Fraud of False Tax Credits

Last updated on February 11, 2013

Tax fraud is growing in spite of efforts made by the IRS and law enforcement agencies. In a recently busted fraudulent tax filing scheme, it was discovered that tax fraudsters were also using false tax credits to get refundable tax credits.

A refundable tax credit not only reduces a tax liability to zero, but it can also get the IRS to pay taxpayers the balance if the amount drops below zero. For example, if a taxpayer is required to pay $5,000 in taxes to the IRS after using all the deductions, an added refundable tax credit of $7,000 will result in the IRS owing $2,000 to the taxpayer. Refundable tax credits offer an opportunity to dupe the IRS into paying them money.

The IRS’ policies tend to add to the problem. In 2011, the Treasury Inspector General for Tax Administration, J. Russell George said the IRS needs no documentation to prove eligibility for the education credit. The Treasury Inspector General for Tax Administration’s (TIGTA) report of 2011 found that in the previous year, 1.7 million tax filers got $2.6 billion in education credits without furnishing documentation to prove they attended school. Such rules make it impossible to spot fraudulent tax credit claims.

It is not always individual tax filers that dupe the IRS, corporations and trusts are not far behind. Non-refundable tax credits for long-term capital gains have been used by regulated investment companies and real estate investment trusts to claim false tax credits.

Without the IRS making its tax collection system more secure, false tax claims running in millions will stay a reality.