IRS targets earned-income fraud; critics crying foul

[MORTARDUDE]

IRS targets earned-income fraud; critics crying foul

THE MERCURY NEWS

December 29, 2003


By Mark Schwanhausser

The Internal Revenue Service is cracking down on rampant fraud stemming from the earned-income tax credit, triggering complaints that the agency is unfairly forcing low-income taxpayers to undergo an audit before even evaluating their tax returns.


Worth up to $4,204, the earned-income credit is often described as a social welfare program that lifts millions of people above the poverty line. It is one of few ``refundable'' credits, meaning that the government will cut a check even if the taxpayer owes no income tax.

As part of a pilot program, the IRS is notifying 25,000 parents or guardians this month that they will not qualify for the credit unless they provide documents showing the address of any children claimed as dependents. In the past, the IRS has required such proof only when it audits suspect returns.

``Think of this as an audit before you even prepare the return,'' said Claudia Hill, a Cupertino tax preparer who is editor in chief of the Journal of Tax Practice & Procedures. ``This is stepping outside the bounds of what we think of as a voluntary compliance system.''

Based on a review of 2002 tax returns, the IRS identified 25,000 candidates with ``high risks or probability for error,'' said IRS spokesman Jesse Weller.

Although the IRS program targets parents and guardians, the credit is available to all low-income taxpayers who qualify under a byzantine set of rules. For example, it sets a range of income limits, and the credit is not available to couples who file separate returns.

In a later stage of the pilot program, the IRS will scrutinize 300,000 taxpayers suspected of hiding income to qualify for the tax credit. The agency also will target 36,000 others who previously claimed married status but now are filing as single or head of household. However, all those taxpayers will be audited after they file their returns.

Last year about 19 million taxpayers claimed more than $32 billion in earned-income credits. The problem is the IRS makes billions of dollars in undeserved payments every year.

The General Accounting Office found that in 1999 -- the latest year for which statistics are available -- the IRS overpaid by nearly $10 billion, or a third of the total it paid out under the program.

Experts say the IRS hopes to dissuade large numbers of tax cheats or unqualified taxpayers from claiming the credit next spring. For instance, between the 1986 and 1987 tax years, seven million dependents vanished from tax returns when the IRS simply started requiring their Social Security numbers to be included on tax forms.

Not like an audit

The IRS contends that providing information upfront to the agency is neither new nor akin to an audit. For example, taxpayers already must submit appraisals with certain charitable deductions and a doctor's note to claim tax breaks for the blind or disabled.

``It is not an audit,'' said Weller at the IRS, ``it is a certification.''

But Kathy Burlison of H&R Block said there is a ``significant material difference'' with previous forms of certification. ``You know the results of that certification at the point you submit your tax return. With the earned income credit . . . you're in limbo until the IRS reviews those certification documents and has made a determination,'' said Burlison, director of tax implementation for the nation's biggest tax-preparation firm.

Critics also argue the pilot program will be an unfair burden on low-income taxpayers who can least afford professional help. They predict some taxpayers -- many of whom are immigrants who aren't fluent in English -- will forgo claiming credits to which they're entitled just to avoid sparring with the IRS.

``The concern is we're dealing with a population that is not that well educated and is already suspicious of authority,'' said Mark Luscombe, a federal tax analyst for CCH, which publishes information for tax professionals.

Acceptable evidence

The IRS outlines a variety of acceptable evidence of a child's residence on form 8836, including school and medical records. It also will accept affidavits signed by a child-care provider, doctor, landlord or others.

But H&R Block's Burlison says taxpayers who changed addresses in 2003, lacked a primary medical provider or shared custody of a child could be hard-pressed to find conclusive documentation that a child lived with them at least half the year.

``Do you have a single document that will verify that your child lived with you?'' Burlison asked. ``It's tough to come up with one document that shows the two of you together. You have to do some legwork there.''