Small Business: Proving You Have Income Without a 1099-MISC

For some small businesses, a simple wire bound receipt book is the key to substantiating your income.

Now some people may be wondering, “Why would I want to prove I have more income than I have to?”   But for many small business owners, that’s exactly the problem—you have income, you want to report it to the IRS, and you’re having a hard time proving it.  This post is for you.

The number two reason for reporting your non-1099 income  (number one of course being basic honesty) is qualifying for the Earned Income Tax Credit.  2011 sort of hit small business owners who normally qualify for EIC with a one-two punch.  We had the new 1099 reporting requirements that upped the ante for so many businesses, and we had the new EIC tax preparer due diligence rules with one of the questions being “Do you have forms 1099-MISC to support the income?” With the next  question being, “If not, is it reasonable that the business type would not receive Form 1099-MISC?”  Here’s a clue:  if you answered NO to the first one, you have to answer YES to the second.

So what types of businesses wouldn’t normally receive a 1099?  Bunches of them!  Face it, if you’re reading this—I’m guessing that your business doesn’t receive 1099s.  Generally, it’s reasonable to expect that anybody who works for other people, as opposed to other businesses, would not receive a 1099.  House cleaners, dog walkers, handymen, lawn mowing services, daycare  providers, interior decorators, and even income tax preparers are all types of business that could easily never see a 1099.   (Yeah, me too!  Although I’m now getting 1099k forms because I take credit cards, I don’t get 1099-MISC for preparing personal tax returns.  Maybe I’ll see some 1099-MISC forms from some of my business clients this year, but I never used to get them in the past.)

So, how does a small time personal service provider prove his or her income to the IRS?  There are a couple of things you can do.  I’m going to start with my favorite:  the business bank account.  This is what I do and several of my clients do it too.   (Okay, because I’m their accountant and this is what I tell them to do.)   Get an Employer Identification Number (EIN) for your business and set up a separate bank account for your business in your business name.  Only business income goes in, only business expenses go out.  You may have to put some of your own money in for a start up, and once you’re making money you’ll take out a draw, but you’ll label those as such.  Other than those two items, your business checking account is pretty much your profit and loss statement as well.  Now for a bigger company that would be over simplifying things, but for us little folks–I’m spot on.  See this post for more information about getting an EIN number:  Free EIN

Why does this make good proof?  Because you’ve got a monthly record of your income and expenses.  I also have deposit slips to back it up:  Mary Jones paid me $200, Fred Smith paid $250.   It’s a good solid audit trail.  Here’s another post about bookkeeping and your business bank account:  Banking and Bookkeeping

But what if you don’t have a separate account?   Maybe your business is just too small to bother with the expense of an extra account.  What if you’ve just got something really simple like watching the little neighbor kid for a couple of hours after school every day.  There’s no contract, no business cards, no advertising.   You get $100 a week from your neighbor friend.  She pays you in cash—it never sees the inside of a bank because that’s your grocery money.   It’s not much but it supplements your child support.  How do you prove that kind of income?

The easiest way to prove your income if you provided child care is to have the person you provided it for claim your services on their tax return.  You make them a daycare receipt, just like the ones regular day cares do showing the name of the child, how much they paid you and your EIN number.  (You can use your social security number but I never recommend that.  You can get an EIN number for free.  Protect yourself.)  This is doubly good because the IRS will get confirmation of your income from an outside source.  You prove income, your customer gets a tax deduction, it’s a win/win situation.
But what if your business isn’t day care?  What if you did something like mow lawns around the neighborhood and shoveled snow in the winter?  Nobody’s going to be claiming you on their tax return, what can you do?  In your case, I like receipt books.  You can find different kinds at Office Max or any office supply store.  I like the ones with a carbon copy—one for you, one for your customer.

Now if you have just one customer and you’re always going to the same place—you can just use the little one that just has a couple of lines and the amount on it.  You might write, “Mowing, Mr. Jones, $30, 5/15/2012” on it.  You know what you did, who you did it for, how much you got paid, and when.  If you have multiple customers you’ll want the larger receipt books that include the address and phone number of the customer.  If you do different types of jobs for different people, you might need the bigger ones so you can write down the type of work that you did for them as well.

You don’t have to have a 1099-MISC to prove your income to the IRS.  You just need to have a system in place to document your income and you’ll be fine.

EIC Help Page

January 27, 2012 by Jan Roberg · 4 Comments
Filed under: Earned Income Credit 
Life's a little bit easier with EITC

It’s that time of year and we’re getting bombarded with questions about the Earned Income Tax Credit. Here’s some of the most popular questions and where to get the answers you need.

My ex has custody of my kids, but the divorce decree says that I get to claim the exemption. My ex says that she gets to because she has custody. I don’t get it, what should we do?

You’re in a situation where you “split” the exemption. Here’s information about how to do that legally: http://robergtaxsolutions.com/2011/11/split-exemption-claiming-one-child-on-two-tax-returns-%E2%80%94-the-legal-way/

According to my divorce decree, I’m supposed to claim the exemption for my child but my ex claimed her anyway. Should I send a copy of the decree to the IRS or the judge?

I’m not an attorney so I can’t give legal advice, but this post has information on IRS rules and court ordered exemptions: http://robergtaxsolutions.com/2012/01/court-ordered-exemptions-and-the-irs/

My child’s daddy is out of the picture. My boyfriend has been living with us for three years now and he’s the primary support for my child. Can my boyfriend claim may child on his tax return because it will give us a bigger refund?

No. And here’s all the reasons why: http://robergtaxsolutions.com/2012/01/can-my-boyfriend-claim-my-child-by-a-different-father-on-his-tax-return-for-the-earned-income-credit/

I went to file my taxes and they got rejected. The IRS says that somebody else used my children’s social security numbers on their tax return. What do I do now?

Basically, you’re going to paper file your tax return. Here’s more information: http://robergtaxsolutions.com/2011/01/my-ex-claimed-my-kid-now-what-do-i-do/

What do I need to do to qualify for the Earned Income Credit?

There are some basic rules that anybody claiming EIC will have to meet, like having a valid Social Security number for one thing. Here’s a list of the rules: http://robergtaxsolutions.com/2011/12/eight-basic-rules-to-qualify-for-the-earned-income-tax-credit/

What if I need more information?

The IRS has the EITC home page. (EIC and EITC are the same thing; earned income credit = earned income tax credit.) They have lots of worksheets to help you determine if you qualify for EIC if your children qualify, and where to get help preparing your return. Here’s the link: http://www.irs.gov/individuals/article/0,,id=96406,00.html

Now if you can’t find the answer you’re looking for, you can always call the IRS – their phone number is 1 (800) 829-1040. Their phones have been slammed lately so you may be on hold for awhile. A few tips: call early in the morning – like 7 am, or later in the day – like after 6pm. And it’s better to call later in the week; Monday’s the worst day to call the IRS. Please be patient and kind to the IRS agent that is answering your question – they have special rules and procedures they are required to follow.

Can My Boyfriend Claim My Child by a Different Father on His Tax Return for the Earned Income Credit?

January 6, 2012 by Jan Roberg · 54 Comments
Filed under: Earned Income Credit 
Dad with his Kids on Father's Day

The IRS doesn't care how good a "Daddy" is. It's all about the strict tax law.

Short answer: No.

Long answer: Noooooooooooooo! Sorry about the bad joke. But really, no he can’t and here’s why:

First, and most importantly, it’s against the law. Seriously – claiming a child that you don’t have a right to claim on your tax return is income tax fraud and that’s a federal crime.

But how would he get caught? Good question. The most likely way he’d get caught is if someone else tried to claim your child on their tax return, like the child’s real father or a grandparent. Someone might have a problem with you or him and turn you in to the IRS. It’s one of the most common questions I see on the internet: “How do I turn someone in?” I’ve worked on a couple of cases where an older child has accidentally turned someone in by filing paperwork for school which somehow got into IRS records. You don’t want to take the risk.

But the most dangerous person as far as your boyfriend is concerned is you. Let’s say you decide to let your boyfriend claim your child and claim the EIC tax credit because it works out to be more money if he does it. You’re breaking the law too, but when push comes to shove you can break into tears and say he forced you etc., etc. It’s not against the law to not claim your child on your tax return, and proving that you “conspired” with him to commit tax fraud would be hard to do. So let’s say that the boyfriend dumps you and goes out and buys a nice engagement ring for his new girlfriend with that tax refund. I’m guessing that would make you hopping mad, right? Furious! You want to get even, don’t you? What better way to get even with that scumbag than to report him to the IRS. You see why he should be afraid? Very afraid!

So what could happen to my boyfriend if he did get caught? The maximum EIC for one child is $3050 ($5036 for two, and $5,666 for three.) First, he’d have to pay that back. Let’s say we’re just talking about one child, he’ll have to pay back $3050 right off the bat. Then he’d also have to refund the $1,000 child tax credit, so now we’re up to $4050. Now he’ll also have lost the head of household status which gave him a lower tax rate plus he’s lost the exemption so we’re looking at maybe $5,000 (or more if we’re talking about more children). Then the IRS will tack on fines, another 25% or $1250 for late payment fees, and most likely another 20% or $1,000 for under-reporter penalties so you’re looking at about $7250 in taxes owed. Ouch!

It’s also possible that he could be criminally prosecuted. Personally, I have never worked an EIC case that has gone on to the criminal division, but it does happen. What good is your boyfriend to you if he’s sitting in jail?

Don’t create problems for yourself by committing tax fraud. It seems like easy money and the temptation is great. You probably even know people who’ve done it and never had any problems. But if you want to feel safe and secure and get a good night’s sleep, file a correct and proper tax return.

You may also be interested in these posts:

My Ex Claimed My Kid: Now What Do I Do?
http://robergtaxsolutions.com/2011/01/my-ex-claimed-my-kid-now-what-do-i-do/

Eight Basic Rules to Qualify for the Earned Income Tax Credit
http://robergtaxsolutions.com/2011/12/eight-basic-rules-to-qualify-for-the-earned-income-tax-credit/

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Note:  We try to answer all the questions that come to us but please be patient.  It’s our busy season right now.  We may not get to your post until the weekend.  When you make a post and use the capcha code, it won’t immediately show up.  You see, for every normal person like you that posts, there’s about three advertisements for things your mother wouldn’t approve of.  (We try to keep this a G rated website.)   We have to edit those out.  If you need an answer right away, here are some links that might help:

EIC questions of any kind:  http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-%E2%80%93–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.

How to find free tax preparers:  http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

How to find your local IRS office:  http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1

If you want to hire us, please call (314) 275-9160 or email us.  We do prepare returns for people all over the country (and a few foreign countries as well.)  We are sorry but we cannot prepare an EIC return for someone outside of the St. Louis area because of the due diligence requirements.

Eight Basic Rules to Qualify for the Earned Income Tax Credit

December 30, 2011 by Jan Roberg · 2 Comments
Filed under: Uncategorized 
Family Shoot 5

Photo by Stuart Richards on flickr.com

To qualify for Earned Income Tax Credit or EITC, you and your spouse (if you’re married and filing a joint return) must meet all of the following rules:

  1. You must have a valid Social Security Number. [If you are foreign born and have an ITIN number, you cannot get an earned income credit, but if you become a citizen and obtain a social security number, you may go back up to three years and amend your old returns using your social security number to qualify for EIC.]
  2. You must have earned income from employment, self-employment or another source. [Alimony counts as earned income, child support does not. Social security, pension payments, and veteran's benefits do not count as earned income.]
  3. You cannot use the married, filing separate status to file your return. [If you are separated and have been living apart for the last six months of the year, you may be able to use the head of household filing status and still qualify for EIC. Do not claim head of household status if you are still living with your spouse. That’s a form of EIC fraud and can get you into big trouble.]
  4. You must either be a U.S. citizen or resident alien all year or a nonresident alien married to a U.S. citizen or resident alien and choose to file a joint return and be treated as a resident alien. [If you are in the US military and stationed out of the country on active duty, you still count as being in the United States for EIC purposes.]
  5. You cannot be the qualifying child of another person. [Let’s say you are a young mother still in school and living with your parents. If your parents can claim you as a dependent on their tax return, then you cannot claim an earned income credit for your child. You will be able to allow your parents to claim your baby as a dependent on their tax return though.]
  6. You cannot file a Form 2555 or 2555-EZ (related to foreign earned income). [Basically, if you’re using this tax form, you’re living and working outside the country so you wouldn’t qualify to claim EIC anyway.]
  7. Your Adjusted Gross Income and earned income must meet the limits shown for 2011:
    Earned Income and adjusted gross income (AGI) must each be less than:

    • $43,998 ($49,078 married filing jointly) with three or more qualifying children
    • $40,964 ($46,044 married filing jointly) with two qualifying children
    • $36,052 ($41,132 married filing jointly) with one qualifying child
    • $13,660 ($18,740 married filing jointly) with no qualifying children
  8. Your investment income must meet or be less than $3,150 for 2011. [Investment income is basically bank interest, capital gains or dividends from stocks. You might have a partnership interest or own a corporation and receive investment income there. These types of income can prevent you from claiming an Earned Income credit.]

Those are the basic rules that everyone must meet to qualify for an Earned Income Credit. If you have children or are self-employed, you have more hoops to jump through.

Other posts that might interest you are Tax Tips for Single Moms: http://robergtaxsolutions.com/2011/01/tax-tips-for-single-moms/

And also My Ex Claimed My Kid: http://robergtaxsolutions.com/2011/01/my-ex-claimed-my-kid-now-what-do-i-do/

Tiny Business Owners: When You Don’t Want to Reduce Your Income for Tax Purposes

December 13, 2011 by Jan Roberg · Leave a Comment
Filed under: Small Business 
Small restaurant in Forks

Photo by Derrick Coetzee on flickr.com

I know what you’re thinking: “Come again? You must be out of your head! Don’t I always want to reduce my income for tax purposes?” Sometimes, the answer is no. Actually, I got the idea for this post from Howard, one of my readers with an accounting background and an owner of a struggling restaurant.

I’m walking on a tight rope here so I want to make sure that I explain this carefully. Under tax law, a small business owner is required to report all of his income and expenses accurately. I’m always telling people “don’t make stuff up” – that’s my rule and I stand by it. That said, there’s some leeway, like prepaying expenses at the end of the year to reduce your business income and stuff like that.

Where I’m going with this is there are some people who don’t want to reduce their business income for the tax year. One category is people who are applying for a home loan—you want your net income to be as high as possible, even if you’re paying self-employment taxes because the bank will be looking at your net income. The other category of folks who might not want to reduce their business income is people who may qualify for an Earned Income Credit (EIC).

Since leaving the big box tax company, I haven’t filed a lot of EIC returns; most of my clients are small businesses owners and have incomes that are too high to qualify. But last year, I had 5 EIC returns for people who had never even heard of EIC before, basically small businesses that had hit a rough spot with this economy. (I do lots of returns for people who don’t own businesses too. But I’m on a business roll right now.)

So here’s the thing: as a small business owner, you’re taxed 13.3% for your self-employment tax for 2011. If you make a net profit of $10,000 your self-employment tax is about $1,330. (Not exactly, it’s a funky equation, but that’s pretty close.) If you’re single with no children, the Earned Income Credit would be about $278, so it would make sense for you to lower your net income if you can so that you reduced the self-employment tax. But, let’s say you’re filing as head of household with 2 children – in that case your Earned Income Credit would be around $4,010 so reducing your net might not be such a good idea.

Bottom line: the tax strategies for a business owner who is a parent may be different than the strategies of a business owner with no children.

The IRS website has an Earned Income Tax Credit Calculator to help you determine how much of an Earned Income Credit you can receive if you qualify for one. Here’s the website: http://apps.irs.gov/app/eitc2010/SetLanguage.do?lang=en.

Remember, that’s just the EIC and it is an estimate. Remember that for your-self employment income, there’s also self-employment tax – the quick and dirty calculation for that is 13.3%. It will help you figure out where you stand with the EIC compared to self-employment taxes.

If you’re married and your spouse has income, that income will be included in the overall calculations, so EIC may not be a factor for you.

There are so many things to think about when you own your own business. It’s a good idea to get some professional help at least once every three years to make sure you’re on track and getting every deduction and tax credit you deserve. If you have made mistakes in the past, a professional can amend your prior year returns and get you refunds for what you’ve missed as long as you’re within that three year time limit.

Will I Go to Jail for EIC Fraud?

April 19, 2011 by Jan Roberg · 458 Comments
Filed under: IRS, Uncategorized 
Manifest Destiny

Photo by e_monk

I often hear the question, “Will I go to jail if I cheat on my taxes?”  People see celebrities go to prison all the time, most recently Richard Hatch, the guy who won a million dollars winning “Survivor” has been all over the news.  He spent four years in prison and could go back again.   Note:  if you win a million dollars on national television, it’s safe to assume that the IRS knows about it and is looking for it on your tax return.

But what about EIC fraud?  What happens to you when you claim a child that’s not yours, or if you allow someone to claim your child when that person isn’t the parent?  What’s the punishment there?

If the IRS examines your return and finds that you cannot claim EIC, the worst case scenario would be that they impose “civil fraud” penalties on your return.  The penalty for civil fraud is 75% of your underpayment of income tax.

Say for example that you involved yourself in a scheme where you claimed children that didn’t belong to you over the course of three years.  The difference between what you received as a tax refund averaged $5,000 more each year than if you didn’t illegally claim those children for a total of $15,000 in excess refund dollars.  When the IRS catches up with you, they will demand their $15,000 plus another $11,250 for the penalty which would make your balance due $26,250.  Add to that the interest you’d be charged and you see how costly this is.

What makes this even worse is that if you are charged with civil fraud the IRS can then turn the case over to the Criminal Investigation Division for prosecution.  You could face both civil and criminal penalties at the same time—meaning they put your butt in jail, levy your bank account and put a lien on your house and any other property you own.

Most people who get caught for EIC fraud don’t have the money to pay back the tax owed, not to mention the added fines.  And of course, the higher the dollar amount owed to the IRS, the higher the likelihood of criminal charges.  So you really don’t want to hear the word “fraud” if the IRS comes calling.

But that’s the worst case scenario, fraud is pretty dangerous stuff, and they have to be able to build a case for it.  One of the key points of fraud is that you knew you were doing it.  I once spoke to a potential client over the phone, she had received an IRS letter and they were charging her penalties for fraud.  As she explained her case, she kept insisting that “she didn’t know.”   I thought there might be a case for her so I asked, “You mean you didn’t know it was wrong to claim someone else’s child?”  She said, “No, I didn’t know I could get caught.”  That’s not going to get you off of fraud charges.  I gave her the name of an attorney—if there’s a possibility of criminal charges, you’ll want the tax attorney over the EA or CPA.  (EAs and CPAs have client privilege for tax issues only, for criminal cases, only an attorney has privilege—meaning what you tell them, they can’t tell on you.)

In most cases though, a much more likely scenario is an accuracy related penalty—that would be 20% of the under-reporting.  Let’s say you live with your girlfriend, she has a kid, she said you could claim the kid; you don’t know it’s illegal but you get caught.  You’ll have to pay back the EIC plus the accuracy related penalty.  If the EIC difference was $5000, then you’d add another $1250 making the balance due $6,250.  The IRS would add interest to that as well.

Generally, if you lose an EIC audit, you’ll also be banned from claiming EIC for somewhere between 2 and 10 years depending upon the severity of the case.  That’s probably the worst penalty for most people.  Many of the people who get in trouble for EIC generally are able to claim EIC in other years.  Being banned from EIC for 10 years can cost a person over $50,000.  That’s a lot of money.

Accuracy penalties usually involve amounts of over $5,000.  If your EIC underreporting is less than that, you’re more likely to pay “late payment” penalties which are equal to ½ of one percent per month.  For example, you file your return in February of 2008, in March of 2010 they catch up with you.  This means that the penalties have been adding up for 24 months, you’ll pay 12% for the penalty, plus the interest owed.  Let’s say you only got an extra $1000 for falsely claiming EIC, you’d have to pay back $1,120 plus interest of course.  The IRS will always get their interest payment.

But what if it’s not my fault? That’s a very common question.  What if it really isn’t your fault?  What happens if you went to a preparer that didn’t know any better and claimed EIC for you when she shouldn’t have.  Or worse, you had a crooked preparer.  (These things really do happen.)

You’ll have to report the preparer.  There are serious fines and penalties for tax preparers associated with EIC negligence and fraud.  The smallest, yet the easiest to prove, is the EIC due diligence paperwork.  For every tax return that has EIC on it, a paid preparer must have a form 8867.  Here’s a link to see what it looks like:  http://www.irs.gov/pub/irs-pdf/f8867.pdf

The link is to the official IRS form.  In my office, my computer software actually uses the same form but I’m required to sign it and have my client sign it as well basically stating that everything on the EIC form is true.  Here’s the thing—the IRS can call up any tax office at any time and say, “Hey, we’re coming to audit your 8867 EIC forms.”  As the owner of a tax business, I have to be able to pull them all and have them ready for inspection.  If I don’t have an 8867 form for every EIC tax return I prepare, its $100 for each one I’m missing.  Guess what, I’m not going to be missing any of those forms.   I can’t afford it and I don’t prepare that many EIC returns.  You can bet that an office with lots of EIC returns has itself covered in the forms department.

So here’s where I’m going with this, if your preparer really is crooked, do report him to the IRS, it’s the right thing to do.  But if you lied to your preparer about your relationship to the child you claimed or some other EIC offense, and the IRS goes to the preparer’s office and pulls the 8867 forms, and they find a signed affidavit with your signature saying that you are the actual parent of the child—now you’ve just proved that you committed a fraud.  That’s the last thing you want to do.  Remember, a plain error costs a lot less than fraud and there’s no jail time involved.

So what should I do if I receive an EIC audit letter?  If you have the rightful claim to EIC, fight it.  If you’re not sure, maybe you do, maybe you don’t—seek professional help.  I’ve seen innocent people lose EIC audits because they didn’t know the rules.  Don’t take chances, it’s too costly.  If you know for a fact that you should not have claimed a child, pay up and get it over with as quickly as possible.  It won’t be easy, but in the long run it will be better for you.

If you know that you’ve illegally claimed EIC, don’t wait for the IRS to come after you.  File an amended return and pay the tax.  You’ll definitely have to pay interest, but by filing an amended return and paying before you get an IRS letter, you have a very good chance of avoiding the penalties.  You’ll probably sleep better too.

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Note:  We try to answer all the questions that come to us but please be patient.  It’s our busy season right now.  We may not get to your post until the weekend.  When you make a post and use the capcha code, it won’t immediately show up.  You see, for every normal person like you that posts, there’s about three advertisements for things your mother wouldn’t approve of.  (We try to keep this a G rated website.)   We have to edit those out.  If you need an answer right away, here are some links that might help:

EIC questions of any kind:  http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-%E2%80%93–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.

How to find free tax preparers:  http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

How to find your local IRS office:  http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1

If you want to hire us, please call (314) 275-9160 or email us.  We do prepare returns for people all over the country (and a few foreign countries as well.)  We are sorry but we cannot prepare an EIC return for someone outside of the St. Louis area because of the due diligence requirements.

EITC Awareness Day: A Contrary View

January 28, 2011 by Jan Roberg · Leave a Comment
Filed under: Uncategorized 

Earned Income Credit Awareness DayJanuary 28, is EITC Awareness Day.  EITC is the Earned Income Tax Credit.  To find out if you might qualify for and Earned Income Tax Credit, you can go to the IRS website and check out the EITC Assistant.  It basically asks you questions and helps you figure out if you can get and Earned Income credit or not.  The site is:   http://apps.irs.gov/app/eitc2010/SetLanguage.do?lang=en

Last year, the IRS handed out $58 billion in Earned Income Tax Credits.  It’s estimated that only four out of every five people who qualify for an earned income credit actually claim it.  Some of the underserved categories of people who missed their EITC (also called EIC) are small business owners and farmers.  If you have self employment income, that still qualifies you for EIC. 

Another category of people who missed their EIC claims are grandparents who have custody of their grandchildren.  It seems that a few years back, when the IRS tightened up the rules about grandparents claiming their grandchildren there was the mistaken thought that grandparents could never claim their grandchildren.  That’s not the case.  If your grandchildren live with you, be sure to check the EITC eligibility page to see if you might qualify.

Okay, the IRS asked me to plug EIC today and that was the plug.  Here’s my side of the story.  As a tax professional, all year long I have heard what I consider to be veiled threats from the IRS to tax pros around the country about EIC.  They can come to our office at any time, pull our files and inspect to see that we’ve completed the proper due diligence on all of our clients.  The PTIN registration, which quite frankly only covers us “good guys who follow the rules” will be used to monitor our returns.  If one of our clients files a fraudulent EIC claim, the IRS can then pull all tax returns that have our PTIN number to check for fraud as well. 

Now I shouldn’t complain.  I don’t file very many EIC returns anyway and the ones that I do file, I’ve done the due diligence.  I have my paperwork in order so it wouldn’t be a problem if the IRS did an EIC audit of my office.  But I guess I’m just a little shocked that the IRS wants me, or anyone for that matter, to promote EIC. 

Here’s why I’m shocked:  of the $58 billion dollars that was handed out last year, the IRS estimates that $13 to $16 billion of that was erroneous payments.  Now let’s be realistic honest mistakes do happen, but a pretty fair chunk of that change is due to downright fraud.  We’re talking roughly 25% of the EIC claims are wrong.  That’s one in four EIC claims.  ONE IN FOUR!

Back in the old days, I used to do EIC audit work for a large tax company.  Many of the audit clients didn’t have their taxes done by one of our preparers, we were just the best place to go to once they got the audit letter.  Some of the “fly by night” operators who prepare those “erroneous” EIC returns disappear after April 15th and some vanish even sooner than that.  I learned a lot from that experience about what not to claim on a tax return.  Maybe this can help someone else.

Do not submit a tax return claiming head of household status if you have been incarcerated for the entire year.  Generally head of household status means that your children are living with you and most prison wardens don’t let you keep your kids with you overnight.  It’s estimated that 4 to 5 thousand fraudulent EIC returns were submitted from prisons last year.  Currently, the IRS does not have access to prison records so they can’t immediately identify those returns.

Do not submit a tax return claiming head of household status if you are in a nursing home.  Kind of like prison, the nurses don’t let you keep the grandkids overnight either.

Do not claim your live-in underage girlfriend as your “qualified child”.   (And please, there are just some things I don’t want to know.)

Head of Household status is a confusing designation.   According to IRS rules, a head of household is someone who is not married that is providing over half of the support for another person, usually a child, but it can be a parent, grandparent, or even a friend that lives with you.  You can’t claim head of household if someone else is supporting you.  Here’s a hint, if you only made $3,000 last year, you didn’t make enough money to support anybody.  Don’t claim head of household.  Its fine to claim single, and claim your child as a dependent and you’ll still qualify for EIC.  But if you claim head of household, it gets your tax return looked at even if it doesn’t change your refund.

Do not claim your neighbor’s child on your tax return no matter how often she sleeps over and eats at your house.  The child is not yours and she doesn’t really live with you—it just feels like it.

Do not make up a fake business to claim income for the EIC.  If you have a real business, bring your receipt books and your expense ledger with you to your appointment.  The IRS is on to that.  Professional preparers are now required to look at your books and see some type of evidence that your business is legitimate.

And finally, do not claim a child on your tax return just to make life difficult for your ex.  If you have a legitimate claim, that’s one thing, but if you don’t and you’re just trying to punish someone, don’t go there.  It will land you in a heap of trouble that’s not easy to crawl out of.

Last Minute Tax Tips: Low Income Earners

December 21, 2010 by Jan Roberg · Leave a Comment
Filed under: Last Minute Tax Tips, Uncategorized 
Protect Your child's identity

It's hard to believe that someone would steal a child's identity, but it happens all the time.

I’ve been posting a lot of last minute tax tips for people who have excess money to donate to charity or invest in retirement plans.  Somebody asked me, “What about the rest of us?  Do you have any good tax tips for people who don’t make a lot of money?”  To be honest, I don’t have as many tips there.  If you’re income is low enough that you wind up not paying income tax, you don’t need a lot of strategies for sheltering your income.   But that said, you do want to make sure that you protect what’s coming to you and I can help with that.

 This is the time of year when I hear the question, “My son’s father wants to claim him on his tax return but he doesn’t have custody and doesn’t pay child support.  How can I stop him?”   Usually these questions are about the Earned Income Credit (EIC.)   When you combine EIC with the child tax credits, you can potentially have over $6,000 in tax refund money.  It’s no wonder that people fight over who claims the children.  Be sure to know the rules before you file.

In order to qualify to claim an Earned Income Credit, your child must meet three tests:

Relationship:  son, daughter, stepchild foster child, brother, sister, half brother, half sister, step brother, step sister or a  descendant of any of them, and

Age:  the child must be younger than the person claiming EIC and under age 19 (or under age 24 if a full time student) or be any age if permanently and totally disabled at any time during the year, and

Residency:  the child must have lived with the taxpayer in the United States for more than half of the tax year.  If you are in the military and stationed overseas, that counts as a temporary absence and you qualify as living with your child for the time that you are on active military duty. 

The residency requirement is the one that’s going to prevent the absentee father from being allowed to claim the child.  Now that doesn’t mean he’s not going to try—there’s between $12 and $14 billion of EIC fraud every year.   But if you are the custodial parent, you should be claiming your child on your tax return.

So how do you make sure that no one else claims your child on your return? 

Protect your child’s identity:   I cannot stress enough how important it is for you to protect your child’s social security number.  Especially this time of year, there is a lot of child identity theft.  Most of the time, if someone steals your child’s identity, it’s someone you know, but I once dealt with a case where a thief was stealing baby ID’s from the hospital.  The tax windfall from an Earned Income Credit (EIC) can be pretty large, and it makes people do bad things.  If an identity thief has your child’s social security number, date of birth, and the correct spelling of you name, they’ve got you.  The social security card has two out of three.  Keep it safe.

If someone does claim your child illegally, (you’ll know because your tax return will be rejected when you try to electronically file it) fight back.  If you are in the right, go ahead and file your tax return exactly the way you’re supposed to; claiming your child and all the tax credits you are entitled to.  You will have to mail the tax return in and it will make for a horrible delay in processing your refund.  But the identity thief will get audited, you will win your case and you will get your money.   If you are not in the right, do not waste your time.  You will be audited too.  You’ll get 11 (sometimes 22) pages worth of questions you have to answer to prove you really do have custody of your child.  If you’re legit it’s easy, if not it’s a nightmare.

Some people will electronically file their return to get whatever refund they can first and then file an amended claim to add their child.  If possible, file the return correctly in the first place.  It gives you a stronger case in the IRS’ eyes and it will actually be processed faster than if you do the amendment.

One piece of advice I saw on a message board about this was to “Go ahead and file your return before he does, even if it’s wrong so that you beat him to it.”  Although filing your return as soon as possible will help prevent someone else from claiming your child, you need to know that it is illegal for a professional to e-file tax returns without having the actual W2s or 1099s.  You’d be amazed at how often the final check stub is a little different from the actual W2.  Don’t file until you have everything you need.

In an ideal world, you wouldn’t have to be afraid of people stealing your child’s identity for financial gain.   We’re not dealing with ideal though.  Protect yourself and your child by keeping his social security card and other personal information safe.

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