This was a recent, real life VITA site scenario. I am seeking suggestions on how to better handle this in the future.

Facts:
Filing status is Single

Client is lawfully eligible for the EITC.

Client's earned income is well to the left of the first kink in the 2021 EITC curve.

Earned income is entirely Schedule C income.

Client has used his vehicle in 2019, 2020 and 2021 for this self-employment.

In 2019 and 2020, the Client did not take any mileage or car expenses as a deduction on Schedule C.

The Client recently appeared with a log of miles that appear to qualify as non-commuting et cetera miles. That is, the Client often traveled to his main job (so non-deductible miles occurred) and then from his main job, traveled to a second job site (
miles are deductible, by my understanding) and then back to the main job site.

Client has no other record of car expenses.

Software facts (not reflecting the law as yet):
Taking miles as an expense at 56 cents per mile, the EITC goes down, and the bottom line, overall refund to the client is lower.

Not taking miles as an expense at 56 cents per mile, the EITC goes up, and the bottom line, overall refund to the client is higher.

Question:
What are the tax preparers lawful options to maximize the client's bottom line, overall refund?

I am reading here:
https://www.irs.gov/taxtopics/tc510

Options as I see them, so far:
1.
The client did not take mileage as an expense for his car in 2019 (the first year the car was in use), due to lack of records. Could the tax preparer then lawfully ignore the mileage records for 2021 and have the client not take the miles as a self-
employment expense?

2.
Could the client opt to use the "actual expense" method for car expenses for 2021, re-construct with difficulty (he is disabled) what he spent on gas and use this actual expense (which would result in a higher bottom line refund to the client compared to
using actual miles)?

3.
Due to the poor records for actual expense of car use, could the client have reported no actual expense (and so no expenses at all) for the vehicle?


Kvetching:
Before I could process the situation fully (doh duh, dumbass on my part?), a reviewer informed me the client had to use the mileage log, because if written records of miles are available, the IRS does not allow manipulating of this nature to increase the
EITC. For this disabled, low income client, using the mileage log and taking miles as a business expense cost the client a few hundred dollars.

I think VITA (and I) could have served the client better and of course still have been within the law's requirements. (In fact the reviewer's approach may have violated the law?)

I hate messing over the disabled. I think I blew this majorly. All I have are shitty excuses.

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What are the tax preparers lawful options to maximize the client's bottom line, overall refund?

The taxpayer is legally required to deduct all his expenses.
He cannot omit expenses in order to increase his EIC or
reduce his tax. The following Q & A is from the IRS web
site.


"I know self-employed individuals have to report all income.
My question is about deducting expenses. Are taxpayers
required by law to claim all expenses pertaining to their
business?

"Yes. A self-employed individual is required to report all
income and deduct all expenses. Revenue Ruling 56-407,
1956-2 C.B. 564, deals with the issue of taxpayers not
taking all allowable deductions in computing net earnings
from self-employment for self-employment tax purposes. Rev.
Rul. 56-407 held that under §1402(a), every taxpayer (with
the exception of certain farm operators) must claim all
allowable deductions in computing net earnings from
self-employment for self-employment tax purposes.

"Net earnings from self-employment are included in earned
income for EITC purposes. It is defined by cross-reference
to the definition of net-earnings from self-employment under
I.R.C. §1402(a). This ruling applies equally to the EITC.
CCA 200022051 also provides insight regarding deduction of
Schedule C expenses."


The preceding text is the second question at this link. https://www.eitc.irs.gov/tax-preparer-toolkit/frequently-asked-questions/earned-income-self-employment-income-and-business

2.
Could the client opt to use the "actual expense" method for car expenses for 2021, re-construct with difficulty (he is disabled) what he spent on gas and use this actual expense (which would result in a higher bottom line refund to the client compared

to using actual miles)?

Using actual expenses is out of scope for VITA, so that is
not an option in your particular case. See Schedule C on
page 8 of Pub. 4012.


Bob Sandler

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On Sunday, March 13, 2022 at 3:24:21 PM UTC-5, Bob Sandler wrote:

What are the tax preparers lawful options to maximize the client's bottom line, overall refund?

The taxpayer is legally required to deduct all his expenses.
He cannot omit expenses in order to increase his EIC or
reduce his tax. The following Q & A is from the IRS web
site.

"I know self-employed individuals have to report all income.
My question is about deducting expenses. Are taxpayers
required by law to claim all expenses pertaining to their
business?

"Yes. A self-employed individual is required to report all
income and deduct all expenses. Revenue Ruling 56-407,
1956-2 C.B. 564, deals with the issue of taxpayers not
taking all allowable deductions in computing net earnings
from self-employment for self-employment tax purposes. Rev.
Rul. 56-407 held that under §1402(a), every taxpayer (with
the exception of certain farm operators) must claim all
allowable deductions in computing net earnings from
self-employment for self-employment tax purposes.

"Net earnings from self-employment are included in earned
income for EITC purposes. It is defined by cross-reference
to the definition of net-earnings from self-employment under
I.R.C. §1402(a). This ruling applies equally to the EITC.
CCA 200022051 also provides insight regarding deduction of
Schedule C expenses."

The preceding text is the second question at this link. https://www.eitc.irs.gov/tax-preparer-toolkit/frequently-asked-questions/earned-income-self-employment-income-and-business

2.
Could the client opt to use the "actual expense" method for car expenses for 2021, re-construct with difficulty (he is disabled) what he spent on gas and use this actual expense (which would result in a higher bottom line refund to the client compared

to using actual miles)?

Using actual expenses is out of scope for VITA, so that is
not an option in your particular case. See Schedule C on
page 8 of Pub. 4012.

Thank you, Bob. This helps a great deal.

Per a reference in one your links, I pulled up the following as still more elaboration:
https://www.irs.gov/pub/irs-wd/0022051.pdf

I am still torn on whether the client using his vehicle for his business in 2019 and 2020,
but not taking miles as an expense until 2021, argues for the client being forced to
take only the actual vehicle expenses deduction in 2021. But then as you kindly pointed out, this
would be out-of-scope for VITA. In theory, off the client goes to H&R Block, where the cost
of the return would reduce his refund notably.

I am aware at this point that these sort of circular situations are fairly common for any
dilettante like myself looking to get back every dollar // legally // possible for low-income
clients. Yet often due to very fact of their disability, one cannot get their taxes
100% right. In the extreme, this EITC client could one day face an audit by the IRS:

IRS to client:
Why didn't you take expenses for your vehicle in 2019 and 2020?

Mentally lower functioning client:
I just trusted VITA.

IRS to VITA:
Why didn't you take vehicle expenses in 2019 and 2020 for this client?

VITA:
We did the best we could to have the client describe and document
the miles. He had no documentation. We had a line that was three
hours long in 2019, going outside. The temperature was 15 degrees.

IRS to VITA:
Tough. You and I both know these facts are not relevant.

IRS to Client:
Have VITA amend your 2019 and 2020 returns.


Just a few years ago I still respected the IRS.

I hope I get fired.

Until then, I will go forward more knowledgeable than before.

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<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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On Sunday, March 13, 2022 at 9:09:22 PM UTC-4, honda....@gmail.com wrote:

On Sunday, March 13, 2022 at 3:24:21 PM UTC-5, Bob Sandler wrote:

What are the tax preparers lawful options to maximize the client's bottom line, overall refund?

The taxpayer is legally required to deduct all his expenses.
He cannot omit expenses in order to increase his EIC or
reduce his tax. The following Q & A is from the IRS web
site.

"I know self-employed individuals have to report all income.
My question is about deducting expenses. Are taxpayers
required by law to claim all expenses pertaining to their
business?

"Yes. A self-employed individual is required to report all
income and deduct all expenses. Revenue Ruling 56-407,
1956-2 C.B. 564, deals with the issue of taxpayers not
taking all allowable deductions in computing net earnings
from self-employment for self-employment tax purposes. Rev.
Rul. 56-407 held that under §1402(a), every taxpayer (with
the exception of certain farm operators) must claim all
allowable deductions in computing net earnings from
self-employment for self-employment tax purposes.

"Net earnings from self-employment are included in earned
income for EITC purposes. It is defined by cross-reference
to the definition of net-earnings from self-employment under
I.R.C. §1402(a). This ruling applies equally to the EITC.
CCA 200022051 also provides insight regarding deduction of
Schedule C expenses."

The preceding text is the second question at this link. https://www.eitc.irs.gov/tax-preparer-toolkit/frequently-asked-questions/earned-income-self-employment-income-and-business

2.
Could the client opt to use the "actual expense" method for car expenses for 2021, re-construct with difficulty (he is disabled) what he spent on gas and use this actual expense (which would result in a higher bottom line refund to the client

compared to using actual miles)?

Using actual expenses is out of scope for VITA, so that is
not an option in your particular case. See Schedule C on
page 8 of Pub. 4012.

Thank you, Bob. This helps a great deal.

Per a reference in one your links, I pulled up the following as still more elaboration:
https://www.irs.gov/pub/irs-wd/0022051.pdf

I am still torn on whether the client using his vehicle for his business in 2019 and 2020,
but not taking miles as an expense until 2021, argues for the client being forced to
take only the actual vehicle expenses deduction in 2021. But then as you kindly pointed out, this
would be out-of-scope for VITA. In theory, off the client goes to H&R Block, where the cost
of the return would reduce his refund notably.

I am aware at this point that these sort of circular situations are fairly common for any
dilettante like myself looking to get back every dollar // legally // possible for low-income
clients. Yet often due to very fact of their disability, one cannot get their taxes
100% right. In the extreme, this EITC client could one day face an audit by the IRS:

IRS to client:
Why didn't you take expenses for your vehicle in 2019 and 2020?

Mentally lower functioning client:
I just trusted VITA.

IRS to VITA:
Why didn't you take vehicle expenses in 2019 and 2020 for this client?

VITA:
We did the best we could to have the client describe and document
the miles. He had no documentation. We had a line that was three
hours long in 2019, going outside. The temperature was 15 degrees.

IRS to VITA:
Tough. You and I both know these facts are not relevant.

IRS to Client:
Have VITA amend your 2019 and 2020 returns.

Just a few years ago I still respected the IRS.

I hope I get fired.

Until then, I will go forward more knowledgeable than before.
--

If no expenses were taken in 2019 and 2020, you are free to choose whichever method of autoexpense in 2021 provides the best result (but not taking them is not an option, as Bob Sandler pointed out). As to 2019 and 2020, your obligation as a preparer is
to notify the taxpayer that s/he should amend and you should explain what the consequences of not amending could be (audit, addtional taxes, etc.). The decision whether to amend or not is entirely the taxpayer's.

Your circular argument proposition really isn't one. The taxpayer is ultimately responsible for the contents of his return, regardless of who prepared it. In the case of an audit, the IRS wouldn't say "Have VITA amend your returns." It would directly
propose changes to the tax liability, based on its analysis of the relevant facts. The IRS isn't going to question the VITA preparer unless there is evidence that the preparer was making systemic errors in preparing returns. I assume VITA preparers make
contemporaneous notes of the tax interview which would show that no records were presented.

Unfortunately, the issue of manipulating self-employment income (expenses) to maximize EITC is the basis for many EITC audits.

Ira Smilovitz, EA
Leonia, NJ

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Ira, your elaboration helps. Thank you.

You are right of course about the circular argument; there is none. This was poor writing on my part.
I meant events such as the following could potentially transpire:

The decisions VITA preparers made for 2021 have implications for prior years, which could
then force a re-visiting of 2021. For example, in the extreme; as I know now from Bob's citations and your
and his discussion; and a bit of googling about things like "bunching around the EITC kinks"; putting
expenses down for this year may be a flag for prior years. The IRS could enter the situation, declare,
"Fraud," disqualify the client from taking the EITC for ten years IIRC; demand the client back-document
miles; force the low-income disabled client to pay around $600 + penalties; and so on. The low-income
disabled client, with a somewhat low functioning mind, would be thoroughly frustrated. As far as I am
concerned, and at least as a matter of personal ethics, it's VITA's fault.

I sit here and think how the Bogart calculator for education credits is legitimately set-up to optimize
a client's refund. As you all know, this often includes maximizing the EITC a client will receive. All of
the latter is lawful. But I know: The IRC views optimizing education credits differently from manipulating (!)
one's Schedule C business expenses to maximize the EITC. Bona fide lawful discretion is allowed
with certain aspects of the education credits, like how certain scholarships are allocated. It is what it is.

I learned a lot from all this discussion. Bob and Ira, thank you again.

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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
<< are at www.asktax.org. >>
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