The National Association of Tax Professionals’ Research Department

THE TAX ATTIC with Jerry Coon

March 24, 2011 // 0 Comments

Obscure Code Sections It seems that we have a slight problem in our tax system. This problem shouldn’t be a surprise to most of us. Prisoners are filing fraudulent tax returns, claiming various credits, and getting the refunds. On top of that, they are then arguing with the Internal Revenue Service about the validity of the claims once they are caught. The National Association of Tax Professionals’ Research Department passed on to us a Tax Court case that recently was decided in favor of the IRS. A Michigan prisoner, interred in one of our maximum security prisons since 1997, filed a 2007 tax return reporting wages earned of $15,640. This amount of wages resulted in him receiving Earned Income Tax Credit of $4,667. He was audited and the IRS disallowed the credit. There is a special Code Section, 32(c)(2)(B), that says “no amount received for services provided by an individual while the individual is an inmate at a penal institution shall be taken into account” when calculating credits such as the Earned Income Tax Credit (EITC). I’m not amazed that the prisoner in question didn’t know about this Code Section. Heck, there are plenty of unique little Code Sections that most of us don’t know about. I am amazed, though, that the prisoner chose to appeal the original auditor’s ruling. I’m quite sure the auditor pointed out and backed it up in writing that this Code Section existed. There really was nothing to appeal. Of course, the prisoner really had nothing to lose and it probably gave him something to do. The Tax Court was not amused. They ruled that 32(c)(2)(B) does apply, as it should, and the prisoner not only wasn’t allowed to keep the EITC amount of $4,667 but he also owed an additional accuracy-related penalty assessed under Section 6662 in the amount of $933. At least common sense did apply in this situation. The other credit that prisoners have claimed en masse has been the first-time homebuyer credit. That credit was either $8,000 for a first-time homebuyer or $6,500 for a long-time resident homebuyer. Evidently, $8,000 or $6,500 was enough money for prisoners to cheat to get. The IRS indicates they believe that overall there was a few billion dollars of fraudulent […]