Will I Go to Jail for EIC Fraud?

EIC Fruad

There’s a big difference between accidentally claiming your child and criminal tax fraud.

I often hear the question, “Will I go to jail if I cheat on my taxes?”  People see celebrities go to prison all the time, Richard Hatch, the guy who won a million dollars winning “Survivor”was been all over the news for awhile for tax evasion.  He spent four years in prison.   Note:  if you win a million dollars on national television, it’s safe to assume that the IRS knows about it and is looking for it on your tax return.  Other celebrity tax evaders include Wesley Snipes, Darryl Strawberry and Willie Nelson.  (And the list goes on and on….)

But what about EIC fraud?  What happens to you when you claim a child that’s not yours, or if you allow someone to claim your child when that person isn’t the parent?  What’s the punishment there?

If the IRS examines your return and finds that you cannot claim EIC, the worst case scenario would be that they impose “civil fraud” penalties on your return.  The penalty for civil fraud is 75% of your underpayment of income tax.

Say for example that you involved yourself in a scheme where you claimed children that didn’t belong to you over the course of three years.  The difference between what you received as a tax refund averaged $5,000 more each year than if you didn’t illegally claim those children for a total of $15,000 in excess refund dollars.  When the IRS catches up with you, they will demand their $15,000 plus another $11,250 for the penalty which would make your balance due $26,250.  Add to that the interest you’d be charged and you see how costly this is.

What makes this even worse is that if you are charged with civil fraud the IRS can then turn the case over to the Criminal Investigation Division for prosecution.  You could face both civil and criminal penalties at the same time—meaning they put your butt in jail, levy your bank account and put a lien on your house and any other property you own.

Most people who get caught for EIC fraud don’t have the money to pay back the tax owed, not to mention the added fines.  And of course, the higher the dollar amount owed to the IRS, the higher the likelihood of criminal charges.  So you really don’t want to hear the word “fraud” if the IRS comes calling.

But that’s the worst case scenario, fraud is pretty dangerous stuff, and they have to be able to build a case for it.  One of the key points of fraud is that you knew you were doing it.  I once spoke to a potential client over the phone, she had received an IRS letter and they were charging her penalties for fraud.  As she explained her case, she kept insisting that “she didn’t know.”   I thought there might be a case for her so I asked, “You mean you didn’t know it was wrong to claim someone else’s child?”  She said, “No, I didn’t know I could get caught.”  That’s not going to get you off of fraud charges.  I gave her the name of an attorney—if there’s a possibility of criminal charges, you’ll want the tax attorney over the EA or CPA.  (EAs and CPAs have client privilege for tax issues only, for criminal cases, only an attorney has privilege—meaning what you tell them, they can’t tell on you.)

In most cases though, a much more likely scenario is an accuracy related penalty—that would be 20% of the under-reporting.  Let’s say you live with your girlfriend, she has a kid, she said you could claim the kid; you don’t know it’s illegal but you get caught.  You’ll have to pay back the EIC plus the accuracy related penalty.  If the EIC difference was $5000, then you’d add another $1250 making the balance due $6,250.  The IRS would add interest to that as well.

Generally, if you lose an EIC audit, you’ll also be banned from claiming EIC for somewhere between 2 and 10 years depending upon the severity of the case.  That’s probably the worst penalty for most people.  Many of the people who get in trouble for EIC generally are able to claim EIC in other years.  Being banned from EIC for 10 years can cost a person over $50,000.  That’s a lot of money.

Accuracy penalties usually involve amounts of over $5,000.  If your EIC under-reporting is less than that, you’re more likely to pay “late payment” penalties which are equal to ½ of one percent per month.  For example, you file your return in February of 2008, in March of 2010 they catch up with you.  This means that the penalties have been adding up for 24 months, you’ll pay 12% for the penalty, plus the interest owed.  Let’s say you only got an extra $1000 for falsely claiming EIC, you’d have to pay back $1,120 plus interest of course.  The IRS will always get their interest payment.

But what if it’s not my fault? That’s a very common question.  What if it really isn’t your fault?  What happens if you went to a preparer that didn’t know any better and claimed EIC for you when she shouldn’t have.  Or worse, you had a crooked preparer.  (These things really do happen.)

You’ll have to report the preparer.  There are serious fines and penalties for tax preparers associated with EIC negligence and fraud.  The smallest, yet the easiest to prove, is the EIC due diligence paperwork.  For every tax return that has EIC on it, a paid preparer must have a form 8867.  Here’s a link to see what it looks like:  http://www.irs.gov/pub/irs-pdf/f8867.pdf

The link is to the official IRS form.  In my office, my computer software actually uses the same form but I’m required to sign it and have my client sign it as well basically stating that everything on the EIC form is true.  Here’s the thing—the IRS can call up any tax office at any time and say, “Hey, we’re coming to audit your 8867 EIC forms.”  As the owner of a tax business, I have to be able to pull them all and have them ready for inspection.  If I don’t have an 8867 form for every EIC tax return I prepare, its $100 for each one I’m missing.  Guess what, I’m not going to be missing any of those forms.   I can’t afford it and I don’t prepare that many EIC returns.  You can bet that an office with lots of EIC returns has itself covered in the forms department.

So here’s where I’m going with this, if your preparer really is crooked, do report him to the IRS, it’s the right thing to do.  But if you lied to your preparer about your relationship to the child you claimed or some other EIC offense, and the IRS goes to the preparer’s office and pulls the 8867 forms, and they find a signed affidavit with your signature saying that you are the actual parent of the child—now you’ve just proved that you committed a fraud.  That’s the last thing you want to do.  Remember, a plain error costs a lot less than fraud and there’s no jail time involved.

So what should I do if I receive an EIC audit letter?  If you have the rightful claim to EIC, fight it.  If you’re not sure, maybe you do, maybe you don’t—seek professional help.  I’ve seen innocent people lose EIC audits because they didn’t know the rules.  Don’t take chances, it’s too costly.  If you know for a fact that you should not have claimed a child, pay up and get it over with as quickly as possible.  It won’t be easy, but in the long run it will be better for you.

If you know that you’ve illegally claimed EIC, don’t wait for the IRS to come after you.  File an amended return and pay the tax.  You’ll definitely have to pay interest, but by filing an amended return and paying before you get an IRS letter, you have a very good chance of avoiding the penalties.  You’ll probably sleep better too.

_______________________________________________________________________

Here are some links that might help:

EIC questions of any kind:  http://www.irs.gov/Individuals/Earned-Income-Tax-Credit-(EITC)-%E2%80%93–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.

How to find free tax preparers:  http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers

How to find your local IRS office:  http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1

 

567 thoughts on “Will I Go to Jail for EIC Fraud?

  1. I have a question.. Me and my girlfriend have a 2 year old together. We were together 6 months out of this year, broke up, then we had custody off and on for a few months. Then she decided she was gunna move to south Carolina and was going to take her with her.. Before she left me and her both agreed to let her go visit her grandma and grandma (my parents) for a few weeks so they could spend some time with her before she moved to south Carolina. My ex was supposed to go pick her up the first week of November but flaked. And my job in Montana is seasonal and won’t let me have her in my housing, so she was stuck with staying with my parents but I’ve gone to visit, sent money, and bought her the things she needs. Would I be in the wrong if I claimed her as a dependent on my taxes?

  2. I did my husband’s taxes late for 2014, his oldest daughter lived with us the entire year. I called a tax preparer office and gave very specific details of the situation and asked if we were legally able to claim his daughter. Was told yes. The EIC is now under investigation. Part of it was already disbursed through child support (all of it would be anyways) and I need to know what happens if it is determined that the EIC was in error. Do we have to pay back what was already disbursed or does the mom that received the back child support?

  3. Hi Amber,
    What you do is file a zero dollar return and claim your kids on there. Now, if you use tax software and show no income, you often can’t get the program to work. What I do is put $1 on the “other income” line – that’s line 21. Your return will process, you’re children’s social security numbers will have been used, and you’ll prevent your ex from selling their exemptions.

  4. Hi Nicholas,
    So you lived with your daughter for at least 6 months out of the year so it sounds like you have a legal claim for putting her as a dependent on your tax return. But since you’re asking, I’m guessing that other folks want to claim her as well. So, do you have a legal claim? Yes. Do you have the highest legal claim? I’m still thinking yes, although I don’t know the whole story. It sounds to me like your daughter was with you more than with your ex – so you’d win there. And, even though she is with your parents now, as the father, you have the higher legal claim. (But you’ll want to be nice to them as they are caring for her right now–but the child should be on your tax return.)

  5. Hi Sarah,
    If you legally claimed the EIC then you should’t be worried about the audit – it will prove you out. But if you should not have claimed the EIC and you do have to pay it back, the IRS will be looking to you to repay the money.

  6. Hi, I realized that I have been claiming some kids for the the last 3 years that I was not quality claim , can I file a 1040x if so I’m so scared that irs might charge me with fraud and go to jail.. I have not been eating I want to die due to this mess that I have created . I’m scared that they might not se it as a error .

  7. Let me clarify I was claiming 2 kids and I will send 1040x due to I realized that I did not qualify to claim those 2 kids , will the irs question me like how could you have not known , I’m really scared I feel like I’m in a alley with no way out . I’ll pay whatever I have to but what is they accuse me of fraud that means I could loose my job or can ever get a job nowhere because it goes on my record . please advise

  8. Hi Jan. I had a question for you. So back in January of last year a co worker had asked me to claim two of her children due to the realization she would only get EIC for two children, (she has 4 children total) for additional financial gain. I refused to take part of it because I knew it was illegal and if I got caught I would get in big trouble. So instead she got another co-worker to claim her two kids and got the refund. She bragged that even though I wouldn’t help her she got EIC without me. I wrote to the IRS and completed form 3949-A . I gave them her name, DOB, where she worked and place of residence along with information about the person she got to claim her 2 kids. This was back in March of 2015 and I never heard back from the IRS. So what I’m asking is does the IRS contact you back to thank you or inform you that they received your letter? I question whether they even received my letter although I am positive I sent it to the right address because the IRS never got in contact with me. Also because my co-worker talked about getting the same person to claim her kids again so I am assuming she never got a letter from the IRS? Is this a long process? Should I send in another letter or continue to wait?

  9. Thank you for your response Jan. I’m not a tax guru and don’t wanna get in any trouble. And yes you are right my ex thinks she should be the one to claim her. So just one more question.. If it came down to a battle against us two. Would my daughter being in the care of my family because her mom left to south Carolina instead of going to get go twords my favor? Time wise? Cause we broke up this June, I moved out and we had her off and on for almost two months. Then my family had her the rest of the year cause my employee housing wouldn’t let me have my daughter with me.

  10. Hi Jan , will u be coming back for advise , I amended my returns for las 3 years of claimimg dependents that I was not qualified will the irs prosecute me ? Please respond I’m very scared will I need a attorney ?

  11. Hi Linda,
    I would file a 1040X and make arrangements to pay back the tax. You doing it before the IRS catches you will pre-empt the more serious charges of fraud. Now, I wouldn’t worry about jail. The IRS doesn’t jail folks for under $40,000 in tax debt – that’s according to a revenue agent that I spoke with at at tax preparer conference. That $40K is per year, not a total of tax owed.

    Now please don’t die or anything awful like that. This is a mess, and a problem, but you’re trying to make it right. Hold your head up.

    Seriously, when you’re talking to IRS agents, or even tax preparers and you’ve claimed kids on your return that you should not have claimed, you may get some attitude. I’m a tax professional and they give me crap for representing people who have made “mistakes” so I can only imagine how they can treat a regular citizen. That said, some of them are the nicest people in the world with wonderful hearts and are completely understanding. You always pray to get the nice one, but sometimes you get the “other” one.

    I suggest getting some professional help with this. A professional may find some other issues that you won’t wind up owing quite so much. Maybe you’re entitled to the exemption even if you can’t claim EIC or something like that. If the preparer gives you attitude, get a different one. You don’t need to pay money for that. (I used to work with a guy that yelled at his clients, then he didn’t understand why they didn’t come back. Duh!)

    Keep repeating to yourself, “I’m bright, I’m beautiful, I’m talented! I made a mistake, but I’m fixing it. I’m a good person!” It’s advice from an old friend’s mother from years ago when I was back in college. Keep repeating that to yourself until it sinks in. Good luck!

  12. @Linda – What you do with the IRS is none of your job’s business. The only way your job would ever find out anything is if the IRS were to garnish your wages because you didn’t set up some sort of payment arrangement. But you’re being all above board about wanting to pay so that’s not going to be an issue for you.

  13. Hi Sofia,
    It’s a very long process and the IRS will never tell you if they did process your complaint. You’ll never know because of confidentiality rules.
    You don’t need to send another letter, you’ve done your part.

  14. Hi Linda,
    Sorry, I only get to answer about once a week. I’ve got tax returns to work on. You’ve already amended. I think you’re going to be fine. You’re gong to owe, but that’s about it.

  15. I realized my ex (we were not married, ever) had been claiming our kids on his tax returns for a couple of years. He has no visitation, no rights, no contact whatsoever with the children, and it has been this way for years. He is court ordered to pay child support but on the judgement the foc ruled that he is to only file for himself, not the kids. I did not sign the 8332 form to allow him to file them. I did report him for fraud, but I have no idea what the IRS does in cases like this.

    Thanks

  16. Hi Hopeful,
    The IRS will not tell you if they ever did anything to your ex. But why don’t you claim your own children on your return? It’s the best way to prevent him from doing it.

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