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Earned Income Tax Credit (EITC) Fraud and How to Stop It
October 26, 2012
I received a call the other week from a non-client taxpayer who was in the process of filing some back tax returns and ran into an issue. This taxpayer is a non-custodial parent of a son from a previous relationship and knew the ex-partner did not claim the son because the ex-partner had no filing obligation. The taxpayer, otherwise qualified to claim the son, asked the custodial parent to sign Form 8332. Form 8332 is the IRS form generally used to release an exemption from a custodial to non-custodial parent. The ex-partner, however, refuses to sign the release. The problem, he is told, is that the ex-partner already allowed friends claim the son for the years he needed to file. The non-client taxpayer’s question to me was – can the ex-partner do that? The answer is NO! The non-client taxpayer’s next question to me was – can the taxpayer file to claim the son since the taxpayer has superior rights over the ex-partner’s friends? Unfortunately, no. The taxpayer does have superior rights over the ex-partner’s friends, but without that Form 8332, the answer is still no. I wish I could say this situation is unique, but it is not by any means. This comes up many times a year, especially around tax season. Variations on the same theme includes an ex-spouse claiming a child(ren) on a return in contravention of a divorce or separation agreements. So, what should you do if you find yourself in the non-client taxpayer’s situation? First, file the returns. Second, you should report the activity by filing Form 3949-A with the IRS. It may not lessen the blow of not being able to claim a deduction for a dependent, but I can guarantee the custodial parent will think twice before allowing others to claim the child in the future. Finally, the IRS provides some good information on earned income tax credit fraud on their website, which I highly recommend taking some time to read. Just click the link. Until next time, Alex