Smart. Sharp. Funny. Fearless.
Wednesday, August 16, 2017


Each year the Internal Revenue Service receives tax returns that show more income than was actually earned, in some cases twice the actual earnings.

That seems bizarre at first blush. After all, why would anyone tell the tax man they made more than they did?

The answer is that Congress has created an incentive for the poorest of the working poor to report more than their actual incomes. Doing so can be worth more than $3,000 to impoverished working parents under a form of negative income tax known as the Earned Income Tax Credit that sends government money to the working poor.

But it is not the working poor themselves who make up phony numbers. The problem is with unscrupulous income tax preparers, the IRS Taxpayer Advocate, Nina E. Olson, and others who work with the poor tell me.

Ginning up nonexistent income lets dishonest tax preparers charge larger fees and helps attract new clients as word spreads of their success at getting big refunds.

Just last month the Justice Department sued to shut down what it characterized in court papers as a nationwide chain of tax fraud mills that reported inflated incomes and often did not tell people it was filing tax returns for them.

Asked about the allegations, Instant Tax Service general counsel Todd Bryant said they were baseless, with a handful of problem cases mischaracterized as the norm.

The IRS and the Justice Department identified a problem with tax preparers inflating incomes years ago.

Abusive tax preparers have been found at big firms as well as underground operations. Failing to get tough on the abusers makes it hard for the vast majority of honest preparers to prosper, as clients who know nothing about the complexities of tax naturally gravitate toward whoever has a reputation for getting the biggest refunds.

Click here for reuse options!
Copyright 2012 The National Memo

10 Responses to Abusing A Tax Loophole Meant To Aid The Poor

  1. As a 46-year tax preparer, I take offense to the statement that the blame is us tax preparers. The problem is with the taxpayer who do their own taxes with just tools at Turbo Tax and similar tax software programs and know how to abuse the system. A couple live together unmarried, have 6 children. They each file separate tax returns (as required by the IRS since they aren’t married). Each claims 3 children and each file as Head of Households even though this can’t be the case since they live in the same house. Each get up to $5,761 ADDITIONAL refund that was never taken out of their paychecks.
    I don’t do these kind of tax returns but I see it happen all the time. My clients tell me about people they know that do this.
    One client has a child that lives in her and her husband. She allows her ex to take the child on his tax return. Instead of him filing as Single with a dependent not living with him, he files as Head of Household. He then can get up to an EXTRA $3,094 that he is not entitled to. Then she comes to me to file her return. Since the child is living with her and her income is low, she is entitled to the Earned Income Credit (even though she doesn’t claim him as a dependant) but she can’t get it because the ex illegally filed as Head of Household. I can’t efile her return (it is rejected) but advise her to paper file her return and claim the child as living with HER. Then it is left to the IRS to contact BOTH filers to see where the child lives. The sad part is that the IRS doesn’t always do this. They issue additional refunds to BOTH filers rather than take the time to go after the ex.
    The IRS needs to audit people like this ex and couple that live together and both claim Head of Household. As far as people living false Schedule Cs, the majority probably did make extra income but fail to report it.
    The solution: eliminate the filing of income tax returns and establish a national sales tax (not a flat tax – that doesn’t accomplish anything but help the rich). When you purchase something, you pay the tax at that time. The seller is then responsible for paying it into the system, not the ordinary taxpayer. Tax everyone. No breaks (other than perhaps groceries and other necessities). No refunds.
    The Earned Income Credit was one of the worse things that ever happened. But it won’t go away. It just keeps getting worse.
    So don’t blame us taxpreparers. Blame the taxpayer (if you can call them that) that know the system and continue to abuse it.

    • You are once again trying to start a big negative campaign against poor people, and what is this comment “taxpayer if you can call them that!” I find that to be extremely bigoted coming from a tax preparer. I really feel for anyone who comes to you that doesn’t make more than six digits. You are going by hearsay and I believe you and your snotty friends are looking for something to joke about while counting up the illegal tax credits you are giving them, because let’s face it only the rich are entitled to corruption in your eyes right!

      • What are you talking about? What illegal tax credits am I giving anyone? You apparently only read what you wanted to read in my comments. I change half what H&R Block or others charge. My fees run from $25 for a senior and students to a max of $225 for someone with several businesses. I have around 400 clients and make around $30,000 to last me the rest of the year. That is an average of $75 per client. I am not going by hearsay or making fun of anyone. What I am seeing is unmarried couples living together that know the system and take advantage of it and get big refunds that they aren’t entitled to. These are the illegal tax credits that THEY are taking. I don’t do their returns. Why am I the bad guy here? When I say “taxpayer if you can call them that” is because they DON”T pay taxes like the majority do. “They” are getting refunds that they are NOT entitled to because they are lying about being Head of Household. Yes, Earned Income Credit is good for those that qualify and are trying to make it as a single parent with children. But what I am talking about are those that abuse the system and you don’t have to be rich to abuse the system.

      • Yep, he is right, I do the same I refused to do taxes for scammers and freeloaders. You mustbe one of them or you don’t understand accounting, taxes etc,etc. Gowdy you charge so little. For Seniors I do it for free, others from $75.00 to $250.00
        HR Block – sucks some I had to red it, and the Turbotax is a crap. Well most willnot like it the new tax codes when we wil go from 6 to 5 and some deductions will be eliminated, Medicare up by .9 for earners above 200K Long term capit. gains from 15 to 20% etc AMT will increase for 2012 and exemptions will be much lower. We wil see it how they like it. And yes U R right flat taxe doesn’t help anybody but the rich who payless in taxes than average Joe. FICA is expiring this year and also HOPE and, the earned tax creditwill go back to a lower level so the scammers will not get as much, and students loans interest deduction will be phased out if you paid it for the last 5 yrs. The marriage penalty also might put some people into higher tax bracket with lower level of income due to standard deduction changes. The average American doesn’t understand taxes and how economy works and basic accounting . Neither is the Repukes or Dems. The fight is on. LOL. Romney/Ryan plan is a DISASTER for middle class. I hope some of the people learn that. We already paying big taxes, wait for Ryan plan we will be supporting entire world. LOL.

    • What a lame attempt to paint poor people as scammers and criminals!! Sorry, repubes you LOSE AGAIN!!! GO PICK ON SOMEONE WITH A SAME INCOME AS YOUR’S, JERKS!!

      You MUST list dependants WITH social security numbers on tax returns. Atempting to do this for the purposes of increasing the amount of the tax return is caught VERY QUICKLY by the IRS before income tax return checks are even issued to the filer. I KNOW!! My ex-husband tried to list our sons as dependants when they’re living with me full-time and he wasn’t paying child support! He was stopped.
      This also happened once with my step-daughter. My husband and I were allowed to take her as a dependent every other year on our taxes. The alternate years, my step-daughter’s daughter claimed her as a dependent. One year it got confused and it was easily remedied with communication with the IRS. But no tax returns were issued to either set of parents until the issue was resloved.
      To those people who are working hard and barely making it, you deserve every penny you get back from the IRS. I know multiple people who are in this position.

      • If you had read my comments closer, line by line, you would realize that I am talking about people like your ex. HE is the problem in the system. He attempts to take your sons as his dependents on his return … which is illegal. If you file your return before he does, yes, he is stopped from filing. However, if he files before you file, then YOU are stopped. In order for YOU to legal claim your sons on your return, YOU have to mail in your return to the IRS and then you should get the refund you are entitled to and the IRS hopefully will go after your ex to make him pay back what was illegal given to him. PLEASE read my comments more carefully before name calling. I am not a “repube” and never have been; I proudly display Pres. Obama’s picture in my office and defend him to anyone who comments.

        • The point is, the IRS does NOT allow this and there IS a system to quickly find these errors. It worked in both situations I cited and the right refund went to the right individual(s) whether it was intentional or unintentional.
          Sorry if I offended you. I work with poor people every day. They are barely making it and the earned income tax is being threatened by republicans. That money helps poor, working poor and challenged middle american families. Like you, I too voted for President Obama and will work to help him get re-elected. Again, my apologies.

          • I don’t mean to belabor the subject so this probably will be my last comments on the matter. When I first started my comments it was to defend tax preparers like myself that work hard for the taxpayer to get what is entitled to them. We don’t make up false Schedule Cs just to get more money back for people. Yes, there are preparers (not professionals in the sense of true tax preparers) that do this but it isn’t fair to put the blame on the preparer. It is so easy now for tapayers to figure their own returns and I am glad that they can but many do abuse the system and get refunds that they aren’t entitled to.
            I have one client in particular where we have a problem every year with her ex. He goes to a tax service (not me) and tells them that their son is living with him. He gets a big refund. My client comes in to my office and when we try to efile her return and claim the son on her return, it is rejected because someone else (the ex) already claimed him. Our only recourse now is to file a paper return for her. It is filed and she gets the correct refund that she is entitled to. Yes, the IRS has a system that IS suppose to work. They are supposed to contact both her and the ex and ask each to provide proof that the son lived with them – school records, doctor records, etc. But she has told me (and I have to believe my client) that that hasn’t happened. If it would, she would have contacted me to ask for my help in getting the IRS what they wanted. So, as far as I know, both parties got refunds that only one was entitled to.
            I am glad that you got your refund. Did your ex have to pay back what he got? I hope so. The IRS DOES refund the money to the first that filed and SHOULD hold up the refund when the other files. But it doesn’t always work this way. I have been doing taxes for 46 years now. They used to do it that way and I hope they continue to do it that way but I have seen so many problems with the IRS in the past few years.
            One big problem that I had in 2009 and 2010 was with the Workers Credit of up the $800 for anyone with Earned Income. I have Amish clients that are NOT entitled to it because they don’t pay into S.S. which is based on Earned Income.
            My tax software correctly figured their return and didn’t give these Amish cleints this credit (refund). But when my return got to the IRS offices, they changed the return and issued $800 refund checks right and left to the Amish (and others exempt from S.S.). I advised my Amish clients when they called to return the checks with a note stating that they were exempt from S.S. Most did but how many around the country didn’t. (Other taxpayers had the same problem.)
            When contacted, the IRS did admit it was an error on their part but it never was resolved. It happened for 2 years before the credit finally was no longer allowed for anyone.
            A retiring IRS agent told me that the problem was that they IRS does not have top-of-the line tax software to process their returns. Their software does not know how to deal with taxpayers like the Amish.
            The point of me telling this is that, like it or not, the IRS does many problems in their system. I can sight numerous other problems that I have had with the IRS in the past few years but that would take too much time.
            Good luck in your work. I think we are both on the same side here. We want what is rightfully coming to our clients. And we don’t want someone abusing the system. Here’s hoping OUR MAN gets back in this fall and that he does get some cooperation from both parties.

  2. Thank you David for pointing out this unfortunate lack of clarity in writing the law and how the IRS should be wary of the Schedule C filers who would benefit from this scheme.

Leave a reply