Claiming the same dependents on more than one tax return to boost refunds or lower taxes is a crime well-known to the IRS.
Lower income workers have a relatively new way to save on their taxes. It’s called the Earned Income Credit (EIC) and has an even bigger tax break for workers supporting children. If you have two children, and qualify as a lower income worker, the odds are good you will qualify for the maximum credit available.
However, some corrupt tax preparers take advantage of this tax credit by “borrowing” one client’s extra kid, for instance if they have three children, and transferring that child over to another client’s tax return so they can illegally create this tax break for more clients.
How the scam works
For example, let’s say “Joe” has four children. His tax preparer correctly lists two of Joe’s children to claim the full earned income tax credit. However, next his tax preparer lists Joe’s other two children on another individual’s (probably a relative who is childless) return to illegally get the same tax saving.
According to the IRS (Tax Scams – How to Recognize and Avoid Them), sometimes the tax preparer has convinced their client to participate in the bogus claim by offering to split the tax refund money generated by the illegal claim. If caught, the tax pro would almost certainly face criminal charges, while civil penalties would be assessed against the taxpayer(s).
If you encounter any of these schemes, or are approached with a new one, the agency wants to know. Report suspected tax fraud by calling the IRS toll-free at 1-800-829-0433.
How to Report Suspected Tax Fraud Activity
The following information on how to report suspected fraud comes directly from the IRS website (www.irs.gov):
Suspected tax fraud can be reported to the IRS using IRS Form 3949-A, Information Referral. Form 3949-A is available for download from the IRS Web site at IRS.gov, or through the U.S. Mail by calling 1-800-829-3676. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888.
The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential. The person may also be entitled to a reward.