Refundable tax credits amount to free money for the recipients.
Which is why the federal tax programs are rife with fraudsters and scamsters, say the Dept. of Justice and the IRS.
Attracting the con artists: most tax credits simply reduce dollar for dollar the amount of money someone owes the government.
But refundable tax credits actually give money directly to people who, in some cases, don't pay taxes at all.
Three programs, the earned income tax credit, the first time homebuyer credit and the additional child tax credit, are rife with fraud.
Improper payments arising from these refundable tax credits have cost taxpayers an estimated $106 billion in less than a decade, according to Rep. Charles Boustany (R-LA).
That's more than the fiscal year budgets of the Departments of Homeland Security, Justice, Treasury, and Transportation combined, he notes.
The United States is broadening its crackdown on fraudulent tax credits. It filed six lawsuits in five states to stop tax return preparers from fraudulently claiming the first-time homebuyer tax credit and the earned-income tax credit, the Justice Department announced in May. Tax preparers caught can face up to three years in jail, a fine of as much as $250,000, or both, the IRS said.
"We are working hard to ensure that those who try to cheat our country by filing phony claims for tax credits do not get away with it," said John A. DiCicco, Acting Assistant Attorney General of the Justice Departments Tax Division, in a statement.
Lawmakers and government officials pushed last May for an even broader crackdown on improper refundable tax credits.
The earned income tax credit (EITC) habitually ranks tops among the most abused federal tax credits. Improper payments amounted to nearly $17 billion in 2010 according to the GAO, or about a quarter of the program's total spending, says the GAO.
Taxpayers have footed the bill for $83 billion in fraudulent payments for the EITC alone over the last decade, according to a Government Accountability Office report.
Spending on the earned income tax credit outstrips spending on welfare and food stamps, says Citizens for Tax Justice.
Thanks largely to the EITC, nearly half of US households, 47%, pay no fed income tax*, according to IRS data.
In recent years, credits for low- and middle-income families have grown so much that a family of four making as much as $50,000 will pay no federal income tax as of 2009, the latest data available, so long as they have two children younger than 17, according to Deloitte Tax.
Rep. Boustany has also reported that the Treasury inspector general found even IRS employees applying for refundable tax credits they had not earned, including the home buyer credit given to first time homebuyers.
Steven Miller, the IRS deputy commissioner for services and enforcement, has also reportedly told the House committee that the IRS fired "a great number of people for this.
A Treasury Dept. Inspector General report that thousands of prisoners successfully claimed the first time homebuyer Credit, as did hundreds of children. Hundreds more successfully claimed the credit by listing "undecided" or "to be determined" as their address.
The Inspector General also recently found thousands of tax filers who claimed the first time homebuyer credit by listing a P.O. Box as their qualifying home, Boustany noted.
He added at the hearing: In the case of the first time homebuyer credit, over half a billion dollars reportedly has gone to individuals who did not qualify for the credit.
However, about a quarter of these payments for these tax credits are wrongfully issued each year, according to IRS estimates.
The earned income tax credit was created in 1974 to encourage low-income families to find work, versus going on welfare. Taxpayers can get the credit whether or not they owe federal income taxes, in other words, they can get a "tax refund" even if the credit exceeds what they otherwise owe in taxes.
The EITC has become one of the federal government's largest programs for lower-income taxpayers.
The homebuyer tax credit, enacted under President George W. Bush in 2008 and modified earlier this year, provides up to $8,000 for first-time homebuyers, the IRS said in a statement. "The purchaser, however, must qualify as a first-time homebuyer, which for purposes of this credit means someone who has not owned a primary residence in the past three years, the IRS notes.
However, the credit is effectively an interest-free, 15-year loan from the government.
People who claimed the first-time homebuyer credit on their federal income tax return in 2008 must begin repaying that tax credit on their 2010 tax return in equal installments over 15 years.
The only tax credit that forces pay back, taxpayers must return the money only on homes purchased in 2008.