IRS to Scrutinize Tax Credit Refunds

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The IRS says it will give greater scrutiny to the Earned Income Tax credit for the coming tax year 2012. This comes after a government watchdog questioned the agency on billions of dollars worth of credit it gave out this year. In October, Congress approved an increase of the fine on paid tax preparers for not verifying the eligibility of those who apply for the Earned Income Tax credit from $100 previously to $500. The Earned Income Tax credit is the largest form of credit paid out by the IRS each year, amounting to more than $55.1 billion in 2009, out of which $11 billion was likely paid out wrongly, according to IRS estimates.

The Treasury Inspector General for Tax Administration (TIGTA) J. Russell George wrote a stinging report in which he faulted the IRS for making potential improper payments involving two other refundable credit programs, one for higher education and the other for families with children in connection with the Earned Income tax credit. The report indicated that more than $18 billion of the $101 billion paid out under the 3 credits could have been done improperly.

The inherent danger in awarding the Earned Income tax credit is that as a refundable credit, it is can be paid out in cash in excess of the tax owed, instead of offsetting part of the tax liability. As such, the Earned Income tax credit is always subjected to abuse.

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Published In: Tax Updates