One of the biggest areas of tax abuse is the improper claiming of the Earned Income Tax Credit (EITC). The EITC subsidizes low-income working families, and the credit is a fixed percentage of earnings from the first dollar of earnings until it hits its maximum, which is determined by marital status and the number of dependent children. For 2013 filings, it provides a tax refund of up to $6,044.
The breakout of earned income, which translates to W2 wages or self-employment income and excludes investment income such as interest and dividends, is listed below. Investment income must be $3,300 or less for the year.
Earned Income and adjusted gross income (AGI) must each be less than:
- $46,227 ($51,567 married filing jointly) with three or more qualifying children
- $43,038 ($48,378 married filing jointly) with two qualifying children
- $37,870 ($43,210 married filing jointly) with one qualifying child
- $14,340 ($19,680 married filing jointly) with no qualifying children
Tax Year 2013 maximum credit:
- $6,044 with three or more qualifying children
- $5,372 with two qualifying children
- $3,250 with one qualifying child
- $487 with no qualifying children
The government has lost billions in tax dollars over the years since the creation of the EITC due to inaccurate claims. In response, the agency implemented a pilot program in 2012 aimed primarily at tax professionals to deal with the matter. The training stresses that tax pros do not automatically assume that a person is entitled to the credit simply because they fall within the above parameters. In fact, built into the professional tax preparation software program is a series of questions that must be answered correctly before the program will calculate the credit and include it in the tax return. It is important to properly interview each taxpayer that has the potential for claiming the credit.
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The IRS claims the program stopped an estimated $198 million in unwarranted refunds in its first year in 2012. For 2013, the program was expanded to include a wider group of preparers and a broader set of interventions and will continue to expand into 2014.
The pilot program “kept $590 million from being improperly paid out in 2013,” according to written testimony of John Koskinen, commissioner of the Internal Revenue Service, before the Senate Finance Committee on April 8.
Koskinen also said the pilot started in 2012 with the identification "of a group of tax return preparers with a history of submitting incorrect or potentially fraudulent tax returns falsely claiming the EITC." The testimony was submitted as part of the committee's discussion of tax preparer regulation.
Last August, The Treasury Inspector General for Tax Administration (TIGTA) reviewed the IRS’ procedures for dealing with abuse in EITC claims and the agency in turn agreed to put in place procedures for reviewing and identifying high dollar EITC claims.
Before attempting to claim the Earned Income Tax Credit, read up on all the rules to make sure you qualify. You can access this information online and answer a set of questions to determine your eligibility: EITC Assistant.
Bonnie Lee is an enrolled agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter and on Facebook.