Person A makes $500,000 a year. Person B makes $20,000 a year. Who is more likely to be selected for a tax audit? The answer might surprise you. Current policies mean low-income workers who claim the Earned Income Tax Credit, or EITC, are more likely to be selected for an audit than high-income earners.
For many, working full-time isn’t enough to cover the essentials, such as housing, food, and clothing. If you work but still struggle to pay the bills, the EITC can provide significant relief. With it, you could get over $6,000 as a tax credit.
[1] The EITC is a refundable tax credit, meaning it can reduce your tax bill to zero and the remaining amount of the credit is refunded to you in cash. It can be the single biggest windfall families see each year.
But claiming the EITC comes with risk. A 2015 law made it more likely that EITC recipients would be audited, and refunds are held until Feb. 15, even for early filers. Refund checks are held for the duration of the audit. For those living month to month, losing their tax refund can be disastrous.
Critics say the EITC is often claimed in error and money is mistakenly sent to the wrong people. To stop these over payments, the audit rate for EITC claimants is higher than for other groups, even while wealthier people have higher rates of tax evasion or tax fraud.
In 2017, EITC recipients were audited twice as often as those with incomes between $200,000 and $500,000. Only millionaires are audited at a higher rate.
The EITC is one of the few things Democrats and Republicans agree on. Started in 1975, the program has grown with bipartisan support over the years. It’s credited with lifting more children out of poverty than any other government program.
To be eligible for the credit, you must be a U.S. resident and have earned income during the previous tax year. You must file your tax return as a single individual or as married filing jointly. There are income restrictions: a married couple with three or more children must earn $54,884 or less and they must have either a qualifying child or be between the ages of 25 and 65.
Students can qualify for the EITC as long as no one can claim them as a dependent on their taxes and they earned income while in school.
The credit is retroactive; if people qualified for the credit for the past three years but didn’t claim it, they can do so on this year’s taxes, potentially putting over $18,000 in their bank account.
There’s no application process for the EITC. Instead, tax filers simply claim the credit on their return. Tax preparers are likely to claim the credit for filers based on income and family size. If people use tax preparation software, such as TurboTax, it will ask questions to determine whether or not the filer qualifies and make the claim on the return.
Despite how easy it is to claim, 1 in 5 people who are eligible don’t do so, squandering thousands of dollars. At the same time, billions are issued to people who don’t qualify.
This is because EITC policies are so complex, with 40 pages of rules. No wonder people are confused.
People who think they qualify shouldn’t let fear of being audited stop them from claiming the credit. If they follow the guidelines as best they can, and collect supporting documents when possible, the audit shouldn’t be painful. The IRS may ask for documents that confirm income and the number of dependent children, so pay stubs, bank account statements, and copies of children’s birth certificates should be kept handy.
It’s a trade off. Claiming the credit can bring a cash windfall, but also bring a higher chance of getting audited. But those who qualify for the credit can certainly use the money, and the benefits outweigh the risks.
