EITC Awareness Day: A Contrary View

Earned Income Credit Awareness DayJanuary 28, is EITC Awareness Day.  EITC is the Earned Income Tax Credit.  To find out if you might qualify for and Earned Income Tax Credit, you can go to the IRS website and check out the EITC Assistant.  It basically asks you questions and helps you figure out if you can get and Earned Income credit or not.  The site is:   http://apps.irs.gov/app/eitc2010/SetLanguage.do?lang=en

Last year, the IRS handed out $58 billion in Earned Income Tax Credits.  It’s estimated that only four out of every five people who qualify for an earned income credit actually claim it.  Some of the underserved categories of people who missed their EITC (also called EIC) are small business owners and farmers.  If you have self employment income, that still qualifies you for EIC. 

Another category of people who missed their EIC claims are grandparents who have custody of their grandchildren.  It seems that a few years back, when the IRS tightened up the rules about grandparents claiming their grandchildren there was the mistaken thought that grandparents could never claim their grandchildren.  That’s not the case.  If your grandchildren live with you, be sure to check the EITC eligibility page to see if you might qualify.

Okay, the IRS asked me to plug EIC today and that was the plug.  Here’s my side of the story.  As a tax professional, all year long I have heard what I consider to be veiled threats from the IRS to tax pros around the country about EIC.  They can come to our office at any time, pull our files and inspect to see that we’ve completed the proper due diligence on all of our clients.  The PTIN registration, which quite frankly only covers us “good guys who follow the rules” will be used to monitor our returns.  If one of our clients files a fraudulent EIC claim, the IRS can then pull all tax returns that have our PTIN number to check for fraud as well. 

Now I shouldn’t complain.  I don’t file very many EIC returns anyway and the ones that I do file, I’ve done the due diligence.  I have my paperwork in order so it wouldn’t be a problem if the IRS did an EIC audit of my office.  But I guess I’m just a little shocked that the IRS wants me, or anyone for that matter, to promote EIC. 

Here’s why I’m shocked:  of the $58 billion dollars that was handed out last year, the IRS estimates that $13 to $16 billion of that was erroneous payments.  Now let’s be realistic honest mistakes do happen, but a pretty fair chunk of that change is due to downright fraud.  We’re talking roughly 25% of the EIC claims are wrong.  That’s one in four EIC claims.  ONE IN FOUR!

Back in the old days, I used to do EIC audit work for a large tax company.  Many of the audit clients didn’t have their taxes done by one of our preparers, we were just the best place to go to once they got the audit letter.  Some of the “fly by night” operators who prepare those “erroneous” EIC returns disappear after April 15th and some vanish even sooner than that.  I learned a lot from that experience about what not to claim on a tax return.  Maybe this can help someone else.

Do not submit a tax return claiming head of household status if you have been incarcerated for the entire year.  Generally head of household status means that your children are living with you and most prison wardens don’t let you keep your kids with you overnight.  It’s estimated that 4 to 5 thousand fraudulent EIC returns were submitted from prisons last year.  Currently, the IRS does not have access to prison records so they can’t immediately identify those returns.

Do not submit a tax return claiming head of household status if you are in a nursing home.  Kind of like prison, the nurses don’t let you keep the grandkids overnight either.

Do not claim your live-in underage girlfriend as your “qualified child”.   (And please, there are just some things I don’t want to know.)

Head of Household status is a confusing designation.   According to IRS rules, a head of household is someone who is not married that is providing over half of the support for another person, usually a child, but it can be a parent, grandparent, or even a friend that lives with you.  You can’t claim head of household if someone else is supporting you.  Here’s a hint, if you only made $3,000 last year, you didn’t make enough money to support anybody.  Don’t claim head of household.  Its fine to claim single, and claim your child as a dependent and you’ll still qualify for EIC.  But if you claim head of household, it gets your tax return looked at even if it doesn’t change your refund.

Do not claim your neighbor’s child on your tax return no matter how often she sleeps over and eats at your house.  The child is not yours and she doesn’t really live with you—it just feels like it.

Do not make up a fake business to claim income for the EIC.  If you have a real business, bring your receipt books and your expense ledger with you to your appointment.  The IRS is on to that.  Professional preparers are now required to look at your books and see some type of evidence that your business is legitimate.

And finally, do not claim a child on your tax return just to make life difficult for your ex.  If you have a legitimate claim, that’s one thing, but if you don’t and you’re just trying to punish someone, don’t go there.  It will land you in a heap of trouble that’s not easy to crawl out of.

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