EITC, corporate estimated tax and inmate information included in new trade laws

When Obama this morning signed the recently passed trade bills with South Korea, Colombia and Panama, not only did laws affecting commerce between the United States and those countries go on the books, but also some new tax laws.

Costlier EITC errors for preparers: As part of the U.S.-Korea Free Trade Agreement Implementation Act, the due diligence penalty that can be assessed tax return preparers in connection with erroneous Earned Income Tax Credit (EITC) claims goes from $100 to $500. 

This fine applies to each instance where a tax professional doesn't adequately check whether a client is indeed eligible for the EITC. It takes effect with returns due in 2012 and beyond.

This tax break for working individuals who don't make much money is a constant source of complaints.

While the tax credit is complicated, leading to lots of innocent filing errors, there also are instances of fraud in claiming the EITC. Congressional estimates are that between 23 percent and 28 percent of EITC claims are wrong for whatever reason.

The EITC due diligence requirement is more than a decade old, but the increased return preparer penalty is seen as one way to ensure that the tax credit claims are legitimate.

IRS tightens EITC rules, too: The Internal Revenue Service also has clamped down on problematic EITC filings.

On Oct. 6, the IRS announced new rules with regard to Form 8867, Paid Preparer's Earned Income Credit Checklist, designed to help tax professionals get all the necessary EITC eligibility information from their clients.

Previously, preparers have been required to keep copies of Form 8867, or comparable documentation, in case the IRS had questions about the EITC clam.

But beginning Jan. 1, 2012, tax pros must file Form 8867 with each return claiming the EITC.

The IRS also has proposed regulations that make preparers' firms, not just the individual tax pros, potentially liable for the penalty.

Increased inmate information: The Korea trade pact also includes a requirement that the Federal Bureau of Prisons and state prison administrative agencies send the IRS a list each year of all inmates housed in those systems. 

The inmates whose information would be available to the tax agency are those incarcerated at any time during the previous two calendar years and the first eight months of the current year.

The trade bill doesn't specify IRS use of the information, but it's obviously an effort to cut down on tax scams and schemes operated by prison inmates.

A Treasury Inspector General for Tax Administration report in December 2010 revealed that prisoners filed nearly 45,000 fraudulent returns in 2009, claiming nearly $300 million in improper refunds.

During Congressional hearings on tax return fraud by prisoners, the IRS has regularly testified that it doesn't have the resources necessary to pursue these inmate scams. This should help somewhat.

Speeding up corporate estimated taxes: The Korea trade act, along with the U.S.-Colombia Trade Promotion Agreement Implementation Act and the U.S.-Panama Trade Promotion Agreement Implementation Act, accelerate the amount of corporate estimated tax due by corporations.

The new corporate estimated tax payment plan rules apply to companies with $1 billion or more in assets.

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