The IRS Dirty Dozen 2015, #10: Falsifying Income to Claim Credits

Following an audit aimed at determining the root causes of improper payments in federal programs, in September 2014 the Treasury Inspector General for Tax Administration (TIGTA) issued a report regarding the risk for abuse of the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC).

In its report, the TIGTA noted that while it does not have the tools to identify the erroneous EITC payments, it does for the ACTC and estimates that improper ACTC payments in 2013 totaled between $5.9 billion and $7.1 billion. It further projected that EITC figures most likely mirror this amount. 

This post will focus on another member of the IRS “Dirty Dozen” list, and one of the only tax scams that involves overstating income on a tax return. 

EITC and ACTC refunds

In 2013, nearly 28 million individuals collected more than $66 billion in EITC. Intended as an antipoverty measure, the EITC provides tax credits to individuals and couples earning less than a certain amount of income.  The amount of the credit is based on the number of children in the family-in 2014 the maximum EITC credit was $6,143 for an individual or couple with three or more children earning $46,997 or less ($52,427 married filing jointly). 

The Child Tax Credit reduces federal income tax by up to $1,000 for each qualifying child under the age of 17, and begins to phase out where earnings reach $55,000 or more for individuals, $110,000 or more for couples). Where the credit is greater than the taxes owed, the Additional Child Tax Credit may be claimed.

The IRS has noted that some taxpayers reduce their income to obtain these credits and others who earn too little to owe any federal taxes inflate their income in order to qualify.  This is a popular tax abuse scheme and is rather simple- file a false return with inflated income, the client gets the credit and the preparer takes a fee out of the refund amount. The only problem is that it’s illegal.

Paying it back – with interest and penalties

The IRS is “on” to this tax scheme, and taxpayers who are caught are liable not only for returning the credit, but also for interest and penalties.  While taxpayers are the ones ultimately responsible for what is on their returns, a growing number of tax preparers are being investigated for promoting and/or engaging in this scheme and the penalties are severe.  

If you are a under investigation for tax abuses, contact the criminal tax defense team at the San Francisco based tax law firm of Moskowitz, LLP. 

Post #11 on the IRS Dirty Dozen will explain recently discovered abuses relating to Fuel Tax Credits.

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