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IRS Clamps Down on Tax Credits Delaying Some Refunds

by
Spencer Wilson
on
11/17/2016
IRS Clamps Down on Tax Credits Delaying Some Refunds

According to the Internal Revenue Service, there are a few tax credits that tax cheats have been using and abusing to defraud the government. The Child Tax Credit (CTC), the Earned Income Tax Credit (EITC) and the American Opportunity Tax Credit (AOTC) are each either totally refundable or partially refundable credits, and that makes them particularly tempting for those who are looking to cut their taxes more than appropriate, or even manipulate the system in order to pocket a refund to which they are not entitled.

As a result of the increase in this type of activity, the agency has created new laws for this tax year which it hopes will save the billions in incorrect credits.  Here is a rundown of the credits as they are meant to be taken, as well as the new rules and how they may affect you. 

  • The Child Tax Credit, or CTC, provides taxpayers who have qualifying dependent children with a credit of $1,000 for each of them. Any credit beyond that which offsets the amount of taxes that the taxpayer owes can be provided as a refund. That refund is a calculation that includes the individual's earned income and the number of children that they have. If you are a high income wage earner, you may find yourself above the threshold to receive this credit.
  • The Earned Income Tax Credit, or EITC, is a calculation designed to provide a refundable credit of up to $6,269 to those who are low income earners. The calculation of the credit and refund is based on how many children the taxpayer has, as well as how much of their income comes from a job.
  • The American Opportunity Tax Credit, or AOTC, is designed for low-income families who have a family member attending college. It serves as a tuition credit of $1,000 for the first $2,000 spent on tuition and related expenses, and another 25% of the next $2,000. The total credit that is available is $2,500, and though it is meant to serve as an offset of taxes owed, up to 40% can be distributed as a tax refund. There is an income threshold for receiving this credit. 

There are several new rules and procedures designed prevent those who are not entitled to these credits from taking them. They include:

  • Purposeful Delay of all Refunds that Include the CTC or EITC: The IRS will not issue refunds for any tax returns that include either a CTC credit or EITC until February 15th of the year in which the tax return is filed. The purpose of this delay is to provide the agency with extra time to ensure that the credit claim is valid and to compare the information contained on the tax return regarding income and tuition is accurate and valid.
  • Requirement of 1098-T to Claim Education Credits: Taxpayers who are seeking a refund or tax credit for education credits are now required to obtain a Form 1098-T Tuition Statement from the educational institution that the family member is attending. This statement will include the employer identification number of the school, as well as information about how much tuition has been paid during the tax year.
  • Due Diligence Requirements for the Preparer: There was once a time when paid tax preparers such as accountants or financial advisors were only required to follow due diligence guidelines when preparing tax returns for an EITC credit. Those same requirements are now in place for the AOTC credit and the CTC credit. Having these requirements in place – and imposing preparer penalties of $510 per disallowed credit -  is designed to ensure that the tax preparer is following all of the rules and is ensuring that the person who is applying for the credit is actually entitled to it.
  • Disallowance Periods: If you make a mistake in your claims for the AOTC, CTC or EITC and the IRS determines that it was done either recklessly or fraudulently, your improper preparation eliminates your eligibility for filing the claim in the future. The ban is generally for ten years if your error is determined to have been fraudulent, while even intentional disregard or acting recklessly precludes your use of the credit for two years.

Retroactive Claims: It is required that those who are claiming any of the three credits - whether for themselves, their dependent child or a student – have a TIN, or taxpayer identification number. This is usually a Social Security Number, and if the person does not have one they need to obtain it before the original due date for the tax return. Failure to provide this information by the deadline will prevent you from taking advantage of the credit.

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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