Introduction
There is no such thing as a free lunch. There is a vein of gold in that old saying. And yet, that doesn’t stop many from trying to get something for nothing. Entire generations have now grown up trained to depend on government support, whether through food stamps, skewed tax credit laws, or welfare. Many of them hardly realize the price they pay in dignity, respect and freedom. And yet, even with those who really need it or really deserve the help, there are many more looking for ways to scam the government for funds.
Each of them is convinced that they have found the foolproof way to fool Uncle Sam and, in many cases, get away with it temporarily. Although there are many variations on the general themes, each will generally fall into one of five categories.
1. EIC Fraud
2. Payroll “under the table”
3. Falsification of W-2 or 1099 information
4. Clustered nest
5. Multilevel Marketing Tax Evasion Methods
EIC FRAUD
The Earned Income Credit is a refundable tax credit designed to help working single parents. Typically, the way a (non-refundable) tax credit works is that if a person has paid $5,000 in tax during the year and qualifies for the $10,000 tax credit, they can only receive the $5,000 they paid in tax. If the individual paid $0 in taxes, the tax credit could be $50,000 or more and they would receive $0. With the refundable tax credit, the person is not required to have paid taxes for the earned income credit to be added to the person’s refund amount.
It works on a sliding scale where the EIC goes up to its maximum (usually around $15,000 in earned income) and when income goes above $15,000 the EIC slides down. The maximum EIC is usually around $5,500. Finally, at around $28,000, the EIC has decreased to $0. As someone who spent several years preparing taxes in low-income neighborhoods, let me tell you, there are those who plan their entire year around getting this huge tax check that is taken from those who pay and given to those who don’t. . The EIC is granted only for your first two children from birth to age 17.
The ‘married or single’ couple with four children will go to a tax preparation office, separate those with experience in this. And even though they each live in the same home, they each claim head of household status, which increases the amount they can deduct from their taxable income and with each of them claiming EIC they can receive a check totaling $10,000. At the end of the year. tax filing season. Householder is supposed to be for those who don’t get any other support from anywhere else. The head of the family must provide for that household, so if there is a boyfriend, girlfriend, spouse, parent, etc. living there, they cannot claim that designation.
These cheaters will do this for years before they are caught, but once caught, they are not allowed to claim EIC for ten years after a fraud investigation. They will then have to return the incorrectly paid EIC and pay penalties for fraudulent returns plus up to 75% of the amount that was defrauded to the IRS.
how they are caught
Every time a person opens a bank account, buys a car, rents or buys a house, a little note is made that identifies their Social Security number with that transaction. Obviously, someone whose earned income is less than $15,500 is not going to buy a $35,000 car or a $200,000 house. These cheaters don’t realize they’re putting a big target on their back that screams, “Audit me!” to trained IRS auditors. He cannot have it both ways and claim that he earned enough income to pay for his purchase on credit and then, on another form, claim that he did not earn enough money to pay taxes.
There is a repository for this information, and the IRS takes note of logical errors. Example; A man came into my office and proudly told us that he was the father of nine children by seven different women and that his total income for the year was less than $3000 and that he wanted to claim half of his children before their mothers so that he could get the refund first. There is no way in this world that a man can only pay for food, rent and gas with a yearly income of $3000. And he wanted to claim that he also supported these children? He went to prison a year and a half later, but I hear his kids are doing just fine without him.
payroll under the table
Whether it’s because the worker lives here in this country illegally or the employer doesn’t want to worry about payroll taxes, a growing number of small businesses are paying cash. And since his employer doesn’t report it, the individual employee sees an opportunity to fool the government. (In some of these cases, these people are involved in illegal activities through which they get all their money. Drug trafficking, prostitution, etc.)
The first caveat here is that this arrangement is illegal. The second is that it is dangerous. Illegal because there are certain state requirements for employment that cannot be met or measured without records. And dangerous because that’s how most employers manage to pay for workers’ compensation insurance. An injury in a workplace where everything is done ‘under the table’ will often receive poor care for fear of reporting the injury to a hospital or qualified physician.
how they are caught
In the same way that those who are cheating EIC, every legal transaction they make puts one more flag in a case that would not otherwise have one. If they are making money that they are not reporting, they will have a hard time explaining how they are making $900 a month in mortgage payments when they only claim to make $500 and are the only support provider for that household. As the Zen master would say, “all things are connected, and yet not all are the same.”
Falsification of W2 or 1099 information
It’s relatively easy to buy a pack of blank W-2s or 1099s and “create” your own income. Scammers typically use a legitimate EIN number from a legitimate business they have temporarily worked at or a friend or relative has worked at and create a W-2 that provides them with enough income to get the EIC credit. By the time the ruse is discovered, the cheaters have cashed their rebate checks super fast and left town. Filing electronically prevents some fraud, but facilitates others.
The rightful owner of the business must explain why they did not pay the payroll tax for these people who falsified these forms. The IRS seems to move a lot slower when you’re the loser. It could mean paying penalties for payroll taxes that were never supposed to be filed anyway.
Many of the people who use this particular scam are illegal immigrants and don’t have a legitimate social security number anyway, those who are legal citizens and yet the cheaters anyway eventually move on and forget about the crime they they have comitted.
how they are caught
Once this particular scam is forgotten, one day they will have to use their social security number for a job, a loan, or a college application. At that point, they nail it even if it’s five or more years later. Offenses of this type earn prison time.
If it’s an illegal that’s cashing this check, it makes it more of a challenge. An illegal usually does not have a checking account to use to cash this check, so they must go to a check cashing store. It is there where they must present identification, addresses of references and some employment information. What many people don’t realize is that every check you receive and cash has clearly identifiable stamps showing where and when the check was cashed, deposited, and processed. If the illegal is still in the same area when the IRS gets up and starts investigating, it doesn’t take much to find them.
the clustered nest
Using the same principle in the first EIC fraud of a couple living together in the same place and each claiming head of household and EIC for each of their four children, the clustered nest describes what happens when that is done. takes to the extreme. Where there are four or more families within the same residence, each claiming HOH and EIC for their group of children. This is common in predominantly Hispanic areas where families can get along with each other in close quarters. Children are often exchanged between relatives to get the maximum benefit from the tax refund.
how they are caught
When doing background checks, there are areas and addresses that are automatic “red flags” for fraud. They are called ‘high risk’ areas, high turnover, transient population, hotels, apartment complexes, etc. When an address has ever been used as a ‘cluster nest’ where more than one family claims residence at the same time, that location is flagged. Eventually, the addresses are combined with the dates and times that individuals claim residence and sole ownership of the head of household title. As long as the whole family moves every three years, they could go on like this for many years. But once an area has been ‘flagged’, so are the social security numbers that use that address.
Multilevel Marketing Tax Evasion Scam
Lately there has been a group that promotes an old idea that everyone considers “new”. This group comes from an MLM that sells legal insurance plans and a large part of its business is recruiting other representatives. As the engine has petered out over the past seven years, it’s getting harder and harder to recruit smart people to these pyramid schemes. Therefore, their focus has shifted to de-emphasize the MLM aspect and sell them the benefits of being able to deduct the expenses they already have by starting their own business.
Most W-2 earners, as they are called, don’t have the time to work 40-60 hours a week and spend another 10-20 on an MLM. So the focus is this, let me show you how to deduct those expenses that you have now anyway and save money on your taxes. When you own your own business, you can deduct losses, home office expenses, and a percentage of your utility bills based on the size of the home office.
So now they have smart people joining this pyramid MLM group, not to advance within the MLM, but to deduct all the losses they will have pushing these prepaid legal insurance plans to their friends and family. There are several things wrong with this; First, your business must be running for the purpose of making a profit, NOT to pay for daily personal expenses. Second, there are rules and regulations for home office and vacation deductions that these ‘phony tax experts’ don’t bother to explain to their new hire, easily leading to deductions being disallowed and penalties and fees begin to accumulate. And third, these so-called tax experts are as far from experts as possible. One weekend training class does not make a tax expert.
how they are caught
The main inspiration behind this devious scheme cleverly avoids investigations and prosecutions. The legal prepaid insurance company, however, seems to constantly attract investigations. Corporate fraud experts have cited several red flags that a company is ready to commit fraud at the corporate level, and this particular company is at that point. Since it is difficult to hold the corporation accountable for the outlandish claims of its sales force, there will continue to be people caught up in this ‘join in’ scheme that has been around for over 30 years. The good news is that the eyes of corporate fraud experts are on them and there will be a slip up soon. Boy, I hope you guys meet a good lawyer.