I stopped in to see John this morning and his entry started me thinking of a really old burr in my butt concerning taxes. So I decided to share Mary and Fred's tax story with you so that you can see why I have this aggravating butt pain.
Please take your blood pressure meds prior to reading.
Fred and Mary are married, both work, and have 4 children under the age of 17.
In 2002 Mary worked part time and earned $13,550 and had no federal income taxes withheld from her wages. Fred earned $22,900 working on on a farm driving a tractor and had $3030.(his choice) federal taxes withheld from his earnings.
A correct 2002 tax return for this couple (married-filing-joint) would have resulted in a tax liability of $1063. but it would be offset by the Child Tax Credit of $4000. (1000. per child) giving them a refund of $2937. of the taxes withheld from Fred's wages.
BUT, Mary and Fred have worked hard, they have 4 children, and they feel they deserve more for their efforts so Mary and Fred decide to follow the course of many of their fellow U.S. citizens and commit a little fraud because it's easily overlooked with the way the tax system works these days.
They each take their W-2s to different tax preparation businesses where they give false information to the tax preparer who has to accept their answers to the interview questions as truth unless they know beyond a doubt that they're not. (The preparers are allowed to submit information to the IRS on returns that they feel are suspect.)
Mary, with her $13,550. in wages, files as head-of-household and takes 2 of the children as dependents. Because her wages are less than the standard deduction and the personal exemptions allowed, she has no tax liability. She had no federal tax withheld BUT she does qualify for Earned Income Tax Credit because according to her interview she maintains a household for 2 dependents who are under the age of 23 and are in school. She receives a refund of $4140. due to the EITC.
Meanwhile, Fred goes to a different tax office and also files as head-of-household, taking the other 2 children as dependents, with his W-2 wages of $22,900. After his standard deduction and personal exemptions are deducted he has a tax liability of $703. This is off-set by the Child Tax Credit so his tax liabilty is reduced to 0. Fred also qualifies for EITC because his gross wages are below $34,178. so he receives $2170. EITC for his 2 dependents. Fred's refund totals $5180 once you add the tax he had withheld also.
The couple's total refund now has increased to $9320.00
This goes on every year folks and not just occasionally. You can't imagine the list of suspected fraudulent returns that I've submitted to the IRS over the years and as far as I know, none of those returns were ever audited. In 2002 that list had over 300 suspect returns on it.
You add it up. That was $6,383. of your money that this one couple gained.