How The New Law Will Affect Your Tax Returns

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UPDATED:  November 8, 2017 – The IRS has announced plans that will affect early filers of tax returns involving the Additional Child Tax Credit and the Earned Income Tax Credit. The federal law entitled the Protecting Americans From Tax Hikes Act of 2015 (also known as the PATH ACT) was enacted on December 18, 2015, and it makes several changes to tax laws that will benefit both taxpayers as well as their families.

Changes to the EITC (Earned Income Tax Credit)

There are several changes to the EITC starting with 2016 tax year returns. These changes came into effect of December 18, 2015. First, individuals will not be allowed to file amended returns claiming EITC for previous years in which a qualifying child didn’t possess a Social Security Number. Second, the Internal Revenue Service can stop an individual who has been claiming EITC for 10 years, if it’s been found that they have been claiming the credit fraudulently. Third, the Earned Income Tax Credit is now liable to penalties for erroneous claims for credits and refunds. Fourth, refundable credits that have been incorrectly claimed will be considered when the penalty for underpayment is determined.

Changes for the American Opportunity Education Credit and Child Tax Credit

If the IRS discovers that a taxpayer has willfully disregarded rules for claiming either the American Opportunity Education Credit or the Child Tax Credit, they will be barred for 2 years from claiming both, or either of these credits. Second, taxpayers are not allowed to file amended returns claiming either the American Opportunity Education Credit or the Child Tax Credit for previous years when the qualifying child didn’t have either a SSN (Social Security Number) or an ITIN (Individual Taxpayer Identification Number). Finally, an educational institution’s EIN (Employer Identification Number), also called a Federal Tax Identification Number, must be reported on Form 8863. If this number is missing, the return will be rejected by the IRS.

Section 201 of the PATH Act

Section 201 of the Protecting Americans From Tax Hikes Act of 2015 states that no refund or credit for overpayments for the 2016 tax year will be made before February 15, 2017 If a taxpayer has claimed the Additional Child Tax Credit or the Earned Income Tax Credit on their return. Starting January 1, 2017 and going until February 15, 2017, the IRS will hold all refunds on ACTC and EITC-related returns in order to comply with the above named law. This action will allow the IRS to have additional time to help them to to prevent revenue loss incurred because of refund fraud or identity theft related to withholdings and fabricated wages.

Under the PATH Act, the IRS can’t release any refund part not associated with the ACTC or EITC, so the entire refund will be held. Taxpayers should continue to file their taxes like they always do, and the IRS will start to accept and process taxpayer’s returns on January 1 as the usually do. The Internal Revenue Service still plans to issue the majority of refunds with a turnaround time of 21 days, except for refunds for ACTC or EITC-related returns that are filed early in 2017, which will be held until February 15 before starting to be issued.

Expansion of Due Diligence Requirements

The PATH Act will expand the due diligence requirements for the Earned Income Tax Credit under Code Section 6695 to include the American Opportunity Education Credit and the Child Tax Credit starting with individual federal returns for 2016. This also includes a $500 penalty. The IRS will also be changing the Paid Preparer’s Earned Income Tax Credit Checklist (Form 8867). This form will be renamed and a number of due diligence-related questions for these 2 additional credits will be added.

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