News: CJ Exclusives

Tax Preparer Says Mexicans Recruited in Fraud Scheme

Fake tax credits claiming phony dependent children used to inflate refunds

In February, a North Carolina tax preparer of Hispanic descent told Carolina Journal that several tax preparers in her community help their clients commit federal income tax fraud by claiming tax credits for children who either do not exist or do not live in the United States.

The preparer spoke to CJ under the condition that her name and location not be revealed. She said the preparers are of Hispanic descent and the clients are Mexicans working in North Carolina. The children claimed typically are listed as nieces or nephews.

Each phony child “qualifies” for a refund of up to $1,000 per year. The tax credits are refundable, meaning the person filing the return would receive money from the IRS even if he owed no taxes.

When the preparer learned of the fraud, she said she verified it by sending a friend to several of the tax-preparing services she suspected. The friend said she was asked to claim dependents that did not exist.

The preparer does not believe any of the major tax-preparation services such as H&R Block or Jackson-Hewitt participate in the fraud, and that it appears to be limited to small operations that often operate each year only during tax season and close their doors April 15.

She also said that she was not sure if the phony tax preparers were making additional money from the fraudulent claims, but she thinks they were attracting more clients by offering inflated refunds.

She said she has lost customers because she would not complete forms claiming the children as legitimate unless her clients produced school, medical, or other records indicating that each child both existed and lived in the United States.

“It harms me and my family. All these people I turn down tell their friends not to do business with me. I believe in competition but it must be fair,” she said.

She told CJ she thinks the state is catching this type of fraud. “The state of North Carolina is doing more auditing,” she said. “When they see nephew, nephew, nephew [on a tax return], it trips something,” she said.

This scheme was detailed in a 2011 report from the Treasury Inspector General for Tax Administration. The report found that claims for the Additional Child Tax Credit from filers using an Individual Taxpayer Identification Number, increased from $924 million in Tax Year 2005 to $4.2 billion in Tax Year 2010.

The IRS will furnish an ITIN to a foreign worker who is not eligible for a Social Security number. Illegal immigrants routinely are issued ITINs. The IRS also will furnish ITINs to children and other dependents they believe to be living in the United States. Fraudsters can create a phony child exemption by securing an ITIN using a fake birth certificate or a genuine birth certificate from a child who does not live in the Untied States.

Don Carrington is executive editor of Carolina Journal.