Top 5 Ways to Fool the Government and How You’ll Get Caught Doing It
Introduction
There is no such thing as a free lunch. There is a golden streak in that old saying. And yet, that doesn’t stop many from trying to get something for nothing. Entire generations have now grown up trained to depend on government support, whether through food stamps, biased tax credit laws, or welfare. Many of them hardly realize the price they pay in dignity, respect and freedom. And yet, even with those who really need or really deserve the help, there are many more looking for ways to scam the government for funds.
Each of them is convinced that they have found the foolproof way to fool Uncle Sam and, in many cases, they get away with it temporarily. Although there are many variations on the general themes, each will generally fall into one of five categories.
1. EIC Fraud
2. Payroll “under the table”
3. Falsification of W-2 or 1099 information
4. Cluster nest
5. Multi-Level Marketing Tax Avoidance Methods
EIC FRAUD
The Earned Income Credit is a refundable tax credit intended to help single working parents. Typically, the way a (non-refundable) tax credit works is that if a person has paid $5,000 in taxes during the year and qualifies for the $10,000 tax credit, they can only receive the $5,000 they paid in taxes. If the individual paid $0 in taxes, the tax credit could be $50,000 or more and they would receive $0. With the refundable tax credit, an individual is not required to have paid taxes for the earned income credit to be added to the amount of their refund.
It works on a sliding scale where the EIC goes up to its maximum (usually around $15,000 in earned income) and when income is over $15,000, the EIC slides back down. The maximum EIC is usually around $5,500. Finally, at around $28,000, the EIC has dropped to $0. As someone who spent several years preparing taxes in low-income neighborhoods, let me tell you that there are those who plan all year around receiving this huge tax check that is taken from those who pay it and given to those who do not pay it. . The EIC is granted only for your first two children from birth to age 17.
The ‘married or single’ couple with four children will go to a tax preparation office, it will separate those who have experience in this. And even though they each live in the same house, they each claim head of household status, which increases the amount they can deduct from their taxable income and with each of them claiming EIC they can receive a check totaling $10,000. At the end of the year. tax filing season. The head of the family is supposed to be for those who do not receive any other support from anywhere else. The head of household must provide for that household, so if there is a boyfriend, girlfriend, spouse, parent, etc. living there, they cannot claim that designation.
These cheaters will do this for years before they are caught, but once they are caught, they are not allowed to claim EICs for ten years after a fraud investigation. They will then have to return the incorrectly paid EIC and pay fraudulent return penalties in addition to up to 75% of the amount defrauded to the IRS.
How are they caught?
Every time a person opens a bank account, buys a car, rents or buys a house, a small note is made that identifies their Social Security number with that transaction. Obviously, someone whose earned income is no more than $15,500 is not going to buy a $35,000 vehicle or a $200,000 house. These cheaters don’t realize that they’re putting a big target on their back that screams, “Audit me!” to trained IRS auditors. He cannot have both and claim that he earned enough income to pay for his purchase on credit and then, on another form, claim that he did not earn enough money to pay taxes.
There is a repository for this information, and the IRS takes note of logical errors. Example; A man came into my office and proudly told us that he was the father of nine children by seven different women and that his total income for the year was less than $3,000 and that he wanted to claim half of his children before their mothers so he could get the refund first. There is no way in this world that a man can only afford food, rent, and gas on an annual income of $3,000. And he wanted to claim that he also supported these children? He went to prison a year and a half later, but I hear his children are doing just fine without him.
Payroll under the table
Whether it’s because the worker is living here in this country illegally or because the employer doesn’t want to worry about payroll taxes, a growing number of small businesses are paying cash. And since their employer doesn’t report it, the individual employee sees an opportunity to cheat the government. (In some of these cases, these people are involved in illegal activities through which they get all their money. Drug dealing, prostitution, etc.)
The first caveat here is that this arrangement is illegal. The second is that it is dangerous. Illegal because there are certain state requirements for employment that cannot be met or measured without records. And dangerous because that’s how most employers manage to pay for workers’ compensation insurance. An injury in a workplace where everything is done ‘under the table’ will often receive poor care for fear of reporting the injury to a qualified hospital or physician.
How are they caught?
In the same way as those who are cheating the EIC, every legal transaction they make puts one more flag on a case that would not otherwise have one. If they are making money that they are not reporting, they will have a hard time explaining how they are making $900 a month in mortgage payments when they only claim to make $500 and that they are the sole provider of support for that household. As the Zen master would say, “all things are connected, and yet not all things are the same.”
Falsification of W2 or 1099 information
It’s relatively easy to buy a package of blank W-2 or 1099 forms and “create” your own income. Typically, scammers use a legitimate EIN number from a legitimate business they’ve temporarily worked at or a friend or relative has worked at and create a W-2 that gives them enough income to get the EIC. By the time the ruse is discovered, the cheaters have cashed their refund checks super fast and are out of town. Electronic filing prevents some fraud, but facilitates others.
The rightful owner of the business must explain why they did not pay the payroll tax for these people who falsified these forms. The IRS seems to move much slower when you’re the one hurt. It could mean paying penalties for payroll taxes that were never supposed to be filed anyway.
Many of the people using this particular scam are illegal immigrants and don’t have a legitimate social security number anyway, those who are legal citizens and yet cheaters anyway eventually move on and forget the crime they they have comitted.
How are they caught?
Once this particular scam is forgotten, one day they will have to use their social security number for a job, a loan, or a college application. At that point, they stick even if it’s five or more years later. Offenses of this type earn prison time.
If an illegal is cashing this check, it makes it more of a challenge. An illegal usually doesn’t have a checking account to use to cash this check, so they have to go to a check cashing store. This is where they must present identification, addresses of references and some employment information. What many people don’t realize is that every check you receive and cash has clearly identifiable stamps that show where and when the check was cashed, deposited, and processed. If the illegal is still in the same area when the IRS gets up and starts investigating, it doesn’t take much to find him.
The clustered nest
Using the same principle in the first EIC fraud of a couple living together in the same place and each claiming head of household and EIC for each of their four children, the clustered nest describes what happens when that happens. leads to the extreme. Where there are four or more families within the same residence, each claiming HOH and EIC for their group of children. This is common in predominantly Hispanic areas where families can get along with each other indoors. Children are often traded between relatives to get the maximum benefit from the tax refund.
How are they caught?
When doing background checks, there are areas and addresses that are automatic “red flags” for fraud. They are called ‘high risk’ areas, high turnover, transient population, hotels, apartment complexes, etc. Where an address has ever been used as a ‘cluster nest’ where more than one family claims residence at the same time, that location is flagged. Eventually, the addresses are combined with the dates and times that individuals claim residence and sole ownership of the head of household title. As long as the whole family moves every three years, they could go on like this for many years. But once an area has been ‘flagged’, so are the social security numbers that use that address.
Multilevel Marketing Tax Evasion Fraud
Lately there has been a group promoting an old idea that everyone considers “new”. This group comes from an MLM that sells legal insurance plans and a large part of their business is recruiting other representatives. As the engine has run down over the last seven years, it is becoming increasingly difficult to recruit smart people for these pyramid schemes. Therefore, their focus has changed to de-emphasize the MLM aspect and sell them the benefits of being able to deduct the expenses they already have by opening their own business.
Most W-2 wage earners, as they’re called, don’t have time to work 40 to 60 hours a week and put another 10 to 20 into an MLM. So here’s the approach, let me show you how to deduct those expenses you have now anyway and save money on your taxes. When you own your own business, you can deduct losses, home office expenses, and a percentage of your utility bills based on the size of the home office.
So now they have smart people who join this MLM pyramid group, not to advance within MLM, but to deduct all the losses they will have pushing these prepaid legal insurance plans to their friends and family. There are several things wrong with this; First of all, your business must be in operation in order to make a profit, NOT to pay for daily personal expenses. Second, there are rules and regulations for vacation and home office deductions that these ‘fake tax experts’ don’t bother to explain to their new employee, which easily leads to deductions and penalties and fees being voided. start to accumulate. And third, these so-called tax experts are about as far from experts as you can get. A weekend training class does not make a tax expert.
How are they caught?
The main inspiration behind this devious scheme cleverly avoids investigations and prosecutions. The prepaid legal insurance company, however, seems to constantly attract inquiries. Corporate fraud experts have cited several red flags that show a company is ripe for corporate-level fraud, and this particular company is at that point. Since it is difficult to hold the corporation accountable for the outlandish claims of its sales force, there will continue to be people trapped in this ‘join-in’ scheme that has been around for over 30 years. The good news is that the eyes of corporate fraud experts are on them and there will soon be a slip. Gosh, I hope you meet a good lawyer.