Fee To Get Old W2 Forms From 2 Years Ago The Top Five Ways to Cheat the Government -and How They Will Catch You Doing It

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The Top Five Ways to Cheat the Government -and How They Will Catch You Doing It


There is no such thing as a free lunch. There is a vein of gold 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 the government for support whether it be through food stamps, distorted tax credit laws or welfare. The price they pay in dignity, respect and freedom is hardly noticed by many of them. And yet, even with those who really need or who really deserve the help, there are many more who are looking for ways to cheat the government for funds.

Each of them is convinced that they have found the foolproof way to trick 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. “Under the Table” Salary

3. Falsification of W-2 or 1099 information

4. Classified Nest

5. Multilevel Marketing Tax Evasion Methods


Earned Income Credit is a refundable tax credit intended to help working single parents. Normally, the way a tax credit works (non-refundable) is that if an individual paid $5000 in taxes for the year and qualifies for the $10,000 tax credit, they can only get the $5000 they paid in taxes. If the individual paid $0 in taxes, the tax credit could be as much as $50,000 or more and they would receive $0. With the refundable tax credit, the individual does not have to have paid taxes to get the earned income credit added to their refund.

It works on a sliding scale where the EIC climbs up to its maximum (usually around $15,000 in earned income) and when the income climbs above $15,000 the EIC slides down. Maximum EIC is usually around $5500. Ultimately at about $28,000, the EIC dropped to $0. As someone who spent several years preparing taxes in the lower income neighborhoods, let me tell you that there are those whose entire year is planned around receiving this huge check from taxes taken from those who pay them and given to those who don’t want to. EIC is only given for your first two children from birth to age 17.

The ‘married or unmarried’ couple with four children will go to a tax preparation center, separately if they are experienced in this. And even though they all 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 an EIC, they can receive checks totaling up to $10,000 at the end of a year tax season The Head of Home is supposed to be for those who get no other support from anywhere. The Household must take care of that Household, so if a boyfriend, girlfriend, spouse, parent, etc. lives there, they cannot claim that name.

These fraudsters will do this for years before they are caught, but once caught, they are not allowed to claim an EIC for ten years after a fraud investigation. They will then have to repay incorrectly paid EIC and pay penalties for a fraudulent return in addition to that of up to 75% of the amount the IRS was defrauded.

How They Get Caught

Every time an individual opens a bank account, buys a car, or rents or buys a home, a little note is made that identifies their Social Security number with that transaction. Obviously someone whose earned income does not reach more than $15,500 is not going to buy a $35,000 vehicle, or a $200,000 home. These cheaters don’t realize that they are putting a huge target on their back that screams, “Review Me!” to the trained IRS auditors. You can’t have it both ways and claim to make enough income to pay off your purchase on credit and then claim in another form that you didn’t make enough money to pay taxes.

There is a storehouse of this information, and the IRS does notice logical fallacies. Example; A man came into my office and told us proudly that he was the father of nine children with seven different women and that his total income for the year was less than $3000 and he wanted to claim half of his children before their mothers did, for that he may obtain the refund first. There is no way on this earth that a man on his own can pay for food, rent and gas on $3000 a year income. And he wanted to claim that he supported too? He went to jail a year and a half later, but I hear his kids are doing fine without him.

Under the Table Salary

Whether it’s because the worker is illegally living here in this country or because the employer doesn’t want to bother with payroll taxes, a growing number of small businesses pay in cash. And because their employer doesn’t report it, the individual employee sees an opportunity to cheat the government. (In some of these cases, these individuals are involved in illegal activity through which they make all their cash. 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 avoid paying worker’s compensation insurance. An injury in a workplace where everything is done “under the table” will usually receive substandard care for fear of reporting the injury to a hospital or qualified physician.

How They Get Caught

In the same way that those who cheat EIC, every legal transaction they make puts one more flag on a case that would not have one otherwise. If they earn money they don’t report, they have a hard time explaining how they make $900 a month in mortgage payments when they only claim to earn $500 and that they are the sole breadwinner for that household. As the Zen Master would say, ‘everything is connected, and yet not all things are the same.’

Falsification of W2 or 1099 Information

It’s relatively easy to buy a pack of blank W-2s or 1099s and “create” your own income. Usually the scammers use a legitimate EIN number from a legitimate business they worked for temporarily or a friend or relative worked for and they create a W-2 that gives them just enough income to get the EIC credit. By the time the ruse is discovered, the scammers have cashed their superfast refund checks and left town. Electronic filing prevents some fraud, but it facilitates others.

The legitimate business person is then left to explain why he or she did not pay employment tax on these individuals who falsified these forms. The IRS seems to move much slower when you are the one who has been wronged. It could mean paying penalties on payroll taxes that were allegedly never filed.

Many of those people who use this particular scam are illegal aliens and don’t have a legal social security number anyway, those who are legal citizens, and yet, scammers anyway, eventually move on and forget the crime they committed.

How They Are Caught

Once this particular scam is forgotten, one day they will have to use their social security number for a job, loan or college application. At that point, they are nailed even though it may be five or more years later. Offenses of this type earn prison time.

If it’s illegal who cashes this check, it makes it more challenging. Typically, an illegal does not have a checking account to use to cash this check, so they must go to a check-cashing store. It is there that they must produce ID, addresses of references and some employment information. What many people don’t realize is that all the checks you receive and cash have 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 too much to find them.

The Cluster Nest

Using the same principle in the first EIC scam of a couple living together in the same place and each claiming Head of Household and EIC for each of their four children, the stacked nest describes what happens when this is taken to extremes. Where there are four or more families within the same residence each requiring an HOH and EIC for their group of children. This is common in heavily Hispanic areas where the families can actually get along with each other closely. Often the children are traded back and forth between the relatives to get the maximum benefit from the tax refund.

How They Are Caught

When doing background checks there are areas and addresses that are automatic “red flags” of fraud. They are called “high risk” areas, high turnover, transient population, hotels, apartment complexes, etc. When an address has once been used as a “clustered nest” where more than one family claims residence at the same time, that location is marked. Then the addresses are matched along with dates and times that people claim residence and sole possession of the Head of Household title. As long as the whole family moves every three years, they could continue to do so for many years. But once an area is “marked,” so are any social security numbers using that address.

Multi-Level Marketing Tax Avoidance Fraud

Recently there is a group promoting an old idea that they are promoting as “new”. This group stems from an MLM that sells legitimate insurance plans and a large part of their business is in recruiting other representatives. As the steam has gone out of its engine in the past seven years, it has become more and more difficult to recruit intelligent people into these pyramid schemes. So their approach changed to de-emphasize the MLM aspect and sell them on the benefits of being able to deduct expenses they already have by opening their own business.

Most W-2 earners as they call them, don’t have time to work 40-60 hours a week and put in another 10-20 on MLM. So the approach is this, let me show you how to deduct those expenses you have now and save yourself money on your taxes. When you own your own business, you can deduct losses, household expenses and a percentage of your utility bills depending on the size of the home office.

So now they have otherwise intelligent people joining this pyramid MLM group, not to get ahead within the MLM, but to deduct all the losses they will have by pushing these prepaid legal insurance plans on their friends and family. There are several things wrong with this; First, your business must be run for the purpose of making a profit, NOT to eliminate daily personal expenses. Second, there are rules and regulations for home office and vacation deductions that these “fake tax experts” don’t bother to explain to their new recruit, which easily lead to the deductions being disallowed and the penalties and fees begin. And thirdly, these so-called tax experts are the furthest from being experts that one could be. A weekend training class does not make a tax expert.

How They Get Caught

The main inspiration behind this devious scheme skillfully evades investigations and prosecutions. The prepaid legal insurance company, however, seems to attract investigations constantly. Corporate fraud experts have cited several red flags that show a company is ripe for fraud to be committed at the corporate level and this particular company is at that point. Because it is difficult to hold the corporation accountable for the outlandish claims of its ‘sales force, there will continue to be people sucked into this “incorporate yourself” scheme that has been around for over 30 years. The good news is that the eyes of the corporate fraud experts are on them and there will be a slip up soon. Wow, I hope they know a good lawyer.

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