Penalties for tax mistakes more costly due to the PATH Act

Summary

• This continues the H&R Block newsroom’s series on the Protecting Americans from Tax Hikes (PATH) Act, which made dozens of changes to the tax code. The PATH Act series covers its permanent extensions of many tax benefits, the renewal requirements for Individual Taxpayer Identification Numbers (ITINs), eligibility changes for certain tax credits, its expansion of other tax benefits, its increasing cost of making mistakes, its impact on small business and its delay of millions of refunds until February 15.
• The PATH Act tax impact resource guide provides information to help media and consumers.

Not all tax credits are created equal. Refundable tax credits are particularly valuable because an eligible person can still get the credit even if they do not owe or have to pay income taxes. But this also means refundable credits are target rich for tax identity thieves. In fact, the earned income tax credit (EITC) has one of the highest improper payment rates of the 16 “high-error” programs identified by the government. So when the Protecting Americans from Tax Hikes (PATH) Act made dozens of changes to the tax code, some of those changes included implementing stiffer penalties for improper claims of refundable credits.

Improperly claiming the EITC resulted in some serious consequences even prior to the PATH Act. Recklessly or intentionally disregarding the rules can get a taxpayer barred from claiming the credit for two years. If they are determined to have fraudulently claimed the EITC, that ban stretches to 10 years.

The PATH Act extended those bans to apply to the American opportunity credit (AOC) and the child tax credit (CTC), two other valuable and popular credits that may be partly or fully refundable. The PATH Act also gave the IRS “math error authority” for these credits.

“Having ‘math error authority’ means the IRS can take action on certain tax return errors without a formal audit of an affected taxpayer,” said Kathy Pickering, vice president and executive director of The Tax Institute at H&R Block. “Taxpayers need to be careful to meet the requirements and substantiate their eligibility. This is especially true of the EITC, which is a complex credit that taxpayers may not be eligible for every year.”

Once their ban expires, affected taxpayers will have to provide additional information to the IRS before being allowed to claim the credit again.

The PATH Act also gave the IRS the authority to assess a 20 percent penalty for incorrect claims of refundable credits like the EITC, AOC or CTC.

“The 20 percent accuracy-related penalty previously applied to cases of substantial underpayment or negligence, which are not likely to impact taxpayers who do their due diligence. But now anyone who incorrectly claims a refundable credit would not just be denied the credit, but could pay a 20 percent penalty on the amount they tried to claim,” said Pickering.

Pickering says these expanded penalties and enforcement provisions should not deter taxpayers who have a right to these credits from taking them.

“My advice to taxpayers is to take all the tax benefits they are eligible for. If in doubt, don’t just forgo the tax credit. Do your homework on the IRS website or talk to a tax professional, who can help you determine if you are eligible and what information you need to substantiate your tax return. Just like you don’t want to face these penalties, you also don’t want to leave money on the table,” said Pickering.