It’s usual to think of
taxpayers hiding income in order to avoid taxation but there’s another scheme
involving misrepresenting income: inflating or including income on a tax return
that was never earned, either as wages or as self-employment income, in order
to maximize credits, especially refundable credits.
Refundable tax credits
are those like the Earned Income Tax Credit and the Additional Child Tax which
require earned income in order to qualify.
With a refundable
credit, you can receive a refund even if you do not owe any tax.
This provides some
taxpayers (and unscrupulous preparers) with an incentive to lie about income in
order to claim the credit.
Taxpayers who engage in
this behavior not only have to pay back the erroneous refunds, including interest
and penalties but may face criminal prosecution.