When it comes to your income, the IRS knows a lot more than you may think. While our tax system relies on self-reporting, you’re not the only one reporting on your income. Just as you are required to report on the money you receive, anyone who pays you must report on the money they pay out. If you’re a W-2 employee, your employer sends your income data to the IRS during tax season. If you’re a contract employee, anyone who pays you must report on that, too.
Regardless, taxpayers and tax practitioners falsely report income each year, and while some do so by mistake, a portion do so in an attempt to defraud the IRS. Their aim is simple: receive a target tax return. But tax fraud is a risky endeavor. Despite the enticing appeal, tax fraud can come with severe consequences.
- What is the Earned Income Tax Credit?
- What is Earned Income Tax Credit Fraud?
- Penalties for EITC Fraud
- How to Avoid Fraudulent Charges
- What Should I do if the IRS has Notified me of Tax Credit Fraud?
- Tax Credit Fraud Resolution
What is the Earned Income Tax Credit?
The Earned Income Tax Credit (EITC) is a tax credit available to low and moderate income taxpayers. In order to qualify for the Earned Income Tax Credit in 2020, you must generate:
- Single with no children: Under $15,820 annually
- Married filing jointly with no children: Under $21,710 annually
- Single with 1 child: Under $41,756 annually
- Married filing jointly with 1 child: Under $47,646 annually
- Single with 2 children: Under $47,440 annually
- Married filing jointly with 2 children: Under $53,330 annually
- Single with 3 or more children: Under $50,954 annually
- Married filing jointly with 3 or more children: Under $56,844 annually
In addition to the above, you must meet the following requirements:
- You must have at least $1 of earned income throughout the tax year
- You cannot have more than $3,650 in investment income throughout the tax year
If you do qualify for the Earned Income Tax Credit, your tax credit will increase according to the number of children you have up to 3 or more children. Those tax credits for 2020 are as follows:
- No children: $538
- 1 child: $3,584
- 2 children: $5,920
- 3 or more children: $6,660
One of the most appealing things about the Earned Income Tax Credit is that it is a refundable credit. That means that you can claim the full credit amount that you qualify for, even if it is greater than your tax liability for the year. Instead of you paying the IRS less, they’ll pay you to take the credit. If you qualify for $538 in EITC but your tax liability is only $200, the IRS will send you a $338 tax refund!
What is Earned Income Tax Credit Fraud?
Earned Income Tax Credit fraud occurs when either a tax practitioner or a taxpayer falsifies tax information in order to fraudulently claim the Earned Income Tax Credit or increase the amount of their Earned Income Tax Credit.
Underreporting Earned Income to Claim EITC
One way that tax credit fraudsters commit earned income tax fraud is by underreporting their earned income to meet the income qualifications to claim the Earned Income Tax Credit. Remember, the IRS does not only receive income reporting from you, but from your employer or payee as well. If the two are compared and don’t match, the IRS may investigate you for earned income tax fraud.
Fraudulently Claiming Children for EITC
Another way that earned income tax credit fraud is committed is by claiming false dependents. Tax credit fraudsters either claim a child that they don’t have or inflate the number of children they are claiming in order to increase their return.
According to the IRS, dependents must meet the following requirements in order to be claimed on your Earned Income Tax Credit:
- The child(ren) must be one of the following: birth child, adopted child, stepchild, foster child, grandchild, sibling, half-sibling, stepsibling, or sibling’s child
- The child(ren) must be under 19 and younger than you OR under 24 and a full-time student. If the child is permanently disabled, there is no age limit.
- The child must have lived with you and been under your care for at least half the year within the United States
Penalties for EITC Fraud
Penalties for committing EITC fraud should not be taken lightly. If you’ve committed EITC fraud, you may be subject to the following penalties:
- You will need to pay back the EITC credit plus interest
- You will need to re-file to claim the EITC again
- In the case that you committed fraud by error, the IRS may ban you from claiming the EITC for the next 2 years
- In the case that the fraud was intentionally committed, the IRS may ban you from claiming the EITC for the next 10 years
If you have falsely claimed the EITC, the IRS can and will penalize you, whether the claim was intentional or a result of error. If you worked with a tax practitioner and they’ve falsely claimed the EITC on your behalf, you’re also responsible. Unfortunately, the consequences of EITC errors will always fall on the taxpayer, whether or not they’re the ones who committed the fraud. While the preparer may face some tax preparer penalties, you’ll receive the brunt of the punishment.
If your former spouse is claiming a child tax credit when they shouldn’t be, you should report them. Calling the IRS is the easiest way to report someone claiming tax credits fraudulently. You can report someone by calling the IRS fraud prevention hotline.
How to Avoid Fraudulent Charges
The IRS understands that people make mistakes on their tax returns, but that doesn’t mean you still can’t face consequences. If you’re concerned about committing tax credit fraud, here are some ways to avoid it:
The IRS isn’t likely to come after you if you give them documented proof to back up any claims you make. In some cases, you may even be able to avoid penalties by doing so.
Hire a legitimate tax representative
If you are hiring a tax company whose name you don’t recognize or isn’t listed on the BBB (Better Business Bureau), ask for a tax representative ID number that you can cross reference on the IRS website.
As tempting as it might be to pad your taxes or add tax credits you don’t qualify for, it’s not worth the risk. The savings from claiming tax credits fraudulently pale in comparison to the legal and financial consequences.
What Should I do if the IRS has Notified me of Tax Credit Fraud?
Have you received a Notice of Deficiency from the IRS? Don’t panic! The best thing to do is to hire a qualified and experienced tax professional who can guide you through the process. You can also find guidance at EITC.irs.gov. Gather any and all evidence you have to support the claims you’ve made on your taxes that the IRS has flagged and comply any way you can.
Tax Credit Fraud Resolution
If you are concerned with claiming tax credits fraudulently or the IRS has issued an audit, don’t hesitate to call Community Tax today. We can help find a solution that suits your needs, whether you’re seeking help with tax credit fraud or are looking to utilize a program from the IRS Fresh Start Initiative. Our qualified professionals are standing by to answer any questions you might have regarding your taxes.