Trade Bills Pass Congress with Tax Provisions

A tax preparer penalty relating to the earned income tax credit (EITC) will increase to $500, and the IRS will receive detailed information about federal and state prison inmates, both measures in a trio of foreign trade agreements Congress passed October 12.

The trade deals with South Korea, Colombia, and Panama passed both the Senate and the House on the same day. They ratify agreements negotiated by the Bush administration with the countries five years earlier, and their passage had been advocated by President Barack Obama, who is expected to sign them. South Korean President Lee Myung-bak, in Washington on a state visit, appeared at a White House news conference Thursday in which Obama praised the bipartisan support for the bills.

EITC Due Diligence Penalty

Section 501 of the U.S.-Korea Free Trade Agreement Implementation Act, H.R. 3080, increases the EITC due diligence penalty from $100 to $500. The Sec. 6695(g) penalty applies to each failure of a tax return preparer to exercise due diligence in determining taxpayer eligibility for, or the amount of, an EITC.

Congress believes increasing the penalty will deter EITC noncompliance (see House Report 112-239);  the IRS has estimated that between 23% and 28% of EITC claims are improper. The increased penalty amount will apply to returns required to be filed after December 31, 2011.

Last week, the IRS issued proposed regulations (see “IRS Proposes Stiffer Preparer Requirements for EITCs”) that would also add new due diligence requirements and procedures for the refundable credit in another effort to bolster compliance. The proposed regulations would require preparers to submit an EITC eligibility checklist to the IRS rather than keep it in their records as is currently required. The proposed regulations would also make preparers’ firms as well as individual preparers potentially liable for the penalty.

Lists of Inmates

Section 502 of the Korea trade act adds (as new Sec. 6116) a requirement that the Federal Bureau of Prisons and state prison administrative agencies annually send the IRS a list of all inmates incarcerated in the prison system at any time during the previous two calendar years and the first eight months of the current year.

The legislation does not specify how or whether the IRS must use the information; however, the IRS has said previously it lacks sufficient resources to pursue fraudulent tax refunds going to prison inmates. The Treasury Inspector General for Tax Administration reported in December 2010 that prisoners filed nearly 45,000 fraudulent returns in 2009 for a total of nearly $300 million in improper refunds. The following month, Sens. Charles Schumer, D-N.Y., and Charles Grassley, R-Iowa, publicly called on the IRS to do more to stop inmate tax fraud.

Corporate Estimated Taxes

The other two acts are the U.S.-Colombia Trade Promotion Agreement Implementation Act, H.R. 3078, and the U.S.-Panama Trade Promotion Agreement Implementation Act, H.R. 3079. All three acts accelerate the amount of corporate estimated tax due by corporations with $1 billion or more in assets, by a combined increase of 0.5% for the third calendar quarter of 2012 and 3.5% for the third quarter of 2016. Affected taxpayers may reduce their estimated tax payments for the following quarter by the same amount.