fight the penalty: File an appeal, delay payment, negotiate, or litigate.
• Pay the penalty: This will mean that the IRS will treat the action as an admission of guilt, triggering expedited disciplinary action. 

Many preparers feel pressured to just “make it go away” by paying, but that’s the wrong move. As Eric Green, Esq. emphasized in his training: 

“File the appeal — ALWAYS.”

However, even if you ultimately settle, the appeals process gives you a chance to reduce penalties, establish that errors were isolated, and prevent automatic referral to OPR.

Lessons from Tom: What you should do today

Here is your action plan to avoid becoming the next Tom:

• Conduct annual EIC training: Train every staff member involved in return preparation. Keep certificates. 
• Create and distribute written procedures: Define exactly how to document, verify, and file EIC claims.
• Require fresh documentation every year: Birth certificates, school records, and proof of residency; make them part of your checklist.
• Document follow-up questions: Don’t rely on memory. If something doesn’t make sense, ask and write it down.
• Review files randomly: Quality control is not optional. Check that Form 8867 is complete and that supporting evidence is there. 
• Appeal if audited: Don’t roll over. Appeals can protect your reputation and help reduce liability. 

Final thoughts

The EIC is meant to help those who need it most. But it’s also a complex credit that opens tax preparers to serious risks. Tom’s story isn’t unusual; it’s happening across the country. While the IRS can’t audit every preparer, they will audit you if the data points to irregularities.

Relying on software isn’t enough. Compliance means having systems, training, documentation, and the willingness to ask hard questions. You’re not just preparing a return; you’re standing between your client and a system that demands integrity.

Ask yourself: If the IRS came knocking tomorrow, would your files hold up?  Now is the time to review your procedures, train your staff, and ensure your documentation is bulletproof. Don’t let a lack of process put your practice and your career at risk.