Monday, November 9, 2015


I recently posted the following comment on a Spacebook state-specific tax preparer  group site.  
I see one of the topics of discussion at the next informal gathering is due diligence for the EITC.  This is where the IRS forces tax preparers to become Social Workers.
What happens?  We are required to spend more time, unrelated to actually preparing a return, on clients with EITC claims doing “background checks”, for which we should be compensated via higher fees.  But, by definition, legitimate EITC claimants are low-income and cannot necessarily afford higher fees.  So either the tax preparer is screwed by “eating” all or part of the appropriate additional fees out of sympathy for the client, or the client is forced to pay a higher fee for return preparation that it cannot afford.  The obvious reaction from the tax preparation community should be to refuse to accept clients with EITC claims.  But then we lose work, and the EITC claimants are punished by being forced to go to fast food chain services like Henry and Richard, where they will almost certainly be overcharged for much less actual customer service and attention (and perhaps competence).
(1)  The Earned Income Tax Credit does not belong on the Form 1040 – or the NJ-1040.  The Tax Code should not be used to deliver federal welfare benefits.
(2)  The tax preparation industry needs an organized and unified lobbying organization to represent us against Congress and the IRS and to fight erroneous regulations like the excessive due diligence requirement for EITC claims.”
The posting also referenced my editorial “Who Speaks for the Tax Preparer?”.
Here are some of the responses I received -
I agree wholeheartedly! I used to work for Henry & Richard in an office located in a low income area. Nearly all the clients I had during the first 6 weeks of tax season, the first "peak", were EITC clients. We also had Rapid Refund, which added to the fee structure the clients had to pay us, but of course, the fees were withheld from their refund.
So much of my time was ‘wasted’ being a social worker AND a loan processor.  The loan application in itself took more time than the tax return, on top of the time wasted working on the EITC claim. At this point, I felt I was no longer a tax preparer.
I no longer work for Henry & Richard, but for myself, and the clients who didn't follow me were the ones with EITC, since I didn't offer RR, nor am I located in a low income area. Now I feel more like a tax preparer. I only have 2 EITC clients.”
John Maxwell
I once WAS a multi-unit franchisee of Henry & Richard's -- two of those offices are very close to Robert's current residence. Said county had the 8th highest per-capita incidence of public assistance at the time.
We did about 3,000 EITC returns in those offices -- complicated by the annual rules changes about relationships (pre-UDC), and the proximity to a Conagra chicken processing facility where most of the employees (our clients) did not speak English.
Sadly, when this is the largest percentage of your client base, the fees will skew higher than 'perceived value' - but we need to pay rent, royalties, salaries etc.
I do agree that the IRS should not be in the business of 'income redistribution'. For that matter, they should not be in health care compliance, either.....
John Sheeley EA
Robert, I agree with just about everything you said. Here is where I differ. I do not mind losing the EITC work. My take on EITC is that it is very risky work. We are held to a very high standard for people who may throw us under the bus for a few extra bucks. It ain't worth the aggravation.
I have started referring EITC people to the low income tax clinics or VITA. If the people insist that they want me to prepare their tax returns I demand a bunch of substantiation or tell them (and have them sign) that I will not prepare the EITC (unless I am very certain they are for real).
When there is the EITC taxpayer, I have to have my radar running. I simply do not want to discover the taxpayer has a cash only dog walking business on the side.  I don't want to have a problem with the tax police because of social services legislation that leaves it up to a lot of ghost and other tax fraudsters to create a culture of ‘let's see what we can get away with’.
On balance I think society would be better served if the social service programs were handled at the state level by the social service agencies. The amount of fraud would most likely be reduced in a big way. It would also make it less profitable for the bad preparers to make a buck or two.”
Marc Standig
We as professional tax preparers certainly have the ability to pick and choose who we take on as clients. It's not like we took a tax preparer's Hippocratic Oath and must service any and all taxpayers that seek us out.
I also agree that we now have to be experts in healthcare, social work, divorce, and foreign investment reporting ( i.e. finding FBAR assets worldwide), to name a few.
Yes we spend more time and have additional risks and due diligence to prepare returns with the above complexities, especially low income clients. EITC clients who either fail to have healthcare coverage or purchased healthcare through the exchange, usually go hand in hand.
Way too much work for too little pay, right?
Perhaps, but I'm of another mindset. I do see me/us as a professional who has a responsibility.
Is it all about the money?
Is it too much due diligence?
Is there too much risk?
Why bother?
You can argue either way.
I for one balance my not so well off clients with all others. What I find is they are truly grateful and depend heavily of my expertise to get them any extra money they desperately need. They would pay almost anything to get their taxes done and really never complain about my fees which is often below my standard billing rate. I also find them thankful, and overall much happier than the highly compensated, hi flying executives that hate paying taxes because they make too much money. In fact those people are often just miserable human beings.
So what's my point here? Just like the doctor that you go to for help you when you are sick, I believe we too have a similar obligation. We may not get the big fee and most certainly will spend more time working on these returns, but these clients won't put your practice on the brink of failure.
Are we just as greedy as the rest of Corporate America? Aren't we smart enough to sniff out the scammers? Isn't that what we spend hours of time and money to learn about and prevent in our practice. In fact we now must give the 3rd degree to all our clients given what we need to know to cover our butts.
The IRS didn't ask to redistribute wealth, enforce and monitor healthcare, and alike. We don't have a choice either.
Personally I'm kind of naive when it comes to this stuff and believe what comes around goes around. So having some low income, EITC tax clients is just part of my job.”
Kenneth Vincent
Of course John is correct when he says “they {IRS} should not be in health care compliance, either….. 
And Marc is right to refer EITC claimants to VITA clinics.  And he is certainly right that clients “may throw us under the bus for a few extra bucks” or may blame us if they get caught filing erroneous EITC claims (which we completed based on information supplied by the client).
As for Kenneth –
I did not think of my objections, or those of our colleagues, to the additional excessive due-diligence for EITC claims as being founded in greed.  My fees are way below market, and very honestly too low.  Part of this is because of my truly minimal overhead.  On balance I do not charge lower-income clients less – it is just that I do not charge higher-income clients more, other than that their returns are more involved and require more forms and schedules.
I am aware that many tax pros have historically charged legitimate EITC clients less than those more highly compensated – just as doctors will charge lower-income patients less.  And I support this as a personal choice available to tax preparers.  I do share Marc’s perhaps cynical, justifiably so, skepticism about EITC claimants with “a cash only dog walking business on the side” or who are informed enough to be able to play us and the system by reporting just enough net income from self-employment to maximize their EITC.
I do find lower-income clients to be especially appreciative of our efforts to reduce their tax liability, or provide them with “found money” via refundable credits (regardless of our opinions on the appropriateness of refundable credits – they are allowed by law).  And I do find special satisfaction in legally saving taxes for clients who could certainly use the money most.  But I also sympathize with higher-compensated clients who complain that they are being excessively taxed simply because it is assumed they can afford to pay.  I do not believe the Tax Code should be used to punish ambition, investment, and just plain hard work.  While I have had the occasional “miserable human being” as a client over the years, it had nothing to do with their income status.  
I do not mind additional work actually preparing forms and schedules that provide our clients with tax benefits, based on information provided by the client or information returns.  But I do mind being forced to do work that has absolutely nothing to do with the preparation of tax returns.  While we obviously cannot knowingly prepare a fraudulent return - unless we have personal knowledge to the contrary, or part of the information provided stinks to high Heaven, we must assume information provided by clients is true and honest.  It is not our job to “pre-audit” our clients’ returns. 
My concern is with the IRS arbitrarily forcing its responsibilities for verifying EITC claims upon us, with accompanying potentially high penalties, without having any say in the process.  It is not just about fee income – but about agita and wasting our valuable time during the limited tax filing season.  I truly believe that the tax preparation industry needs a unified lobbying voice in Washington.
Obviously the ultimate villain in the piece is the idiots in Congress – who continue to erroneously use the Tax Code to distribute government welfare and other social benefit programs.  It is true that the IRS did not ask for these continuing added responsibilities, usually coming without commensurate increases in budget.
So, do any of my fellow tax professionals out there have anything to add to the discussion?


Anonymous said...

Refundable tax credits are social welfare? Really? As a tax preparer, you ARE a public servant in a private practice. Having said that, when you accepted this role for compensation, you agreed to certain standards and the ethics that come with performing the job. As tax preparers, we are responsible for making sure that our clients Qualify for all tax breaks, not just the refundable one's. For a thorough preparer, due diligence applies to every return, not just those with EITC and refundable credits. Tax fraud happens on All Kinds of tax returns, and probably moreso on high income returns, for those who are looking for more tax breaks than they deserve.

Robert D Flach said...

Anon -

The Earned Income Credit and the Additional Child Tax Credit ARE federal welfare programs whose benefits are delivered through the tax return. Your saying that they are not welfare does not make it so.

I am NOT a public servant. I am a private consultant. I do NOT work for the Internal Revenue Service or the Department of the Treasury. I work for myself, and, by extension, for my clients. Your saying that I am a public servant does not make it so.

I DO all I can to make sure that ALL my 1040 clients take full advantage of ALL the allowable tax benefits to which they are entitled, regardless of how I feel about the appropriateness of providing the benefit via the Tax Code.

I DO the appropriate amount of due diligence on ALL my returns. Unless I have personal knowledge to the contrary, or something really smells, I assume that what my client is telling me is true without requesting detailed verification. As I said above, I do NOT work for the Internal Revenue Service, and am NOT required to “pre-audit” a return I am preparing. I object to having to become a social worker and verify that a taxpayer is entitled to receive federal welfare benefits.

There is NO direct correlation between one’s honesty and one’s level of income.

‘Nuff said.


Anonymous said...

Speaking of federal welfare, ever heard of farm subsidies? It's your opinion, and you know, everybody has one. Credits, even if refundable are not Welfare. I am curious as to why you choose to call these particular credits "welfare" I thought Welfare was more of a get something for doing nothing situation. Again, ever heard of farm subsidies? People are clearly working here, and getting something in return for it. That is not the definition of welfare. BTW you may start out as a consultant, but the minute you start doing their taxes, you become a tax preparer. I also object to the excessive accountability and liability of EITC, but I object more to you classifying the credits as "welfare". Also the issue of whether you work for the IRS or Dept of Treasury is a moot point, they write the rules.

Happy Tax Preparer

Robert D Flach said...


Definitions of “welfare” include -

MERRIAM WEBSTER = 2a . aid in the form of money or necessities for those in need.

DICTIONARY.COM = 3. financial or other assistance to an individual or family from a city, state, or national government.

THE FREE DICTIONARY = 2a. Financial or other aid provided, especially by the government, to people in need.

The Earned Income Credit is financial aid by the national (and sometimes state) government to an individual or family assumed to be in need. The Earned Income Credit is a federal, and sometimes state, welfare program.

Farm subsidies are payments to farmers not to grow certain crops intended to “manage the supply of agricultural commodities, and influence the cost and supply of such commodities”. They are not welfare. And they are, correctly, not delivered via the Tax Code.