We have been told Governor Asa Hutchinson will propose a pro fraud and waste tax law in his special session. If it passes, it will show how far our Arkansas Republican legislators have fallen.

What is this pro fraud and waste provision? It is a tax law called “Earned Income Tax Credit (EITC).” The title sounds good but it has nothing to do with providing a credit against taxes paid. Instead, it is a welfare program disguised as a tax law. It is redistribution of wealth. And worse, it encourages tax fraud.

EITC lets a low-income person file a tax return and, even if the person does not owe any income tax, get a lump sum payment from the state – a payment funded by you, the taxpayer.

WHY EITC IS SO BAD

Even if you support the redistribution wealth to low-income individuals, EITC is still not the way to do it because of high levels of fraud and waste. Plus doing it though the income tax laws instead of through the welfare laws is not the way to go.

There is an EITC provision in the federal income tax laws and it is the most abused provision in the federal Internal Revenue Code. The IRS says EITC is the provision most subject to fraud and mistake.

The IRS estimates that between 21 percent to 26 percent of federal EITC claims are paid in error. 

Twenty one to twenty six percent  is a HUGE percentage of waste. The IRS says this is due to both: (1) unintentional errors because the law is complex, and (2) intentional FRAUD.[i]

With a fourth of all federal EITC payments being due to fraud or mistake, is this the kind of program you want to bring to Arkansas?

TYPES OF FRAUD

According to the IRS, some people scam the federal income system by reporting more income than they made so they can maximize how much they will make off of taxpayers through EITC and other refundable credits.[ii]

EXAMPLE: A fraudster who doesn’t work at all can scam the system by claiming he was self-employed and made just enough income from odd jobs that he falls below the level of having to pay any income tax AND (SURPRISE!) qualifies to get free money from you through the EITC.

The IRS says another way people commit fraud is by under reporting income to pay less tax. EITC makes this fraud even worse because not only does the fraudster not pay what he owes, the underreporting of income may also make the person eligible for FREE MONEY under EITC.

EXAMPLE: A self-employed person may commit fraud by hiding income from the IRS by not reporting or under reporting cash received or checks cashed at the payer’s bank. On top of that fraud, the fraudster can then claim the EITC payment. Not only does such a fraudster not pay taxes on his income, but the fraudster also gets free money from you the taxpayer as an EITC payment.

Some state Senators and Representatives are considering voting for EITC as a trade off to the Governor for other concessions. A state Senator or Representative who votes for any bill with EITC in it need to be traded off by the voters.

Tell your state Senator and state Representative to say “No” to EITC and to pass REAL and SIGNIFICANT tax cuts.

[i] https://www.eitc.irs.gov/tax-preparer-toolkit/frequently-asked-questions/fraud/fraud

[ii] https://www.journalofaccountancy.com/news/2019/mar/2019-irs-dirty-dozen-tax-scams-201920830.html and https://www.journalofaccountancy.com/news/2019/mar/2019-irs-dirty-dozen-tax-scams-201920830.html