Social Security's Office of Inspector General (OIG) has issued a report on the effects of correcting its earnings records to remove improperly recorded Self Employment Income (SEI). The amount removed from earnings records is not insignificant -- around $200 million a year. Most of it is removed for reasons other than fraud -- routine mistakes in reporting income such as an incorrect Social Security number.
While some SEI is removed due to EITC fraud, there's no doubt that there's plenty more fraud that's never identified. A significant part of the EITC fraud, perhaps most of it, isn't the fault of the person in whose Social Security number the SEI was recorded. The way this works is that a crook finds out that a person isn't working due to age or illness and wouldn't be filing a tax return. It may be a relative or friend. They obtain the Social Security number and file a tax return in that person's name listing fictitious SEI. The crook asks that the tax refund go to a bank account he or she controls. The elderly or sick person whose Social Security number was used never becomes aware of the fraud. The federal government never finds out about the EITC fraud in most cases but even if they do the amount of money is so small so they don't expend much effort tracking down the crook. There are also persistent reports that some unscrupulous tax preparers are involved in EITC fraud in various ways.
Correcting earnings records because of misreported SEI, whether accidental or fraudulent, is not an insignificant burden for Social Security. It's also causing incorrect benefit payments because of inflated income on earnings records although the report doesn't try to estimate how much money this would be.
While some SEI is removed due to EITC fraud, there's no doubt that there's plenty more fraud that's never identified. A significant part of the EITC fraud, perhaps most of it, isn't the fault of the person in whose Social Security number the SEI was recorded. The way this works is that a crook finds out that a person isn't working due to age or illness and wouldn't be filing a tax return. It may be a relative or friend. They obtain the Social Security number and file a tax return in that person's name listing fictitious SEI. The crook asks that the tax refund go to a bank account he or she controls. The elderly or sick person whose Social Security number was used never becomes aware of the fraud. The federal government never finds out about the EITC fraud in most cases but even if they do the amount of money is so small so they don't expend much effort tracking down the crook. There are also persistent reports that some unscrupulous tax preparers are involved in EITC fraud in various ways.
Correcting earnings records because of misreported SEI, whether accidental or fraudulent, is not an insignificant burden for Social Security. It's also causing incorrect benefit payments because of inflated income on earnings records although the report doesn't try to estimate how much money this would be.
9 comments:
I have seen this problem first hand in my practice. Several of my clients filed tax returns and reported self-employment income while filing Applications for SSI. The first time it happened the client had a story that she was running garage sales. The second one said she did ironing for people in her apartment complex. I sent the clients to an accountant to amend the tax returns. Now when I see self employment in the middle of a case I have a good idea of what it is. The real question for an Attorney representing Social Security claimants is how to handle this. I tell all of my clients to tell the truth even if they think the truth hurts their case. In this case the truth is harmful. I think the best way to handle it is to amend the tax returns and tell the truth at the hearing.
In my community, neighborhood Tax preparers hawk the EITC to every neighbor, relative, or stranger.
With all the client's I have "doing hair", you'd think that Atlanta must be the most well-coiffed city in the country.
I explain the other side of the coin as I draft the w/d of the RFH.
At least two or three times a year I see reporting of self-employment in strangely even amounts where it is extremely questionable as to the bona fides of the situation. On one occasion, it was a scenario like Charles poses, someone using the number without the knowledge of the client. The rest of the time it was a client filing a fraudulent return to obtain the EIC.
For me, unless they are willing to amend returns and show me they actually have filed those amended returns, I will tell them that their choice is to either withdraw their claim or find a new lawyer. I will not allow them to perjure themselves before an ALJ and I won't do anything to further their case unless they are completely honest and start the correction process. Sometimes they do file amended returns, but mostly they decide to withdraw their case. If they won't do that either, I withdraw as attorney without disclosing to the ALJ why.
I am aware of the SS provisions dealing with assisting in a fraud but I do believe that attorney client privilege prevents me from reporting them to the IRS or SS without their consent, however much I might want to do so. But an aware ALJ who looks at the earnings record, should be able to figure out the problem. They are not bound by attorney client privilege.
I would be interested to know if anyone handles the problem differently or if their take on privilege is the same as mine.
I see this very frequently. I had a woman who cut neighborhood kid's hair for $5 a head and she has over $10K in net SEI. "You cut over 2000 haircuts last year? It's gotten to the point where I can look at an earnings record and tell when someone had another child or how many they have as there are sweet spots for 1, 2 and 3 kids. We have removed earnings and terminated folks back to their original date of entitlement. Most of the time if you disregard the SEI, the person is not insured and looks to be an SSI only case. I also get the story that they haven't worked in 5-6 years.
What about these self employment earnings of $12000 a year for the past 4 years?
Oh yeah, I forgot I was a barber or did something else like that.
My thought is how could you forget you worked 3-4 years in a business?? I have seen earnings records of legit barbers that have a storefront and I know are actually cutting hair and their earnings can be less than the EITC fraudsters some years.
I ask for business license, proof of income, expenses, etc and usually hear nothing back. Actually not usually. I have never had one that looked suspect have anything to show they were self employed. Remove the earnings and report to IRS fraud folks.
My experience is that almost always the person filing is the person who committed the EITC fraud.
In our area, the folks on the street have a name for it: "Doin some tax". Based upon my observations, about 50% of the county residents claim to be babysitting, doing hair, or doing nails.
re: 10:56pm - Your suspicions aren't evidence, and don't worry about reporting it to the IRS. The IRS knows about the widespread abuse of EITC but simply has no way to combat it as they don't have even a fraction of the manpower that would be needed. As a result, simply they ignore the individuals for the most part and try to go after the tax preparers who are perpetrating it. In our area, it isn't working so well. And, when you refer a person to the IRS, they are told they might hear back from IRS in 6 months or so.
Simple solution: make SEI exempt from EITC, unless you itemize. Congress could fix this...
10:56 and others. In my state (NC), the State Bar has ethics rules which state that when an attorney withdraws from a case, the attorney is still bound by an obligation to the client's confidentiality, and may NOT disclose the reason. Most often, an astute judge will realize that there is some irregularity and will snoop into the matter more thoroughly, but the lawyer has not injured the client. Only if specifically ordered by a judge to disclose the reason, can the attorney disclose. And, before disclosing any such fact, I would call the State Bar to inquire from their experts as to the correctness of the action.
In my city I've seen way more of the identity theft kind of fraud. The state return is often for a state the beneficiary has never lived in or visited, and the federal refund gets mailed somewhere far away, so I really don't think it's the claimant. People go to homeless shelters and buy SSNs for like $50. People shouldn't be selling their SSNs obviously, but they get far less for it than they lose when their SSI is terminated and an overpayment is assessed. And it's not a quick process to get SSA to fix the problem and turn the benefits back on....darn near impossible for someone who's basically illiterate, homeless, no income, and usually mentally ill. I'm sure there are folks who claim EITC for their own benefit but I haven't seen any yet.
@349 PM--Do you take SSI or SSA disability claims? We see EITC fraud very regularly.
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