We blogged back in February how the IRS is using MA Department of Revenue resources to conduct audits of tax returns that have taken the earned income credit (EIC). In that post, we shared some of our experience and advice as to how to try to control the audit process. If you lose at the MA level, the IRS will follow up with their bill (significantly larger). Primary targets are those returns that also have a Schedule C included in the return.
This post is a follow up. The more we think about it, the more one thing becomes quite clear. For purposes of Massachusetts, perhaps the EIC simply isn’t worth it. If a Taxpayer needs to go through six months of a MA DOR exam (and a six month stay at our warm, fuzzy facilities at Guantanamo Bay may be easier), We think we are ready and willing to suggest that Taxpayers with a Schedule C and the EIC for Federal purposes should seriously consider not taking the EIC on their MA return.
Why? Because it appears there is a very, very large chance of being selected for a very intrusive examination. And for what – $300 to $400? The professional fees could be ten times that! Going it alone will cost at least the same amount in aggravation and lost sleep, to say nothing of venturing into an examination setting with no experience. And then, if you lose, you lose the Federal EIC as well (which could be in the thousands of dollars).
So, to follow up on our post of February 14, 2012, we are prepared to suggest that Massachusetts Taxpayers with both Schedule C and the EIC consider NOT taking the EIC on their MA return.