Chapter 5: Personal Tax Credits. 05: Personal Tax Credits

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1 Page Chapter 5: Personal Tax Credits 1

2 Learning Objectives Page Upon completion of this seminar, participants should be able to Identify personal tax credits for which our clients may qualify for Determine what personal tax credits are refundable and what forms are used for filing. Understand the due diligence requirements for refundable credits. 2

3 Key Developments Page With the passage of the 2015 Path Act IRS was given math error authority (removing a credit without taxpayer agreement) TIGTA in its report estimated this will reduce EITC fraud by $5.2 billion annually. Expect IRS to use this authority more frequently. Page 56 Effective 12/19/2015 an EITC cannot be claimed retroactively if there was no valid SSN on that date. Page 56 The due diligence failure amount has increased to $510 per failure. Page 56 IRS has issued Reg outlining how the practitioner can comply with the knowledge rules and verification requirements. Page 57 3

4 Key Developments Page Note the increasing number of documents the IRS is requiring to verify a EITC claim and their retention. Page 58 TC Memo , Tsehay v. Commissioner. The court allows a MFS taxpayer to claim EITC. IRS issues AOD that it will not acquiesce to the courts decision. Page 60 Ct. Fed CL 02/06/ AFTR 2d tax preparer assessed diligence penalty, arguing tax payer provided false statements. Page 61 Timely filing (with extensions) required to claim CTC. Page 62 CTC provides due diligence penalty of $510. Page 63 4

5 Key Developments Page The due diligence and record retention requirements are identical for: EITC CTC Page 63 The personal energy credit has expired and will likely not be renewed. 5

6 Legislative Update 6

7 Disaster Tax Relief Legislation On September 28, Congress approved H.R. 3823, the "Disaster Tax Relief and Airport and Airway Extension Act of 2017," a bill providing temporary tax relief to victims of Hurricanes Harvey, Irma, and Maria. The bill was passed by the House by a margin of 264 to 165. The Senate passed the bill unanimously on the same day, but added an amendment to it. The House adopted the Senate version by voice vote. President Trump signed the legislation September 29 th. Details on the bill can be found at congress.gov/bill/115thcongress/house-bill/3823 7

8 Disaster Tax Relief Legislation Special rule on earned income for EITC and CTC purposes. New law. The Act provides that, in the case of a "qualified individual," if the earned income of the taxpayer for the tax year which includes the applicable date is less than the taxpayer's earned income for the preceding tax year, then the taxpayer may, for purposes of the EITC and CTC, substitute (elect) the earned income for the preceding year for the earned income for the tax year that includes the applicable date. If the election is made, it applies for both Code Sec. 24(d) and Code Sec. 32 purposes (EITC and CTC). 8

9 Disaster Tax Relief Legislation Special rule on earned income for EITC and CTC purposes. New law. For Hurricane Harvey, a "qualified individual" is one whose principal place of abode on August 23, 2017 was located either in the Hurricane Harvey disaster zone, or in the Hurricane Harvey disaster area and the individual was displaced from their principal place of abode by reason of Hurricane Harvey. Similar definitions apply for Hurricane Irma (using a September 4, 2017 date) and Hurricane Maria (using a September 16, 2017 date). In the case of joint filers, the above election may apply if either spouse is a qualified individual. 9

10 Disaster Tax Relief Legislation The Internal Revenue Service has published a list of the affected counties: Who is covered by the act can be found at: irs.gov/newsroom/help-for-victims-of-hurricanes-irmaand-maria irs.gov/newsroom/tax-relief-for-victims-of-hurricaneharvey-in-texas 10

11 III. Earned Income Credit (IRC Sec. 32) Page 56 Erroneous claims have brought additional compliance and/or prohibition from claiming EITC 11

12 III. Earned Income Credit (IRC Sec. 32) Page Even more compliance provisions have been added in the last several years to: Allow IRS to eliminate questionable EITC claims. Prevent fraudsters from using fraudulent information for prior years. Increasing the documentation requirements of practitioners. The due diligence penalty continues to increase. 12

13 III. Earned Income Credit (IRC Sec. 32) Page The PATH Act added the ability of IRS to use its math error authority for improper EITC claims. 13

14 III. Earned Income Credit (IRC Sec. 32) Page 56 D. The EIC credit: 1. The ability to file a claim for a prior year (12/19/2015) was eliminated by the PATH Act. 2. The filing of a credit claim must be on a timely filed return (this includes extensions). 14

15 Due Diligence for EITC and CTC Due diligence requirements for the two primary refundable personal credits EITC and CTC have been unified. By a show of Hands: A.The rules require greater levels of inquiry B.The rules require more detailed documentation. C.There is now a due diligence penalty for both credits D.All of the above 15

16 III. Earned Income Credit (IRC Sec. 32) Page E. An expansion of the preparer enforcement provisions: 1. $510 (an increase from $500) per due diligence failure. 2. Increased information required by Form

17 III. Earned Income Credit (IRC Sec. 32) Page 57 Documents and record keeping requirements: 5. Copies of birth certificates, social security cards or drivers license to prove eligibility. 6. Reasonable Inquiries of inconsistent or incomplete information (Foxx case Page 61) 7. Retain documents used for a period of 3 years. 17

18 III. Earned Income Credit (IRC Sec. 32) Page 57 The regulations under IRC 6695: 1. Oops I made a mistake $1, Reckless conduct $5,000. The comments of Reg indicate that statements by taxpayers should be confirmed by documents (Foxx Page 61) 18

19 III. Earned Income Credit (IRC Sec. 32) Page 58 G. Taxpayers without a qualifying child MUST: a. Provide the principal place of residence for more than ½ of the year AND b. The taxpayer must be age at year end AND c. The taxpayer(s) are not being claimed by another individual as a dependent during the year. 19

20 III. Earned Income Credit (IRC Sec. 32) Page A child must be qualifying and meet the following four tests: a. Relationship AND b. Age Under age 19 on 12/31/2016 OR under age 24 and full time student OR permanently disabled during the year AND c. Child did not file a Joint Return AND d. Child lived with claimant more than ½ of year (Joint custody issue will be based on sleeping nights) 20

21 III. Earned Income Credit (IRC Sec. 32) Page 58 Satisfying the IRS for the EITC has become increasingly a paper chase: T/P 21

22 III. Earned Income Credit (IRC Sec. 32) Page 58 Varying requirements for various states that piggyback on to the federal EITC. 22

23 III. Earned Income Credit (IRC Sec. 32) Page 60 Did the court make an error? 23

24 III. Earned Income Credit (IRC Sec. 32) Page eitc.irs.gov 24 05: Chapter Personal 12: Tax Credits Personal Tax Credits 24

25 III. Earned Income Credit (IRC Sec. 32) Page 61 J. Some current issues of note regarding EITC: 1. IRS encourages taxpayers to review withholding due to 02/15 refund requirements. 2. TIGTA encourages IRS to me more pro-active in collecting third party documents to identify improper EITC claims 25

26 III. Earned Income Credit (IRC Sec. 32) Page 61 Foxx (CT Fed CL 02/06/2017) At Issue: A tax preparer was assessed a preparer penalty associated with an improper EITC claim. Facts: Taxpayer accused tax preparer of the problem. Tax Preparer said taxpayer gave false information. During the exam of the taxpayer the practitioner was not able to provide required due diligence documents. 26

27 III. Earned Income Credit (IRC Sec. 32) Page 61 Foxx (CT Fed CL 02/06/2017) At Issue: A tax preparer was assessed a preparer penalty associated with an improper EITC claim. The Decision by the Court: a. Practitioner disregarded rules and regulations. b. Practitioner failed to perform due diligence. c. Practitioner failed to examine necessary documents. 27

28 III. Earned Income Credit (IRC Sec. 32) Page 61 Lopez v. Comm. TC Summary Opinion There we NO contemporaneous records to which the court allowed a much smaller amount of income for the Schedule C The court made a statement in its final analysis that the failure of the taxpayer to maintain the necessary records could subjected them to an IRC 6662 penalty. 28

29 Page 62 IV. Child Tax Credit (IRC Sec. 24) The PATH Act affected several items associated with the CTC. Permanent extension of the $3,000 lower earned income threshold. The preparer penalty due diligence penalty applies to BOTH EITC and CTC for 2016 $510 There is NO retroactive claiming of the CTC AND a claim for the CTC must be made on a timely filed return. 29

30 Page 62 IV. Child Tax Credit (IRC Sec. 24) Other outcomes of the PATH Act: Any claim for CTC/ACTC must be made on a timely filed return (including extensions). There are no prior period claims allowed for 2016 and beyond. An ITIN must have be in place when claiming the credit as of 12/19/

31 Page 62 IV. Child Tax Credit (IRC Sec. 24) Other outcomes of the PATH Act: The due diligence penalty of $510 along with the record keeping requirements apply to the CTC. Practice Pointer: Many practitioners who did very few EITC claims find themselves faced with the identical requirements for the CTC, a credit more frequently part of the returns we prepare. 31

32 Page V. Adoption Credit and Income Exclusion The adoption credit no longer a refundable credit Maximum Credit $ 13,570 AGI Phase Out $203,540 - $243,540 Special Needs Child Adoption credit allowed in year adoption finalized without regards to costs actually incurred 2018 maximum credit $13,840 Phase Out $207,580 - $247,580 32

33 VIII. Residential Energy Efficient Property Credit Page 68 Non-refundable credit of 30% of cost of qualified personal residence property and cost of installation Good thru 12/31/ % % % 2021 Then it is gone 33

34 Personal Energy Credit Okay we get to ask AGAIN if the taxpayer made any energy improvements to their personal residence, BUT check to see if they have met their max 35