Question

If a Schedule C taxpayer does NOT bring documentation to prove their income, the Tax Professional __________.

a. Must be given other evidence that the self-employment income is accurate before completing and signing the return.

b. Cannot prepare the return.

c. May not claim Earned Income Tax Credit (EITC) on the taxpayer's return.

d. Should instruct the taxpayer to prepare a Form 1099-MISC to document their own income.d

Answer 1

If a Schedule C taxpayer does NOT bring documentation to prove their income, the Tax Professional __________.

Answer is (a)

Must be given other evidence that the self-employment income is accurate before completing and signing the return.

Explanation:-

• EITC due diligence, IRC §6695(g), requires paid tax return preparers to make additional inquiries of taxpayers who appear to be making inconsistent, incorrect or incomplete claims related to their self-employment when the tax return includes the earned income tax credit.
• All additional inquiries made to comply with EITC due diligence and the client's responses must be documented.
• Tax preparers should ensure that the amount of net self-employment income reported is correct.
• Taxpayers sometimes want to over-report or under-report their income to qualify for or maximize the amount of EITC.
• The preparer should ask sufficient questions of clients claiming self-employment income to be satisfied that:
  1. the client is actually conducting a business,
  2. the client has records to support income and expenses, or can reasonably reconstruct income and expenses records, and
  3. the client has included all income and related expenses on Schedule C, Profit or Loss from Business (Sole Proprietorship).