Did you know that today is “Earned Income Tax Credit Awareness Day“? Most of us don’t get the day off, but as it is Friday, we can celebrate after work into the wee hours.
What are we celebrating? Well, the EITC is a refundable tax credit designed for poor working families with children. A “refundable” credit generates a tax refund if there is no tax to offset, so the EITC works as a welfare payment for poor families with some earned income. It phases out as incomes increase.
Some economists praise the EITC as a useful anti-poverty program that doesn’t kill jobs the way minimum wage laws do. Others look at it as a way to achieve “tax justice” by redistributing taxes to the poor.
Still, if you really want to be fully aware of how the EITC works, you should know about a few things that aren’t on the IRS EITC Awareness Day web page.
For example, you should know that the EITC phase-outs make it a poverty trap. The effect of the phase-out of the credit as income rises is to impose a marginal rate on additional earnings of EITC recipients as high as that imposed on some of the top income earners. The Federal-Iowa combined rate, taking into account phaseouts and payroll taxes, can exceed 50%.
This is a serious disincentive for EITC recipients to improve their earnings. Combined with the loss of other benefits, it can make self-improvement an unrewarding pastime.
Up to 25% of the EITC goes to people who shouldn’t get it, according to TIGTA. Part of it is because taxes are complicated and math is hard. A significant part, running into the billions, goes to fraudsters. Even in a good cause, you have to question the value of a program that misdirects so much money.
Like all refundable credits, the EITC is a fraud magnet. Any time the government will write a check just for the effort of filling out a form, fraud happens. Just a few random instances:
Waterloo, Iowa preparer get 30 months for earned income tax credit fraud. A preparer invented earnings to get Iowa clients EITC refunds.
Tax Preparer Sentenced For Fraud Scheme. “The fraudulent returns sought refunds of $354,000 based on bogus expense deductions and refundable credits, such as entitlement to the First Time Home Buyers Credit and the Earned Income Tax Credit when the filer had little, if any, taxes withheld from income in that year.”
Tax preparer who bilked IRS out of $4M for poor clients: Fraud a ‘spiritual calling’. “As it turned out, Reed was inflating the incomes of his clients – generally unemployed women with children – so that they could claim an earned income tax credit.”
So as you observe this festive day in your own way, you can ponder whether the guy celebrating at the next table is buying because he just got his fraudulent EITC refund.
Get your Buzz now! Because Robert D. Flach has posted his final Buzz for this tax season, with a kind shout-out to the Tax Update Blog. Don’t miss his thoughts on choosing a tax pro.
William Perez, Head of Household Filing Status, Explained
Accounting Today, Obamacare Penalty to Be Owed by as Many as 6 Million Taxpayers. That will make it popular.
Robert Wood, Senators Blast IRS Commissioner Over Waste, Bonuses, Bad Service, More. Well, shooting fish in a barrel can be fun.
TaxProf, The IRS Scandal, Day 631. More government stonewalling. Well, it’s worked so far.
William McBride, Federal Government Lost Money from 2013 Tax Increases on Investors (Tax Policy Blog):
As President Obama prepares to roll out another tax increase proposal targeting capital gains and dividends, it’s instructive to look at what happened the last time he did that. Fortunately, the IRS just released preliminary data on tax year 2013, the year the top tax rate on capital gains and dividends went from 15 percent to 23.8 percent. The fiscal cliff deal raised the top rate to 20 percent and the Obamacare investment surtax added 3.8 percentage points.
From the IRS data, we can see that investors didn’t just sit there and pay the higher tax rate. Qualified dividend income dropped 25 percent, from $189 billion in 2012 to $141 billion in 2013. Capital gains dropped 12 percent, from $475 billion to $416 billion. Recall this was in the midst of a historic stock market boom.
Not all tax increases lose money, and not all tax cuts make money. This shows, thought that increases in capital gains rates can backfire. The realization of many capital gains is discretionary, and many taxpayers will discreetly hold on to gains, rather than cash them out, when rates rise.
Perhaps this might not have been the best way to impress the sentencing judge. The Denver Post reports Convicts in $100 billion tax fraud skipped sentencing to play golf
The three Colorado Springs defendants were arrested Thursday after they failed to appear for sentencing Wednesday. They were escorted into court Thursday afternoon in handcuffs, all wearing street clothes.
“We did go golfing. I shot a 49, which was pretty good for me,” Pawelski told the judge after she emphasized the seriousness of the felony charges he faced.
Judges always understand you skipping a court date if you have a tee time.
Arguello reset sentencing for all three tax fraud convicts for Feb. 10. The judge brought each offender into the courtroom separately. Brokaw and Pawelski each told the judge they are a “natural man.”
“I am a natural man, a legal person, a legal man; something I didn’t know before,” Pawelski said.
Good thing he figured that out. He’ll likely have plenty of time to ponder that starting about February 11.