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Getting Caught Claiming the Earned Income Tax Credit Fraudulently Will Get You Audited And Is Tax Fraud

Updated on September 8, 2012

The Earned Income Tax Credit is designed for the working poor struggling to make ends meet. The IRS encourages everyone making less than $49,078 per year to see if they qualify to claim the EITC. Last year the EITC disbursed over $59 billion dollars to those who claimed the EITC. The amounts vary but the average filer received $2,200. The maximum EITC amount for 2011 is a whopping $5751.

As you can see there are substantial amounts of money flowing through the EITC program and therefore it is also fertile ground for tax fraud. It’s estimated that 1 out of 3 EITC claims is fraudulent. Fraudulent filing of the EITC is so rampant in fact that the IRS implemented a specific clause that prohibits a filer from claiming the EITC for two years if they are caught claiming it erroneously.

“A person or couple will be disallowed EIC for two years if they claim EIC when not eligible and the IRS determines the "error is due to reckless or intentional disregard of the EIC rules." A person or couple will be disallowed for ten years if they make a fraudulent claim. Form 8862 is required after this time period in order to be reinstated. However, this form is not required if EIC was reduced solely because of math or clerical error.”

How It Works

If your income is under a certain threshold you may qualify for the Earned Income Tax Credit.

EITC eligibility requirements are:

  • With three or more qualifying children, income less than $43,998 or $49,078 if married filing jointly. Maximum refund: $5,751
  • With two qualifying children, income less than $40,964 or $46,044 if married filing jointly. Maximum refund: $5,112
  • With one qualifying child, income less than $36,052 or $41,132 if married filing jointly. Maximum refund: $3,094
  • With no children, income less than $13,660 or $18,740 if married filing jointly. Maximum refund: $464

This means for example, a single person working for minimum wage at Wal-Mart would likely qualify for a $464 credit. The same person, if they had three children they could claim would get $5751.

Where People Make Mistakes

They claim children they don’t have the right to claim. For instance, in the example above the guy may in fact have three kids but they may live with their Mother and not him. He may look at the EITC and think claiming the three kids is the difference between getting the $464 he is entitled too or $5751 he is not entitled to if the kids are not his dependents. That’s a lot of money and can be quite tempting, especially to someone struggling to make ends meet on minimum wage. In fact its so tempting some people who don’t even have children say they do trying to bump up their EITC.

Another common error is several filers claiming the same child. Dad may claim his son for purposes of the EITC and the aunt, for instance claims the same child on her EITC as the child lived with her for part of the year.

Will I Get Caught?

If depends on your level of fraud. If you don’t have children and claim children then yes most certainly. In the computer age social security numbers are easy to track and verify. It’s not like the 70’s where people got away with claiming their dogs as dependents and stood a good chance of getting away with it.

If you are claiming a child that's not your dependent and nobody else also claims the child on their tax return you may escape detection. The IRS audits less than 1% of returns so if there are not blatant red flags such as more than one filer claiming the same child the odds of going undetected go up.

Do you think anyone you know would tip off the IRS about your fraud? This is a very real way many people get caught committing tax fraud. Your significant other may know all about your dirty laundry and the fact that you fudged your EITC claim. Said significant other at some point then becomes angry spiteful former significant other and calls the IRS to inform them of your misdeeds.

What If I Do Get Caught?

The short answer is you’re screwed.

You will have to pay back all of the refunds and credits you received. In addition you will be assessed interest, penalties, late payment fees and possibly under-reporter fines. The total you will owe them will be staggering and you have to pay it. You can’t wipe it out in a bankruptcy.

The IRS knows many people get away with tax fraud. They simply have too many returns to process each year to scrutinize each of them. On the one hand this is good if you are a would be cheat. On the other hand this is very bad if you get caught being a cheat.

You see the IRS not only wants to punish you for cheating on your taxes by fining you into oblivion they also want you to tell everyone you know about your horror story with the IRS. How you owe them $10,000 and they are garnishing half your paycheck and don't care if you have enough money to pay your rent.

You will in fact be a walking, talking public service announcement regarding the pitfalls of cheating on your taxes.

That said, if you are entitled to the EITC you should claim it. It has been found to be one of the most effective weapons in fighting poverty and encourages many to enter the work force when otherwise they may not.

If you're not entitled to it, then claiming it is tax fraud pure and simple and if you get caught you will pay.

It's just not worth the risk.


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