How is it that people who don't really work claim to be self employed on their taxes and get a refund?

Question

How are people doing this? What kind of money ar they getting, like a couple hundred or thousands? Wont they go to jail? How are they doing it?

Answer 1

For 2006, a Schedule C with $11,300 in net earnings, and two qualifying children, will receive both SS credit toward retirement benefits, as well as a refund of approximately $3,000 due to the Earned Income Credit.

That would be the maximum refund a self-employed person could get without paying any taxes in advance, based only on the Earned Income Credit.

The IRS requires Schedule C filers who are claiming the EIC to deduct all of their expenses. A Schedule C return with no expenses which claimed the EIC would be suspect. Also, a Schedule C with expenses and EIC could be audited with proof of not only the income but also the expenses.

A person putting in a false claim for refund can be disqualified from the EIC for up to 10 years. Preparers who have done this have been sent to jail.

Answer 2

A refund is a return of excess taxes paid. If they are truly not working, they are not paying taxes and are therefore not receiving a refund. A refund means you gave the government too much from your paycheck during the year----it is not just free money handed out.

Self employed individuals actually get hit with a higher tax burden since they must pay all of the fica and medicare taxes that employers split with their employees. They are required to file and pay quarterly estimated tax payments during the year and will be hit with penalties if these payments are not made prior to the end of the tax year.

There is a tax credit called the earned income credit for low income individuals. This is a refundable credit so it is possible to get back more than you paid in. You still have to show some income to qualify.

If you believe someone is truly doing something illegal on their taxes, the IRS has a tipline but make sure you know the facts of the situation before you bring an audit down on someone.

Answer 3

They're not. You have to pay into the system to get a refund.

There's only one way to get a refund in your taxes without paying in, and that is to be employed and earn a very small amount (like $10k during the year). You can get back slightly more than you pay in through the "earned income credit" and through the "additional child tax credit".

Many tax preparers call this the "IRS Welfare System".

Single people without kids have to have very low income and qualify only for EIC. People who have kids can qualify for both even if they earn a little more, depending on how many kids they have.

Here's a big well-kept secret:

People who have kids and are ACTIVE DUTY MILITARY can make a substantial amount and still qualify. The way they do it is by entering a hazard zone or a combat zone and earning their salaries tax free. (When reserves are called up for active duty, they qualify, as well.)

All you have to do is enter a hazard zone for a single day, and all of your salary is tax free for that month. If you are paid as much as $100k at higher ranks, and you spend most of the year in a "zone", your actual taxable income could be low enough to qualify for the credits.

When my ship went on deployment, the commanding officer would always try to make sure that we didn't cross that line in the water departing from our hazard zone (the Persian Gulf) until the first day of the month so that we could claim an extra month tax free. We tried to do the same when entering, but it didn't always work out.

Last time I checked, there were 18 named hazard zones, Iraq counted as one.

Answer 4

It's possible to do this if they have kids, and claim an income amount where they're eligible for and earned income credit that's larger than the taxes they would owe on that amount of income.

The taxes, including self employment tax, would eat up most of the EIC, so they'd likely end up with hundreds, not thousands, of dollars. But it's fraud, and if and when they get caught they would wind up in major trouble. Not wise - but people do a lot of things that aren't smart.

The IRS has started recently looking much more closely at EIC claims.

Answer 5

If you had no reportable income, were on welfare for example, you could falsely file a Form 1040 Schedule C reporting enough phony profit to generate a maximum refund of earned income credit and additional child credit after payment of self-employment tax. If you get caught, you can be barred from getting earned income credit for 10 years.

Answer 6

don't believe everthing that a person tell you. My mother use to tell us believe nothing that you hear, and only half of what you think that you saw.

If they are getting back some type of refund it is not for the taxes that they paid into the government. You should ask them what's their favorite type of dessert that will handle well in the mail?? When they get caught it will not pay them to lie year after year.