By Rachel Ochman
As long as there’s a tax code there will be fraudsters looking for loopholes. And what could be easier than opening the spigot to free cash already rubber-stamped by Congress? Enter the refundable tax credit.
Last week’s Tax Guy column explains how refundable tax credits, which allow you to get a check from the government even if you owe no tax, encourage fraud. Claiming some of these credits requires minimal time and paperwork, and can promise hefty sums of cash—in the thousands of dollars. All a recipe for fraudulently prepared returns, says Tax Guy Bill Bischoff.
Bischoff predicts the $13,170 refundable credit for adoption expenses—and the relative lack of proof needed to claim it—will result in thousands of sham returns this tax year. But the adoption credit is neither the first nor will be the last tool of tax swindlers. Here are a few eyebrow-raising examples of credits filers have used to dupe Uncle Sam.
First-Time Homebuyer Credit. It conjures up the tender image of a young couple buying their first nest, all with the help of the U.S. government. But the now-expired $8,000 credit became an easy target for tax fraud because initially, you didn’t even need to file paperwork proving your home purchase. The Joint Committee on Taxation estimated that first-time homebuyers would be paid more than $4.3 billion in fiscal years 2009 and 2010. Meanwhile, a Treasury Inspector General for Tax Administration (TIGTA) audit last June revealed a number of disturbing statistics that could further plump this figure. Among them, 18,832 taxpayers filed claims for just 7,695 addresses, totaling more than $134 million. And at least 1,295 prisoners received fraudulent credits from their 2008 returns at a $9.1 million price tag.
The Earned Income Tax Credit. Congress created the EITC in 1975 to help offset Social Security taxes for low-income workers. The amount of EITC claimed has risen steeply in the past quarter century, according to another TIGTA report. The IRS estimates that $11 billion to $14 billion of bogus EITC claims are filed each year (a figure that prompted TIGTA to scrutinize the role tax preparers play in submitting improper claims). For those of you keeping score, 23.7 million tax returns claimed the EITC in tax year 2008, which tallies up to $49.2 billion in claims—the IRS’s fraud estimate makes up a decent chunk of that.
Additional Child Tax Credit. The credit applies to those parents who get less than the full amount of the child tax credit. A TIGTA report shows that in tax year 2007 about two-thirds of filers using individual taxpayer identification numbers (ITINs) received the Additional Child Tax Credit, totaling almost $1.8 billion in fraudulent claims. ITINs are assigned to people ineligible for Social Security numbers but still required to file taxes—namely foreign workers. Though they’re not valid for employment purposes, almost 300,000 employers filed Forms W-2 with ITINs, reporting wages totaling more than $9.5 billion. What’s more, individuals can be assigned multiple ITINs, which can lead to the improper issuance of refunds.
Readers, do you think refundable tax credits should be eliminated given their fraud-inspiring track record?