Why Enhancing the Earned Income Credit Is a Bad Idea

To read more articles by Eva Rosenberg, MBA, EA, click here and check out the Talk to TaxMama archive.

Once upon a time, tax storefronts and offices in primarily non-English-speaking communities were able to make a very nice living running Earned Income Credit (EIC) mills. Some offices managed to whip out as many as 6,000 or more tax returns; just pumping out these returns.

As we have come to realize since, many of those returns were fraudulent. Refundable credits are rife for fraud.

Recently, I received an invitation to a teleconference call from Senator Sherrod Brown:

WASHINGTON, D.C. – In advance of President Obama’s budget proposal that is expected to expand tax opportunities for low income workers, U.S. Sen. Sherrod Brown (D-OH) will hold a news conference call to urge Congress to pass a bill that would strengthen and enhance the Earned Income Tax Credit (EITC), which Ronald Reagan called the “most effective anti-poverty program in the U.S.” Brown is the author of the Working Families Tax Relief Act, legislation that would answer the call of the Administration and leading Republicans by making permanent enhancements to the EITC and expanding its eligibility to childless workers. The EITC is a refundable tax credit that encourages work, helps families make ends meet, and leads to healthier, better educated children. By strengthening and enhancing the EITC, Brown’s bill would help lift 300,000 workers out of poverty and promote economic opportunity for all Americans.

The more I thought about this, the angrier I got. Why? Essentially, we – as tax preparers – are now facing a $500 penalty for not doing very extensive due diligence on our EIC clients. They are no longer quickie returns. And I am darned tired of having us put into the middle, due to poor controls. (Disclaimer: I don't have any EIC clients – but my EA students sure as heck do!)

Here's my reply to the invitation:

Thanks for the invitation.

But the Earned Income Credit is one of the biggest sources of tax fraud in the entire system. So, frankly, no, I don't think it's a wonderful, beneficial thing to raise it. And tax professionals are flat-out tired of being forced to devote additional hours, when preparing otherwise simple tax returns, to becoming a police force to prevent EIC fraud.

So unless your illustrious senator plans to make the EIC payable only via payroll (i.e., refund the money by increasing each week's paycheck), forget it. He's just throwing away more money that the U.S. budget cannot afford.

Thanks anyway.

How do you feel about this?

About the author:
Eva Rosenberg, EA, is the publisher of TaxMama.com ®, where your tax questions are answered. Eva is the author of several books and ebooks, including "Small Business Taxes Made Easy." Eva teaches a tax pro course at IRSExams.com and tax courses to help you deal with tax debt http://www.cpelink.com/teamtaxmama.




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