EIC "extra" due dilligence

[Kea]

Client is married and has 3 kids. Self-employed with remodeling business. By the time they took all their expenses their $100K revenue was down below $10K

Software is showing an audit flag for EIC over 70% of max & income too low for that many dependents & advising that I document my additional questions.

I'm not really sure what else I should ask. I've had this client for several years & last year was a bad year (like it was for so many people). They are "friends of friends" and have never given me any reason to doubt them. They have gotten EIC every year.

Actually I didn't get either audit flag before I entered the 2nd vehicle's mileage. 18K miles. Lowered EIC by about $1K & Sch C income by $9K. (I did not tell them the extra miles actually "cost" them.)

She did comment when she signed the form -- "Wow how did we live off that low an income? It was a really bad year!" I also know from a comment in the early part of the year that they were struggling to make sure they didn't have "everything" shut off (i.e. electricity, gas, etc.)

My personal knowledge of them makes me believe they qualify for EIC. Just checking what IRS wants me to add to their questions.

Thanks.

[kcjenkins]

Sounds like you don't need any extra, you already know the answers. If you did not, then you would ask now, but since you know these clients, ignore that message and move on. It's just a reminder.

[Kea]

I'm more worried about the IRS penalties than the software messages. Gotta keep them happy! (It's too expensive not to.)

Thanks

[Bart]

I'm not really sure what else I should ask.

Ask them how 5 people lived on 10K.

[Margaret CPA in OH]

As one who has 3 contractors I can tell you that one option to live is to use lots of credit cards to buy the materials. They are deductible in the year charged but payments may be minimal. I still can't believe the balances due on one of my clients. He has had 2 cards/accounts closed with huge balances outstanding. He has to write a check now for every purchase at Home Depot. I don't see him ever coming out of it and, yes, he owes me some, but keeps up with payments.

[Kea]

I got an email from her explaining that she went to the food pantry a lot; got extensions on some of her bills so she could pay the mortgage; in-laws paid for Xmas presents; found agencies that would help out when times are tough.

I went ahead and put those comments in the software. I hope it keeps IRS happy, but if not, she can document all her income & expenses.

Also, in kind of a flip side to what Margaret said, they have bought lots of tools and equipment over the years that are being depreciated. (Taking 179 in earlier years was not particularly beneficial). So they are taking depreciation this year on money that was spent in the past (better years). Also $9000 deduction for mileage that was not an "out of pocket" $9000 cost. (More of a future year cost that will impact what they can sell the vehicle for or what repairs are needed.)

And, like Margaret, she does owe me from last year. When I reminded her she explained the situation. That's why I already knew about the struggle to keep the lights on. She did say things were looking better this year -- so far. I hope it keeps up. And she will pay in full when she gets her refund.

[Don in Upstate NY]

... I went ahead and put those comments in the software. I hope it keeps IRS happy, but if not, she can document all her income & expenses. ...

The IRS doesn't know anything about the "extra" questions, or even that you asked any questions at all. The "Paid Preparer’s Earned Income Credit Checklist" (Form 8867) or your software vendor's equivalent is NOT transmitted to the IRS when you file the return. You keep it for your records to CYA in case there is some question in the future.

[kcjenkins]

Also, in kind of a flip side to what Margaret said, they have bought lots of tools and equipment over the years that are being depreciated. (Taking 179 in earlier years was not particularly beneficial). So they are taking depreciation this year on money that was spent in the past (better years). Also $9000 deduction for mileage that was not an "out of pocket" $9000 cost. (More of a future year cost that will impact what they can sell the vehicle for or what repairs are needed.)

I hope you are not taking any §179 this year. And I would look at whether there are any expenses you could capitalize and spread out, as they would be better off with less expenses this year? More income would be more EIC.

[Kea]

Only one asset bought in 2010 and It's on 7 year depreciation. Didn't take the 50% or Section 179. It was "only" $80 anyway, but figured it might help more in later years.

[kcjenkins]

Any 'supplies' or 'repairs' that could be inventoried or depreciated rather than written off?

[Kea]

Thanks for the suggestion, but no, they just buy materials as needed for a particular job. No repairs, either. She referred to a several month period at the end of the year where the phone just didn't ring - said it got covered in cobwebs from lack of use. Winter is always slow anyway, but this was worse. With springtime now hitting central Texas things are starting to pick back up.

We've been starting to think about getting some new windows for the back of our house. The street behind us is getting busier & too noisy for sleeping. I may see if that's a project they can do. If those windows help, we might consider adding them to the rest of the house to reduce our energy bills.