Getting Ready for Tax Season

I have not had a lot of time for writing the last week or so. A few crises with vendors at my day job, combined with prepping for an exam at the accounting class I’m taking, with tax preparation classes piled into the mix for the last week. The combination of the three has kept me pretty busy.

But the process of getting ready for the start of tax season next January has brought up an issue I want to comment on, so once again I am spurred to set pen to paper (or push electrons onto CRT screen, whatever the computer equivalent is).

Part of the tax prep classes this weekend covered due diligence for tax preparers assisting clients in filing for the earned income credit. The EIC is supposed to supplement the income of wage earners, usually with children. It is a refundable credit, which means that even if you get all of your withholding back, you can still get thousands of dollars in additional money.

Under 2008 tax law, you max out your EIC with two children. If you have more than two children, you receive no additional benefit. If you have zero or one child, you get a smaller benefit. If you have less earned income, you get a smaller check from the government.

So what happens is that people with more earned income and fewer kids claim the children of people who have already maxed out their tax benefit. The amount of fraud and misrepresentation connected to the Earned Income Credit is massive. Every tax preparer in my class had a war story about making claims that just weren’t believable.

But do we turn those people away? No we do not. We accept the client’s statements at face value. We can question the story and document the answers, but we do not require any corroborating evidence. We leave that up to the IRS.

The thing that strikes me about that is that we aren’t being paid by our clients. Sure, the client is getting his or her withholding back. That’s part of their refund. But the lion’s share of the “refund” is provided by credits such as the EIC. The tax preparer is taking his fees out of the government’s money, not the tax filer’s.

That sets up a massive conflict of interest on the part of the tax preparer. If we turn a blind eye to holes in the client’s story in order to get them a bigger refund check, we get a bigger fee for doing the paperwork. The client has huge incentives to cheat, and the tax preparers have incentives to facilitate the cheating.

If I were the IRS, I would step up my auditing of tax preparer’s work by a factor of ten. That would make the tax preparers less willing to accept dodgy answers from a client.

After all, unlike many of the clients, I actually pay income taxes. I don’t want to see my tax dollars going to a fraud.