Friday, May 15, 2009


* The Spring 2009 issue of the National Association of tax Professionals’ quarterly TAXPRO JOURNAL included an item on member comments on the tax provisions of the American Recovery and Reinvestment Act of 2009 (I was too busy preparing 1040s to submit my 2 cents worth – although I was asked to by the editor).
One recurring comment concerned the revisions to the First-Time Homebuyer Credit. To quote one member who seems to sum up the complaint of most participants, the credit, “as it has been revised, has left buyers from the previous law feeling cheated – not so much out of the additional $500 credit, but in the repayment provision.”
The poor schmuck who closed in December 2008 is royally screwed because he/she has to pay back the credit, while those who closed just days or weeks later get to keep the money as a gift from “Sam”!
* I had a chance to look over some of the 1040 proposals for 2011 included in BO’s “Greenbook” (this has nothing to do with the savings stamps of old given out by supermarkets – dating myself again).
It appears that the Obama Administration has no interest in simplifying the Tax Code. The Greenbook proposals only add more complexity and confusion.
The proposals continue existing and add new “refundable” credits – and therefore invite widespread tax fraud. First there was the refundable First-Time Home Buyer Credit, followed by BO’s Making Work Pay credit. And then the American Opportunity Credit refundable education tax credit, which the Greenbook makes a permanent replacement for the HOPE Credit. Now BO wants to revise the Retirement Savings Credit and make it refundable as well.
To get a refundable credit of $7,500 on the 2008 Form 1040 all a person had to do was fill out a form that did nothing more than ask “How much money, up to the maximum, do you want us to send you?” There was no additional information or attachments required, nor any need to separately sign off, under penalty of perjury, on the fact that one qualifies for the credit. I await the IRS statistics on the number of fraudulent Form 5405s filed.
I do agree that the American Opportunity Credit is a superior tax benefit to the HOPE credit, especially in expanding its potential recipients by increasing the income thresholds. And I also somewhat like the fact that the revised saver’s credit would permit depositing the credit directly to the retirement account that creates it - according to the Greenbook print-out the proposal “would provide for the credit to be deposited automatically in the qualified retirement plan account or IRA to which the eligible individual contributed”. As the print-out puts it, “Making the saver’s credit more like a matching contribution would enhance the likelihood that the credit would be saved”.
Here's a thought. If BO wants to give $2,500 to college students to help pay for the cost of tuition why not just make it a direct grant based on the FAFSA application instead of a refundable tax credit?
When will politicians understand that refundable credits are not good tax policy? Unfortunately such credits, like the disastrous rebate checks, provide a political benefit and will probably continue regardless of the cost.


TaxRascal said...

Why are refundable credits so prone to abuse? Is it just because they're less documented than normal refunds? Or is it because there's more of an incentive to lie, because of the terms of the refund?

Robert D Flach said...


Normally a fraudulent return must rely on bogus withholding to get a refund. So generally a phony Form W-2 must be included as a component of the scam. W-2s are “matched” by the IRS, and so it is somewhat easier to identify an erroneous return more quickly.

With a refundable credit, like the Earned Income Credit, the “crook” just has to make up numbers on the 1040, such as phantom self-employment income, to initiate a refund. It is extremely difficult to verify self-employment income.

As I mentioned in my example with the Form 5405, in the case of the refundable First Time Homebuyer’s credit all one has to do is make up a number and carry it over to Page 2 of the Form 1040.

The same is true with a refundable tuition credit. I doubt very much whether the IRS properly matches 1098-T information returns to 1040s, especially since the information reported on most 1098-Ts – tuition and fees billed – has absolutely nothing to do with claiming a credit. The credit is based on tuition actually paid and not tuition billed.

By the time the IRS gets around to suspecting an error, or asking for documentation, if it ever does, the “crook” has taken the money and run.