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Warning: Tax Refunds will be Delayed - IRS Clamps Down on Tax Credits

by
Karen C. Drescher, CPA, CGMA
on
12/21/2016
Warning: Tax Refunds will be Delayed - IRS Clamps Down on Tax Credits

The United States tax code offers a number of refundable credits that are designed to offset specific expenses. Three of the most popular of these are the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC) and the American Opportunity Tax Credit (AOTC). 

  • The Child Tax Credit (CTC) provides a $1,000 credit for each qualifying dependent child that a taxpayer has. The credit is determined by both the number of children and the income level, with high-income families eventually phasing out of eligibility for the credit.
  • The Earned Income Tax Credit (EITC) is specifically available for taxpayers who work but who earn a low income. The calculation is based on a formula using the work income, other income, and number of children, and can be valued as high as $6,269.
  • The American Opportunity Tax Credit (AOTC) is specifically for low income families, and provides credit for college tuition that they pay. Eligibility is based on income, and there is a phase out, but those who qualify and who have eligible students paying tuition are offered a credit of 100% of the first $2,000 that is paid, and 25% of the net $2,000 and other related expenses. The highest amount of credit given for each child within a family is $2,500 per year, and of that amount a refund is available for up to 40%.

Because each of these credits is refundable, when a taxpayer claims it appropriately, the credit not only reduces the amount of tax that is owed, but where more tax has been paid then is appropriate, a refund is provided.  For those who are entitled to the credits, this means that it has the potential of putting cash into their pockets, but is also the refundable aspect of the credits that make them vulnerable to fraud. They are frequently used inappropriately by tax cheats, and this has meant that the government has written refund checks to undeserving people, and it has cost the country billions. Now the IRS has announced that it has created new laws specifically designed to put a halt to this fraudulent activity.

The new laws that are guarding against tax refund fraud include:

  • Disallowance Periods: These will take effect when a taxpayer is identified as having inappropriately claimed one of the three credits, and will bar them from being able to claim them again in the future. This is the case whether the claim is improperly filed fraudulently or recklessly, though the time period will be determined by the circumstances. For those who have attempted fraud, the disallowance period will be ten years, while for those who have shown intentional or reckless disregard for the rules the disallowance period will be two years.
  • Delayed Refunds: When tax refunds are owed for either a Child Tax Credit or an Earned Income Tax Credit, the refund will be sent out later than has been done in the past. The earliest that these refunds will be sent will be February 15th. The goal of the delay is to provide the IRS with the ability to verify the claims, matching the information that is shown regarding income, tuition, and more to ensure that they are correct and true.
  • Claims for Education Credits Will Require 1098-T: A 1098-T is a form provided by an educational institution to verify how much tuition has been paid. The EITC will no longer be able to be claimed without providing both the 1098-T and the educational institution’s employer identification number, except in very specific situations.
  • Preparer Due Diligence Requirements: Tax preparers who are paid for their services have historically been responsible for meeting due diligence requirements to ensure that the taxpayers whose tax forms they are preparing are eligible for the EITC for which they are applying. The new laws expand those responsibilities and require that additional work be done to comply with new due diligence requirements that include ensuring eligibility for both the AOTC and the CTC. With the added work comes added liability for mistakes and oversights: for each credit that a paid preparer has signed off on that is disallowed, the preparer can be fined a penalty of $510.
  • Retroactive Claims: In the past, the AOTC, CTC and EITC could be claimed regardless of whether the child or student for whom the credit was being claimed had a Taxpayer Identification Number (TIN), using what was known as a retroactive claim. Going forward, only those children or students whose TIN was in existence prior to the due date for the original return (in the tax year for which the credit is being claimed) will be allowed: retroactive claims will be denied.
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Karen C. Drescher, CPA, CGMA

Karen C. Drescher, CPA, CGMA

Whether it is helping a individual or a Georgia small business with their taxes, or offering to be a backstop through their difficulties, Karen is always there for her clients. When you are a client of Karen's, she always tries to make you feel comfortable in a casual and friendly environment.

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