Attorney-at-Law

THE $500 MISUNDERSTANDING

In Uncategorized on 10/25/2011 at 16:13

Back in 1962, a young novelist named Robert Gover wrote the cult classic “The $100 Misunderstanding”. The phrase has entered the common lectionary, and I, even I, used it for my blogpost “The $250 Misunderstanding”, 6/3/2011.

Now Congress has added the $500 misunderstanding, via Public Law 112-41, the United States-Korea Free Trade Agreement Implementation Act, which, besides implementing free trade, raises the Section 6695(g) $100 preparer penalty to $500 for each due diligence failure by a preparer on an EITC claim.

In short, one wrong answer out of the two dozen or so required on the Form 8867 due diligence checklist, which now must accompany the return as well as being retained by the RTP, is worth $500 out of the preparer’s pocket. This was touted as an offset to the revenue to be lost by freely trading with Korea. So IRS will be enforcing this, to make sure that those who trade with the Land of the Morning Calm will not unduly deplete our national treasury.

Now how much does the average RTP charge to prepare an EITC return? And who is eligible to request an EITC? Clearly neither preparer nor requester is one of the 1% who feels the ire of the Wall Street Occupiers. And I’ll wager a large sum that no one who requests an EITC is a major trading partner with Korea, or anywhere else.

Now this is a non-partisan blog. I grind no axes here. But who is kidding whom? What level of IRS resources will be deployed to crack down on the $50 per return solo preparer? And when they are driven out of business by the first two penalties (and there is no maximum penalty per preparer or per return under Section 6695(g)), who will prepare the returns? True, the statute makes the RTP’s employer liable, so maybe IRS will concentrate on the franchise operations, which may be good news for the solos. One can but wait and see. I do not even want to contemplate the impact on VITA and other not-for-profit volunteer preparers and their organizations.

We all know that IRS reckons somewhere between 23% and 28% of all EITC filings are improper. But when Congress decrees a 17-part test, accompanied by a mandatory cross-examination worthy of Clarence Darrow in his prime, to provide what is claimed to be tax relief for, but is really welfare to, (presumably) the poorest in our society, what did Congress expect?

In any case, there’s nothing like slipping a Draconian penalty, that hits the bottom of the food chain the hardest, into Section 501 of a massive trade bill. You have to admire a Congress capable of this sort of thing.

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