Question

How should you handle the situation involving Lila, your best friend's 19-year-old daughter, who has a two-year-old child? Lila lived at home and was a full-time student until she quit college at the end of September during the tax year. Your friend, Lila's mom, gives you Lila's tax documents and suggests letting Lila claim herself and her child for the Earned Income Credit (EIC). To comply with the EIC due diligence knowledge requirement, what actions should you take?

a) Proceed with completing Lila's return, filing her as a single nondependent and claiming the EIC for her child.
b) Disregard information obtained through a personal relationship.
c) Cannot complete Lila's return under any circumstances.
d) Cannot ignore the facts about Lila living with her mother for nine months of the year when she was a full-time student.

Answer 1

To comply with EIC due diligence, we must ascertain all relevant facts about Lila's living situation, college attendance, and financial support to determine her eligibility for the EIC. Simply acting on the suggestion without verification will not fulfill the legal requirements of tax preparation.

Step-by-step explanation:

The appropriate action to take in the situation involving Lila and her eligibility for the Earned Income Credit (EIC) is based on tax law and the facts of her situation. A direct answer in 2 lines would be that we should not ignore the facts about Lila living with her mother for nine months of the year as a full-time student. The Internal Revenue Service (IRS) rules for EIC qualification are specific and taxpayer-specific circumstances must be considered when determining eligibility.An explanation in 200 words requires understanding that the EIC provides a tax credit for low to moderate-income working individuals and families, particularly those with children.

The credit increases with the income earned up to a certain point, after which it remains stable and then begins to phase out. For example, in 2013, a single parent with two children could receive a credit of $5,372 up until $17,530 of income. This credit is intended to alleviate poverty and incentivize work.As per due diligence requirements, one must verify whether Lila can claim herself and her child for EIC. This involves an analysis of whether she lived with her mother, if she provided more than half of her own support, and if she qualifies as a dependent for her mother. Simply relying on someone's suggestion, even if it's Lila's mother, is not sufficient. Tax preparers must confirm all the relevant facts and apply the tax laws accurately to avoid issues with the IRS.