According to a federal audit released on Monday the IRS is implementing new procedures to prevent the issuance of tax credit refund checks to ineligible tax filers. Nearly $2.3 billion in refundable credits were mistakenly issued between 2006 to 2009. As of 2010 approximately half has been recovered primarily by taking money out of future refunds. The IRS intends to implement a screening process by the upcoming tax filing season to eliminate issuing refund checks generated by refundable credits to ineligible filers.
The refundable credits under close scrutiny include the Additional Child Tax Credit (ACTC) and the Earned Income Tax Credit (EITC). These tax credits can erase a tax burden and result in a refund check from the government. Those credits are scheduled to expire at the end of 2012 along with other tax provisions.
Additional Child Tax Credits and Earned Income Tax Credits are susceptible to fraud. The IRS said that many erroneous claims are not intentional. Also filers may be eligible for a refundable credit in one year and possible not eligible in other years. However there is a low success rate in recovering credits after a refund has been issued. As a result the IRS is developing a screening process that makes tax payer history available when considering claims for refundable credits.
There are no changes to the eligibility requirements for refundable credits through 2012. As a result filers who are eligible for the refundable credits will notice little to no change. However if a filer erroneously received a refund check in a prior year from refundable credits and the filer is eligible for a refund in the upcoming filing season, the check may be withheld to recover the funds erroneously issued resulting in a reduced or no refund check next year.
It is impossible to predict exactly what Congress might ultimately decide to do next year with the uncertainties in the world economies and as pressure on tax and spending changes grow. Tax filers should stay in touch with their CPA to better understand how they may be affected by any tax-law changes or other circumstance.