When Republican presidential nominee Mitt Romney uttered those now infamous words about 47 percent of Americans seeing themselves as victims, depending on government assistance and paying no taxes, a part of that group includes folks who receive refundable tax credits.
A new examination of these tax breaks by the government watchdog office charged with keeping an eye on the Internal Revenue Service has found that lax controls over refundable tax credit claims have cost the U.S. Treasury billions of dollars.
Tax credits reduce the amount of tax you owe. If your tax liability is $500 and you can claim a $500 credit, your tax bill is zeroed out. Refundable credits, as their name indicates, can provide a taxpayer with a refund even if the filer didn't owe any taxes; for example, a $700 refundable tax credit combined with a $500 tax bill will get that taxpayer a $200 check from Uncle Sam.
When people, and by people I mean candidates during an election year, talk about abuse of the tax code, they tend to focus on refundable credits, most often the earned income tax credit, or EITC. This tax credit was designed to help low-income working families recover some of the bite that FICA taxes take out of their relatively small paychecks.
But because the EITC is one of the more complicated tax credits to claim, and because it can produce a refund, it is also susceptible to fraud.
The Treasury inspector general for tax administration, or TIGTA, recently conducted an investigation into the Internal Revenue Service's handling of refundable credit claims, specifically the EITC and the associated additional child tax credit, and found that the agency needs to exercise greater control over refundable credits.
During tax years 2006 through 2009, according to the TIGTA report, taxpayers claimed almost $470 billion in refundable credits. But IRS examination of those claims after the refunds were issued found that the agency issued an estimated $2.3 billion in erroneous credits.
By the end of December 2011, reports TIGTA, the IRS had recovered around $1.3 billion of that mistakenly refunded money, most of that collected through refund offsets, that is, reducing the taxpayers' subsequent tax refunds. And it's a safe bet that the IRS will not be able to get much, if any, of the rest of those incorrect tax credit refunds back.
Questionable tax breaks for all
The EITC has long been a target of some tax reformers. They argue that it's a social policy that shouldn't be enacted via the tax code.
I generally agree that using tax policy as a social policy bludgeon is not a sound way to collect the revenue that a government needs to operate.
But if we're going to ax one socially skewed tax, let's get rid of them all.
My husband and I are child-free. If others want kids, good for them. But we also aren't too thrilled that people with children get an added tax break (or two or more) thanks to the $1,000-per-child (for now) tax credit, just because they reproduced.
Then there's the refundable additional child tax credit which, as noted earlier, TIGTA also found was frequently abused by taxpayers. Folks already get exemptions for their dependent children. Why should they get more of my federal tax dollars just because they opted to follow the path of super-sized reality TV families?
And what about the implicit sanctioning of the American dream, that is, homeownership? The United States is one of the very few developed countries that provides a mortgage interest tax break to home buyers. Folks seem to be able to buy homes in other parts of the world just fine without help from their governments.
Don't forget about all the other homeownership, and second homeownership, tax breaks. Tax writers even added a new, albeit temporary, tax credit, for first-time homebuyers a few years ago. That was a total mess, causing delays in filing, myriad mistakes and downright fraud.
The hubby and I are homeowners. We've bought five homes over our 30-plus years of marriage and refinanced a couple of them. And we've gladly claimed the tax breaks for our primary residences.
But there is no good tax policy reason for such real estate tax benefits. In fact, they cost the United States millions of dollars a year. But still they are in the tax code because homeownership is a social ideal that lawmakers want to promote.
The EITC and similar tax breaks rewarding parents and homeowners are just a few of the many tax issues that must be addressed by Congress and the president, whomever he might be, in the coming months.
So maybe it's time for all of us to start thinking about how fair all these tax deductions and credits are and which ones we'd be willing to surrender.
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