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.
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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
Hi Angel,
I just read about a woman who has to do 18 months in prison for something like that. Don’t do the crime if you can’t do the time!
Hi Ruben,
You’ve done nothing wrong so you won’t go to jail. Oh, you’re asking about your ex aren’t you? It’s pretty slimey. She won’t go to jail either. Is she doing something wrong? Maybe – but it’s possible that she’s not. It depends. There are situations where some relative might be allowed to claim a child. I’m guessing, since you’re asking, that she’s not doing it properly. But you’d have to know a lot of the details and be sure about it before you report her for tax fraud.
Hi Linda,
I think you already know the answer. There’s a good reason the court have you legal custody of those children, right? I’m guessing that you need the ADC in order to put food on the table and keep a roof over their head. Now if you let their father who is not supporting them claim those kids – and ADC finds out that somebody else is claiming them- Hmmmm. What do you think will happen?
My guess is that the court made you the guardian of those kids because you will look out for their best interests. What is the best thing for those children?
Hi Giz
He won’t go to jail. He may have to pay back the tax refunds that he got, but jail won’t come into the picture.
Hi Darlene,
This sounds like tax fraud. She could also be at risk for losing her food stamps and medicaid. She should really not let someone else claim her daughter, unless it’s her ex and he’s only claiming the exemption, but not EIC.
Hi NK,
Your were right and you won! Anything beyond that is his problem, not yours. Ideally, the IRS will revise his taxes and he should be required to pay them back. Although I’ve heard that sometimes that doesn’t happen (which I hate!) But bottom line – you were right and you won!
Hi Cordell,
He’ll keep getting letters, that’s for sure. But you want a little more detail. My guess is that the person who should be claiming the child claimed her on a return. So, if your friend doesn’t respond to the letters, eventually the IRS is going to say, “hmmm, I guess this other person has the rightful claim, we should give him/her the money instead.”
Then, since your friend didn’t respond at all, then the IRS will be like, “Oh – he must be a liar, so we’re going to amend his return for him – taking the child off.”
And he’ll get a letter about that.
Then the IRS will say, “Hmmm – he’s still not responding. So we’re going to bill him for the money.”
And he’ll get a letter about that too.
Eventually, the IRS will get tired of sending letters and they’ll get to the point where they garnish his wages or put a levy on his bank account.
So, even if your friend should not have been claiming his Godniece, he should respond. Do what he needs to do to make it right and stop the bleed. He can make arrangements to pay a monthly amount to get caught up.
Hi Queen,
Does your ex have any proof? That’s what I’d be asking. Did you sign a form 8332? No? Hmmm. Do our kids live with your ex? No? Hmmmm. So what does your ex have over you? Probably nothing. But only you know that answer for sure.
Hi Ashley,
There’s an IRS form 3949. And for more information on reporting Tax Fraud, just click that link.
But here’s one question, if the person who is being harmed won’t report it, you have to ask yourself, “why?” My guess is that you want to help someone that you care about. If he’s refusing to make the claim, and you report the mother for tax fraud, is there anything that will come back to hurt him? Just be sure you think through everything first.
A lady knowing she is doing fraud gave another person a 3yr old child ss# so they could claim him he got the money and didn’t give nothing to her and now she wants to do it again plus she gets food stamps her husband works under the table and her son to and gets food stamps and don’t pay taxes for four years !!!! Making 500 a week cash !!!
Hi Sherri,
You should at least be given an identity theft protection PIN for them. And I really don’t understand why someone with a legitimate claim to a child doesn’t get an IP PIN for them. That’s not your fault – I blame the IRS.
I know the IRS doesn’t like to give IP PINs to divorced parents – I get that, circumstances change and you can’t always tell who really has custody of the kids – that’s one thing. But you adopted the kids. You talk about proving the adoption – some I’m assuming that you’ve got legal adoption paperwork and everything. That should be an open and shut case.
But I don’t control the IRS. I’m assuming that you filed an Identity Theft Affidavit for your kids when you filed your tax returns. If you didn’t, try filing one now. I don’t guarantee that it will work to get you a PIN, but if you haven’t filed one of these already, it certainly can’t hurt.
Our 2 grand kids have been living with us, supported by only us, completely full time for 2 years. We do not have any legal guardianship. The parents are claiming them on their taxes.
** Is this legal or fraud??**
Plus receiving monthly food stamps.
We’ve reported food stamp fraud but nothing happened. We’ve already spent $3,000. on attorney for guardianship that amounted to nothing. Sorry about giving more info. Thank you.
I pay child support to my exfir 4 kids of mine and her family just told me she has bee letting everyone in her family clam my kids so they get more money and she slits it with them
I question is i have 2 grandkids they were legal ing give to me by court my son wants to claim them , i retried so i do any more but i get ADC for rhem he wants ro claimthem on his 1099 can he ?he has not helped pay ant thing
My ex claimed 3 kids for 4 years. And head of house hold. Kids only see them once a year for Christmas. I am filing my taxes. For the past 4 years now. Will he go to jail.
My daughter is letting someone claim her daughter this has been done 3 years in a roll on top of this she also is claim food stamps and a medicard on her daughter while she is telling the irs someone else is supporting her daughter is this fraud
When I divorced my ex, we agreed to joint custody and that each of us would claim one of the 2 children. Shortly after, he was reported for abuse of the children and lost joint custody. I was awarded sole custody by the court. I did not petition to modify the previous agreement, because it was explained to me that the previous agreement created by us was nullified by the new one created by the court. I have sole custody and all rights therein.
When tax time came, I explained to my ex that I would be claiming both children and he was mad as hell, but he knew I had the legal right. The next couple years, nothing was said, I claimed the children because I had sole custody.
This year, for some reason, my ex got cocky and claimed one of the children on his taxes. He laughed at me for not being faster and told me I’m not too smart, and blah blah blah (he did this via text). My electronic filing was rejected.
I sent my prepared taxes to the irs via mail, and included a copy of the court document where I was awarded custody.
Today, I see that my tax refund was direct deposited into my bank account, the entire amount I expected having claimed both children.
What does this mean for my ex and for me? Is my role in this done, they have determined that I had the right to claim the children? Will he be facing consequences for wrongly claiming a child?
I know someone that has been claiming their God niece for years. He was really young when he started claiming her and didn’t know of the rules. He just got a paper audit and doesn’t have any documentation and she didn’t live with him full time anyway. Do you know what will happen if he doesn’t respond to the first letter he got?
My ex claim my kids. Spending all the money and said if i call the irs she will say that am the one that ask her to claim them .
What do you do when the mother claims her 3 kids but doesn’t have custody nor is able to even speak to the kids. How do I report her if the actual person that is suppose to get to claim them won’t report it
Adopted two children who are related to me. For the past 4 yrs someone has been claiming them on their taxes. Why can’t I have my childrens’ social security numbers changed instead of having to prove I adopted them every single year?
Hi Nicolae,
So in a situation like this, the first question I ask is: who is the person being harmed? Is it your friend? Because she loses money by not being able to claim herself? Or is it the grandmother? Because maybe she should be claiming your friend as a deduction on her return. If either of them are harmed – then they should paper file a return claiming the proper exemptions and go from there.
But maybe they choose not to. You still see that this mistress woman is a tax cheat. You could report her. Here’s a link about how to do that: Whistleblowing
But, before you do that – think. Clearly, I don’t know the whole story so I don’t know. But what I’m reading here is that this mistress woman is paying for your friend’s health insurance. And no, that does not give her the right to claim your friend on her taxes. But – if you report her – who’s going to pay for your friend’s health insurance? What happens to your friend?
This brings us back to the “who’s being harmed?” issue. I believe that it would be the grandmother, (or maybe your friend.) Which brings me back to – one of them should paper file a return if they have been wronged.
Hi J,
That’s a good question. How do you find out who claimed your child? Sadly, the answer is – you don’t.
Oh – you’ll know someone claimed your child because your e-filed return will get rejected. That’s the first clue. But if you call the IRS – they won’t tell you who did it. Privacy laws. I can get on my soapbox and scream, “what about the privacy of the person who’s child’s ID has been stolen?” until I’m blue in the face, but it does’t matter. Privacy laws also protect the criminal. Arrrgggghhh!
So all you can do is paper file your return and wait. The IRS will probably contact you and ask you to prove your case, which you will. But unless your ex calls you up and yells because you filed a claim – you’ll probably never know for sure that it was him who claimed your kid. Sorry.
Hi Eli,
Sounds kind of crooked to me. But maybe there’s more to the story we don’t know. If she claims her child support as income – hmmmm, that’s not taxable, so why would she do that? Weird.
So the question is, do you want to rat her out or not? Here’s a link: Earn Cash Blowing the Whistle on Tax Cheats
It’s a tough call. It’s got to be frustrating watching her prance around the world in designer clothes while your kids get food stamps. But on the other hand, it’s your kids’ biological mother. One thing you should know – unlike other government “whistle blower” programs. the IRS whistle blowers identity is not protected. She could find out it was you who ratted her out. So if you decide to turn her in, you should be really sure that’s what you want, and be prepared for consequences if she finds out it was you.