Why does the IRS need to take action on tax credits?
The IRS takes action on tax credits for the 2016 tax returns during the 2017 tax season for a good reason. Tax credits and tax fraud costs the government billions of tax dollars a year. The IRS is clamping down on tax credits due to these costs. In an effort to rein in tax fraud, some new laws took effect in 2016. These laws clamp down on individuals who file a fraudulent claim on the American Opportunity Tax Credit (AOTC), the Child Tax Credit (CTC), or the Earned Income Tax Credit (EITC).
All three of these tax credits are partially or totally refundable credits. This means that, in addition to reducing an individual’s tax liability to zero, the excess credit can be part of the refund to the taxpayer. Unfortunately, this makes the tax payer a favorite target of those who commit tax fraud.
Three Tax Credits the IRS Takes Action On
The IRS takes action on tax credits for the 2016 tax returns to be filed in 2017, here are three tax credits below:
American Opportunity Tax Credit (AOTC)
The American Oppotunity Tax Credit or AOTC is the college tuition credit for low-income families. The ATOC provides a credit for each eligible student equal to 100% of the first $2,000 and 25% of the next $2,000 spent on college tuition and related expenses. The maximum credit is $2,500, of which 40% is refundable. The credit will phase out depending on income.
Child Tax Credit (CTC)
The Child Tax Credit or CTC is a tax credit of $1,000 for each of the taxpayer’s qualifying dependent children. The credit not taken to offset the taxpayer’s tax liability is refundable. The refund is, in part, the basis for the number children in the family. It is also based in part on the taxpayer’s earned income. This credit may also phase out for higher-income taxpayers.
Earned Income Tax Credit (EITC)
The Earned Income Tax Credit or EITC is a refundable tax credit award to low-income taxpayers who work. The taxpayer’s income amount is the basis for the credit that comes from working as well as on total income and on number of children. In 2016, this credit can be worth as much as $6,269.
Here is a rundown of some of the new provisions that the government has put in place to defend against fraud.
What is a retroactive claim?
Retroactive claims are no longer in effect. The IRS prevents individuals from retroactively claiming the AOTC, CTC or EITC if the individual, dependent child or student for whom the claims the credit does not have a taxpayer identification number (TIN). This means, the TIN must be complete before the due date for filing the original tax return and within the tax year that the claim was made for the credit. The IRS will deny the credit if the TIN is not issued on time. In most cases, the TIN is a Social Security number, also known as the SSN.
What does disallowance periods for improper credit claims mean?
Disallowance Periods are when a taxpayer claims the AOTC, CTC or EITC either fraudulently or recklessly. That individual will be no longer be able to claim that credit for a set period of time. The disallowance periods are 10 years for fraud and 2 years for reckless or intentional disregard of rules and regulations.
What is my tax preparer responsibility with regard to Preparer Due-Diligence Requirements?
Preparer Due Diligence Requirements are the same as in he past. Paid tax preparers have always been held accountable to the due-diligence guidelines for EITC qualification. Meaning before including the EITC on any tax return the prepare must see substantial backup proving the credit. These due-diligence requirements now include the CTC and the AOTC. This adds additional work for paid preparers. It also, increases the paid tax preparer’s liability for errors, as each disallowed credit could be subject to a $510 preparer penalty.
1098-T Requirement to Claim Education Credits
A tax return must have the 1098-T in order to claim education credits. Now, when a taxpayer pays tuition, and they include the EIN for the educational instution, the claim on the tax return is now valid. This number, can be found on the Form 1098-T (Tuition Statement) given by the educational institution. Also, the tax payer must include other information that is necessary to determine the credit. The new rules require that the taxpayer (or the student dependent) receive a 1098-T form to claim the credit. There are exceptions are made.
Refunds from AOTC and CTC Returns Will Experience Delay On Purpose
Another action items the IRS will take on tax credits is tax returns will be held until February 15th. Tax refunds that include the EITC or CTC are subject to delay by the IRS. Tax return refunds that include an EITC or a refundable CTC will not be go out prior to February 15th. This gives the IRS additional time to verify the validity of the credit claims. Also, it gives the IRS time to match the credit claims against the taxpayers’ income amounts. Then when the taxpayer files the tax return, the IRS can verify the tuition.
If you have questions related to any of the foregoing safeguards, the delayed refunds or the credits themselves, please give Alex Franch, BS EA a call at 781.849.7200. Alex is an enrolled agent with the IRS. Also, you might as well make an appointment to have your taxes prepared and filed. Worthtax has locations in Quincy, Weymouth and Dedham or book your appointment online.
Other Sources for the IRS Takes Action on Tax Credits
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- College Expenses Getting You Down? Tax Credits Can Help.
- It’s Tax Time: Tax Tips to Make Tax Prep Easier
- Trump’s Tax Plan
- Surviving Spouse Estate Tax Exclusion