The Internal Revenue Service offers the following seven tips to help taxpayers avoid an emerging scheme tempting senior citizens and other taxpayers to file tax returns claiming fraudulent refunds.
These schemes promise refunds to people who have little or no income and normally don’t have a tax filing requirement.
Promoters claim they can obtain for their victims, often senior citizens, a tax refund or nonexistent stimulus payment based on the American Opportunity Tax Credit, even if the victim was not enrolled in or paying for college.
Con artists falsely claim that refunds are available even if the victim went to school decades ago. In many cases, scammers are targeting seniors, people with very low incomes and members of church congregations with bogus promises of free money.
A variation of this scheme also falsely claims the college credit is available to compensate people for paying taxes on groceries.
These schemes can be quite costly for victims. Promoters may charge exorbitant upfront fees to file these claims and are often long gone when victims discover they’ve been scammed.
Taxpayers should be careful of these scams because, regardless of who prepared their tax return, the taxpayer is legally responsible for the accuracy of their tax return and must repay any refunds received in error, plus any penalties and interest. They may even face criminal prosecution.
To avoid becoming ensnared in these schemes, the IRS says taxpayers should beware of any of the following:
- Fictitious claims for refunds or rebates based on false statements of entitlement to tax credits.
- Unfamiliar for-profit tax services selling refund and credit schemes to the membership of local churches.
- Internet solicitations that direct individuals to toll-free numbers and then solicit social security numbers.
- Homemade flyers and brochures implying credits or refunds are available without proof of eligibility.
- Offers of free money with no documentation required.
- Promises of refunds for “Low Income – No Documents Tax Returns.”
- Claims for the expired Economic Recovery Credit Program or for economic stimulus payments.
- Unsolicited offers to prepare a return and split the refund.
- Unfamiliar return preparation firms soliciting business from cities outside of the normal business or commuting area.
In recent weeks, the IRS has identified and stopped an upsurge of these bogus refund claims coming in from across the United States. The IRS is actively investigating the sources of this scheme, and its promoters can be subject to criminal prosecution.
A tax credit is a dollar-for-dollar reduction of taxes owed. Some tax credits are refundable meaning if you are eligible and claim one, you can get the rest of it in the form of a tax refund even after your tax liability has been reduced to zero.
Here are four refundable tax credits you should consider to increase your refund on your 2011 federal income tax return:
1. The Earned Income Tax Credit is for people earning less than $49,078 from wages, self-employment or farming. Millions of workers who saw their earnings drop in 2011 may qualify for the first time. Income, age and the number of qualifying children determine the amount of the credit, which can be up to $5,751. Workers without children also may qualify. For more information, see IRS Publication 596, Earned Income Credit.
2. The Child and Dependent Care Credit is for expenses paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent, while you work or look for work. For more information, see IRS Publication 503, Child and Dependent Care Expenses.
3. The Child Tax Credit is for people who have a qualifying child. The maximum credit is $1,000 for each qualifying child. You can claim this credit in addition to the Child and Dependent Care Credit. For more information on the Child Tax Credit, see IRS Publication 972, Child Tax Credit.
4. The Retirement Savings Contributions Credit, also known as the Saver’s Credit, is designed to help low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or workplace retirement plan, such as a 401(k) plan. The Saver’s Credit is available in addition to any other tax savings that apply. For more information, see IRS Publication 590, Individual Retirement Arrangements (IRAs).
Two federal tax credits may help you offset the costs of higher education for yourself or your dependents. These are the American Opportunity Credit and the Lifetime Learning Credit.
To qualify for either credit, you must pay postsecondary tuition and fees for yourself, your spouse or your dependent. The credit may be claimed by either the parent or the student, but not both. If the student was claimed as a dependent, the student cannot file for the credit.
For each student, you may claim only one of the credits in a single tax year. You cannot claim the American Opportunity Credit to pay for part of your daughter’s tuition charges and then claim the Lifetime Learning Credit for $2,000 more of her school costs.
However, if you pay college expenses for two or more students in the same year, you can choose to take credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your spouse’s graduate school tuition.
Here are some key facts the IRS wants you to know about these valuable education credits:
1. The American Opportunity Credit
- The credit can be up to $2,500 per eligible student.
- It is available for the first four years of postsecondary education.
- Forty percent of the credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes.
- The student must be pursuing an undergraduate degree or other recognized educational credential.
- The student must be enrolled at least half time for at least one academic period.
- Qualified expenses include tuition and fees, coursed related books supplies and equipment.
- The full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $80,000 or $160,000 for married couples filing a joint return.
2. Lifetime Learning Credit
- The credit can be up to $2,000 per eligible student.
- It is available for all years of postsecondary education and for courses to acquire or improve job skills.
- The maximum credited is limited to the amount of tax you must pay on your return.
- The student does not need to be pursuing a degree or other recognized education credential.
- Qualified expenses include tuition and fees, course related books, supplies and equipment.
- The full credit is generally available to eligible taxpayers whose modified adjusted gross income is less than $60,000 or $120,000 for married couples filing a joint return.
If you don’t qualify for these education credits, you may qualify for the tuition and fees deduction, which can reduce the amount of your income subject to tax by up to $4,000. However, you cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.
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