According to IRS, the EITC errors rate alone stands at 24%. Tax preparers and filers make common mistakes with claims regarding EITC, ACTC, OTC and CTC that may lead to penalties. If the IRS finds these mistakes intentional or fraudulent, you may be barred for tax credit claims from 2 to 10 years. Claiming wrong tax credits in these categories remains a common red flag for the IRS. An increasing number of filers get IRS audit notices for wrong and miscalculated tax credits.
Filing EITC Returns
EITC criteria and qualifications are set for qualifying earned income, salaries and wages. Even as a low wager, if you do not pay any taxes, you will have to apply for an EITC return claim. You will also file for the tax credits for each of your qualifying children.
The earned income requirement for EITC are:
$50,162 with three or more qualifying children
$46,703 with two qualifying children
$41,094 with one qualifying child
$15,570 with no qualifying children
The tax credit due to you may range differently. For example, you can take a maximum EITC refund of $6,557 with three or more qualifying children.
The IRS sends the tax refunds to all filers on a set schedule. These returns are sent by mid-February each year at the latest. However, in some cases, the IRS may hold your tax credit refunds if there are discrepancies found on your claimed returns.
The claimed tax returns must match your total annual earnings with the information you submitted to the IRS. If some part of your earnings were not included earlier, make sure to clarify and add the additional earnings when claiming the tax refunds.
Avoid the double claims on EITC or CTC, especially when you file separate tax returns. Claiming EITC and CTC refunds for the same child twice by both Spouses may lead you to trouble. The chances of facing an IRS audit and penalties will be higher with double claims.
Claiming the AOTC Wrongly
The American Opportunity Tax Credit (AOTC) and the Lifelong Learning Credit (LLC) are somewhat linked. It allows you to take educational expenses credits for children dependent on you for four years of a college education.
The qualifying students must have attended the college or institute for more than half of the time. The AOTC must be claimed by only one spouse for each qualified child, as there are no double benefits. The limit of aggregated gross income is $90,000 for single and $180,000 for joint filers.
Make sure to claim the AOTC on qualifying and deductible expenses only. All educational tuition, fees, books, etc. are included in qualifying expenses. The non-qualifying expenses are boarding, insurance, travel, and other personal expenses.
You can qualify for an AOTC refund of $2,000 and $2,500 with LLC per qualifying child.
Common mistakes with AOTC that invite an IRS audit or penalties:
Claiming refunds twice for the same children
Claiming non-qualified educational expenses
Claiming refunds for educational expenses for more than 4 years
Claiming multiple tax breaks for the same expense
Claiming without receiving a 1098-T form
Also, pay close attention to the qualifying children criteria for age, student, residency and dependency set by the IRS.
What happens with Wrong EITC, AOTC, and Other Claims?
The tax preparers may end up paying cash penalties for lack of due diligence and deliberate mistakes.
For tax preparers these penalties are:
$500 for each failure to comply with due diligence requirement
$1,000 for each tax calculation found unreasonable by the IRS
$5,000 for each wrong tax filing or calculation deliberately or intentional disregard of rules
Even if you file the taxes and refunds through a tax preparer, the IRS holds you as the responsible person. You may also face consequences from the IRS if you claim wrong tax credits and refunds.
Your tax refunds may get delayed
You may get banned for two years for intentionally filing wrong tax claims
You may have to pay back the additional tax credits claimed before the current refunds are issued
IRS distributed more than $63 billion in EITC and CTC refunds as of 2019. The nationwide EITC average claim is $2,476. All you need to do is file the correct tax credits and make sure that you and the children are qualified according to the criteria set by the IRS.
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