Growing Without Rain

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Archive for December 2009

Enforcing the rules – or extracting an unfair penalty?

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TDN.com reports on an IRS audit of a Seattle single mom:

At issue, though, was that she and her two sons, ages 10 and 8, were all living at her parents’ house in Rainier Beach (she pays $400 a month rent). So the IRS concluded she wasn’t providing for her children and therefore couldn’t claim them as dependents.

She stood to lose what is called earned income tax credit, a refund targeted to help low-income workers.

The IRS eventually audited her parents, as well. In the end, the woman had to pay the IRS $1438 in penalty and interest because she couldn’t provide enough evidence to show that she was supporting the children, but the IRS backed off its demand for a refund of the EIC.

Unlike the author of the article and many of the commenters, I can’t entirely fault the IRS for what they did. Rachel Porcaro was unfortunate, to be sure, but there are many other people out there who deliberately set out each year to do deliberately what she did inadvertently – claim as many low-income credits as they can, at best questionably, and at worst deliberately fraudulently.

Every year, we are required to undergo refresher training in detecting potential fraud, and one of the bigger focuses of that training every year is on EIC. There are just too many people out there who know (or think they know) how to game the system to max out on EIC, and too many tax preparers out there who will prepare their returns without questioning whether the taxpayer is actually entitled to those credits. As long as we have a system that encourages low-income people to earn some income, but not “too much” income, we will have people who try to work that system to their advantage, and we will have a need for due dilgence on the part of professional tax preparers, and on the part of the IRS, to flush out that fraud.

I don’t deny the need to help low income earners, to be sure. But I don’t think a system which is as easily subject to manipulation as is EIC is the best way to do it.

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Written by nctaxpro

December 7, 2009 at 10:50 am

Posted in Taxes

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