What You Should Know About Earned Income Audits

Arizona tax lawyerTax season is right around the corner, and there are some important things that are better to know before filing. One such issue worth consideration is an audit from the IRS. While audits are a fairly rare occurrence, with only about 0.5 percent of all taxpayers experiencing one in a given year, the odds of being selected for one increase dramatically when the Earned Income Tax Credit is applied to a return. 

What is the EITC?

The IRS describes the Earned Income Tax Credit (EITC) as a deduction that can be applied to a tax return for low- or middle-income households. It is easiest to qualify for the EITC if you have a child at home and a verified source of employment income, but there are ways to qualify without a child. The credit reduces the amount of taxes that are owed in a given year, which may result in a refund. Taxes filed that include the EITC cannot receive their refunds before mid-February. 

Auditing the EITC

The IRS audits many households that claim the EITC. In examining the trends, ProPublica came to the conclusion that this is often due to the child requirement. For households that claim the EITC on the grounds of having children, there are specific requirements those children must meet, and concern over these details can trigger an audit. These details are actually fairly extensive, and households may not be prepared to defend themselves if called into question about them. Tax returns are held during the audit process, and if it goes poorly, the household may end up owing taxes rather than receiving anything. 

Furthermore, roughly 92 percent of audits related to the EITC are done entirely through the mail. As such, taxpayers are expected to mail in copies of documents that prove residency of and relationship to the child in question, without ever seeing an IRS agent. A support center is available to receive calls, but since no one agent oversees audits, taxpayers may not end up speaking to the same person twice by using that system. 

Understanding your options

Ultimately, the first line of defense against an audit is simply to make sure you understand every tax credit you claim and are absolutely certain you meet the requirements. For complicated returns, this may require a tax professional who understands the nuances of the tax code. If you intend to claim the EITC, take the time to get documentation ready to show that you qualify for the credit, even before you file. The faster those documents can be returned, the easier the process will be.  

Finally, if at any point you need help or have questions about the tax audit process, be sure to reach out to a professional who can walk you through it and fight on your side if the IRS rules against you. Contact us today for more details about what we can do to help you.  

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