Earlier this month, a reader sent me an email with a link to a news clip from Channel 13 (WHTR in Indianapolis) with the title “13 Investigates: IRS tax loophole.” She wrote:
“I was wondering if it was true…seems a little far-fetched to me.”
I checked it out and dismissed it as much ado about nothing.
But then I saw it on Twitter.
And I saw it on Facebook.
And I realized that the video had gone viral as taxpayer outrage mounted.
But folks are mad about the wrong thing.
This is not a loophole. It’s tax fraud. Those are two totally different things. And Channel 13 knows it.
A loophole is an ambiguity. There’s nothing ambiguous about what’s going on here: this kind of fraud simply isn’t allowable under the Tax Code. The credit that the report refers to is the Additional Tax Credit and it’s claimed on a federal form 8812 (form downloads as a pdf). The credit is for certain taxpayers who get less than the full amount of the child tax credit – it is not some kind of loophole for undocumented workers to use to beef up their refunds. The rules for qualifying children still apply and it’s very clear that the credit is restricted to those children who are classified as “a U.S. citizen, a U.S. national, or a U.S. resident alien.”
Nonresident aliens – meaning those living abroad like those cited in the news piece – don’t qualify. And the scenarios that were noted in the piece? Those instances are used as an example of what doesn’t count in the IRS Publication on child tax credits:
Example. Your 10-year-old nephew lives in Mexico and qualifies as your dependent. Because he is not a U.S. citizen, U.S. national, or U.S. resident alien, he is not a qualifying child for the child tax credit.
It makes an exciting story and a sensational headline, right? But those reporters are toying with you. They’re trying to make you think that this is a massive scheme only being committed by gardeners and dishwashers. But they’re wrong. This kind of fraud isn’t restricted to illegal aliens or undocumented workers. This kind of fraud is happening right here, stateside, by U.S. residents and U.S. citizens. The IRS has been warning folks away from scams and schemes for years. And yet, taxpayers still bite at the chance to illegally boost refunds by padding deductions and claiming bogus credits.
So who’s to blame? Well, clearly those folks who are claiming fraudulent refunds. And those tax professionals who are helping them perpetuate tax fraud.
But I would suggest that perhaps you and I should shoulder a bit of the blame, too. There is immense pressure on the IRS to get refunds to taxpayers almost instantaneously. And whenever IRS wants to slow the process down to screen for fraud, taxpayers scream. And so, the IRS kicks out refunds as fast as they can and try to figure it out later.
And how’s that working out for them? In 2009, the IRS announced that it was investigating more than 100,000 “doubtful claims” related to the first time homebuyer’s credit, totaling about $800 million in potentially false credit. Prisoners have been looting the IRS for years and years by claiming fake refunds. And we’ve all heard the stories and read the news about taxpayers who claim improper expenses, lie about child tax credits or say that they went to college when they didn’t. Where’s the outrage about all of that fraud?
There is some screening. This year, the IRS has reported that as of March 9, 2012, they had stopped 215,000 questionable returns with $1.15 billion in claimed refunds. But even as taxpayers complained that the IRS was too slow to issue refunds, I couldn’t help but think about how much fraud didn’t get stopped.
When it comes to identity theft, the numbers are even bigger. J. Russell George, head of TIGTA, told a congressional hearing last week that up to $26 billion could be refunded to identity thieves in the next five years. Clearly, there needs to be some reform: a better system in place for checking Social Security numbers and Individual Taxpayer Identification Numbers (ITINs) would be a start.
Don’t get me wrong: I’m not suggesting that we give anyone a pass on tax fraud. Undocumented workers should be targeted as much as the next guy. But if we focus on buzz words like “loophole” (which it’s not) or pretend that this fraud is somehow much different than other fraud because of our prejudices about who is committing the fraud, it takes away from the much, much bigger problem of screening and enforcement.
How about we collectively agree that tax fraud is bad and that it needs to stop? And how about we tell Congress to give IRS the resources to stop it?
But the drama? The suggestion that bad behavior is somehow restricted to a certain group of people? That we can do without. It’s getting us nowhere.
