Last week we gave you the first six scams of the IRS's "Dirty Dozen." This week's column presents the second half of 2013's "Dirty Dozen". Don't fall prey to these schemes.
Including income that was never earned, either as wages or as self-employment income in order to maximize refundable credits, is a popular scam. Claiming income on your tax return that you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit (EITC) could result in repaying the erroneous refunds, including interest and penalties and, in some cases, even prosecution.
To many of us it is counter-intuitive to think that if you have more income, you get a bigger refund - but with some refundable credits that is exactly the case. Unlike most deductions and credits, the EITC is refundable -- taxpayers can get it even if they owe no tax.
Because it is refundable, the Earned Income Tax Credit is a magnet for tax fraud. Edwin Rubenstein, president of ESR Research issued a report in 2009 documenting abuse of the EITC. Rubinstein found that, "Year after year about one-third of all EITC returns are based on illegal multiple returns, phony Social Security numbers or claims of nonexistent children or spouses."
The General Accounting Office has reported that the IRS estimates between 27 and 32 percent of EITC dollars are paid erroneously.
8. False Form 1099 Refund Claims
In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.
7. False/Inflated Income and Expenses