Tax Blog

Refundable Tax Credit Fraud

By Kelly Hanley, Esq.

IRS EITC, CDCC, and Identity Theft

The Treasury Inspector General for Tax Administration (TIGTA) recently released a report on the IRS’s efforts to ensure that claims for the expanded Child and Dependent Care Credit (CDCC) and the self-only Earned Income Tax Credit (EITC) under the American Rescue Plan Act of 2021 were valid. In response, the IRS has agreed to tighten their filters for these refundable tax credit claims to weed out fraudsters. Based on this news, I thought it an opportune time to discuss refundable tax credit fraud and its implications, given that it’s a much bigger problem than most folks realize.

Introduction: Unraveling the Complexity of Refundable Tax Credit Fraud

In a world where financial ecosystems have evolved to unprecedented complexity, refundable tax credit fraud has emerged as a considerable challenge. It’s a complex web of misinformation, identity theft, and exploitation of the nation’s tax system. But what exactly is it, and how is it impacting not just the IRS, but every taxpayer?

Decoding Refundable Tax Credit Fraud

To truly understand refundable tax credit fraud, let’s begin by defining the core components. A tax credit, unlike a deduction, directly reduces your tax liability. A refundable tax credit takes this a step further, allowing taxpayers to receive a refund even if the credit exceeds their tax liability.

Unfortunately, this beneficial system has also become a lucrative target for fraudsters. The culprits either submit fraudulent claims under stolen identities or misrepresent their eligibility, duping the government into paying out undeserved refunds. This illicit practice is what we refer to as refundable tax credit fraud.

Unveiling the Impact: Fraudsters and Scams are Bigger Than You Think

It might be tempting to dismiss this as a victimless crime. After all, it’s the big, faceless government bearing the financial brunt, right? However, this erroneous belief couldn’t be further from the truth.

Every dollar lost to fraud reduces the pool of resources available for critical public services, and it leads to stricter rules and regulations, adding unnecessary complexity for honest taxpayers. A report from the IRS suggests that during fiscal year 2019, the IRS paid out $17.4 billion in improper Earned Income Tax Credit payments alone. The total impact, when considering other refundable credits like the Child Tax Credit and the American Opportunity Tax Credit, is undoubtedly staggering.

The IRS Strikes Back: A Response to Refundable Tax Credit Fraud

With the alarming rise in fraudulent activities, the IRS has decided to fight back. It has begun tightening its screening processes, developing sophisticated filters and verification techniques to identify and weed out fraudulent claims.

Think of these measures as a form of modern-day financial detective work. The IRS is scrutinizing patterns, looking at anomalies, and putting two and two together to catch the fraudsters red-handed. It’s a daunting task, but the IRS seems up to the challenge, having prevented nearly $2.3 billion in fraudulent refunds from being issued in 2019.

The Roadblocks: Challenges in Combating Refundable Tax Credit Fraud

However, as impressive as the IRS’s efforts have been, they are not without significant hurdles. A central challenge lies in striking the right balance: ensuring honest taxpayers can smoothly claim their credits without the risk of being wrongly flagged, while making sure the fraudsters can’t game the system.

The IRS’s increasing reliance on technology for fraud detection also opens up potential issues. Computer algorithms, despite their advanced capabilities, can occasionally misinterpret complex, real-life scenarios. Moreover, the timely processing of refunds is another challenge. With increased scrutiny, there’s an inherent risk of delaying genuine refunds—a delay that can cause substantial hardship for those depending on these funds.

Navigating the New Landscape: Tips for Taxpayers

As a taxpayer, it’s crucial to understand how you can navigate this increasingly scrutinized landscape. One of the essential steps is to safeguard your personal information. With identity theft being a common modus operandi for these fraudsters, it’s more important than ever to ensure your private data remains private.

When filing for refundable credits, make sure to provide accurate and complete information. Discrepancies in your application could potentially flag your claim, leading to delays.

Conclusion: A Call to Action Against Refundable Tax Credit Fraud

Refundable tax credit fraud is a significant issue that affects us all. It’s a drain on public resources, a cause for tighter regulations, and a threat to honest taxpayers. However, the intensified efforts by the IRS, coupled with responsible practices by taxpayers, can go a long way in mitigating this menace.

It’s important to remember that this isn’t just about the IRS. It’s about fostering a tax culture that values honesty and integrity—a culture where every cent of public money is treated with the respect it deserves. Let’s play our part in creating that culture. Let’s stand united against refundable tax credit fraud.

Need Help with ERC, Fake Tax Returns, or Other Fraud?

Call The Tax Defenders today for a FREE attorney consultation. Whether it be payment plans, offers in compromise, unfiled returns, IRS levies or wage garnishments, we have helped thousands of taxpayers just like you put your IRS worries behind you. Call today. 312-345-5440.

What is a refundable tax credit?

A refundable tax credit, whether issued by state or federal authorities, provides taxpayers with a unique advantage – the potential for a refund exceeding their tax obligations. Primarily, it functions by lowering your tax liability on a dollar-for-dollar basis. If this credit, due to its refundable nature, surpasses the total tax you owe, the surplus isn’t lost. Instead, the IRS, or the corresponding state revenue department, sends you a check, turning this credit into direct cash in your hands, irrespective of your initial tax liability. This means that even if your tax liability is zero, you could still receive a refund, highlighting the true value of a refundable tax credit.

What happens when you report fraud to the IRS?

When you report suspected fraud to the IRS, you’re initiating a process designed to protect the integrity of the U.S. tax system while preserving your anonymity. Your identity remains confidential, in line with IRS regulations. After you submit a report, updates on the investigation’s progress or status are not typically shared due to the strict confidentiality provisions under IRC 6103, safeguarding tax return information. The types of infractions that fall under tax fraud include, but are not limited to, declaring false deductions or exemptions. It’s important to note that reporting fraud contributes to the crucial task of maintaining fairness and accuracy in our tax system.

What is the penalty for fraudulently reporting child tax credit?

Misreporting or fraudulently claiming the Child Tax Credit is a serious offense, and the IRS imposes stringent penalties to deter such misconduct. For a taxpayer who intentionally and fraudulently claims this credit, the penalty can lead to a disqualification period of up to 10 years. On the other hand, for taxpayers who recklessly or intentionally disregard the rules—without fraud—the disqualification period may be two years, as outlined in IRC § 32(k)(1) and Reg. §1.32-3. These penalties underscore the importance of truthfulness and accuracy when claiming such credits.

What is the penalty for refund fraud?

Engaging in refund fraud is a serious offense that attracts stiff penalties under U.S. federal law. If found guilty, the severity of the punishment largely depends on the extent of the fraudulent claim. While penalties can vary, they may include significant fines, imprisonment, or both. For instance, a fraudulent claim involving amounts less than $2,500 but more than $750 could be classified as a Class A misdemeanor, potentially resulting in a fine up to $4,000 and/or a jail term of up to one year. Remember, these penalties are illustrative; the actual consequences can vary based on the specifics of each case. The overarching message is clear: refund fraud is a high-risk, illegal activity with serious potential repercussions.

Is employee retention credit real?

Yes, the Employee Retention Credit (ERC), also referred to as the Employee Retention Tax Credit, is indeed real. It is a bona fide refundable tax credit designed to support businesses and tax-exempt organizations in retaining their employees during challenging economic times. The criteria to qualify for the ERC vary based on the claim period, and it’s important to note that this credit isn’t available for individuals. It serves as a valuable financial tool for eligible entities, incentivizing employee retention and contributing to economic stability.

What is the penalty for fraudulently claiming the earned income credit?

Engaging in fraud related to the Earned Income Tax Credit (EITC) carries significant penalties as per the IRS guidelines. If found guilty of EITC fraud, you are obligated to repay the erroneously claimed credit on your return, along with accrued interest. Additionally, you may be required to submit a fresh application to claim EITC in the future. In cases where the fraud is deemed to have been committed in error, the IRS could potentially disqualify you from claiming the EITC, either temporarily or permanently. These penalties underscore the importance of maintaining accuracy and truthfulness when claiming the EITC, thereby preserving the integrity of the tax system.