Using Craigslist to Fish For Bogus Dependents

20 Flares Filament.io 20 Flares ×

In today’s post I will highlight a recent post from my and Keith’s longtime colleague at Villanova, Jim Maule, on his eclectic blog Mauled Again. Jim’s post from earlier this week is called Buying and Selling Dependency Exemptions For Tax Purposes. In it he discusses a recent indictment detailing how a Missouri man advertised on Craigslist to buy phony dependents. From the DOJ Press Release (which as I do cautions that the information in the release reflects allegations), here is what the man posted on Craigslist in January of 2015:

 “WANTED: KIDS TO CLAIM ON INCOME TAXES – $750 (SPRINGFIELD, MO) IF YOU HAVE SOME KIDS YOU ARENT CLAIMING, I WILL PAY YOU A $750 EACH TO CLAIM THEM ON MY INCOME TAX. IF INTERESTED, REPLY TO THIS AD.”

The Missouri man got what he asked for and e-filed his 2014 return using those three kids, with the added chutzpah of filing by snail mail the 2012 and 2013 years to allegedly goose his refund. The Craigslist poster now is facing federal charges of filing false tax returns.

read more...

In addition to this just being newsworthy because of the way that the person publicly advertised his willingness to commit a felony (generating an honorable mention PT Darwin Award nomination), the actions highlight some of the challenges associated with using the tax system as a means to generate benefits based on family status. Jim uses the story to highlight his earlier proposal in a 1995 Tax Notes article, Tax and Marriage: Unhitching the Horse and Carriage, where he proposed to allow a system based on transferable exemptions so individuals say with little earned income could in fact sell the exemptions to those who could benefit. I copy from Jim’s post and his original article:

This unused exemption amount sale aspect of the proposal is not as mercenary as it initially appears. If unused exemption amounts could not be sold, then tax revenues, or budget deficits, would need to be increased to provide funds for public welfare programs benefitting the impoverished. Permitting impoverished individuals to sell unused exemption amounts transfers to those persons directly the dollars that would otherwise be collected by the federal government and transported through a bureaucratic maze that would reduce the amount reaching those in need by some substantial percentage. In a sense, it would create a ‘private market negative income tax.’

To the extent a negative income tax is unattractive because it involves cash grants from the government, the shifting of its incidence to the private sector eliminates direct governmental involvement and casts the exemption sale transactions in a private enterprise light. Though the negative income tax, even in the form of unused exemption amount sales, is considered by some to be a work disincentive, the amount for which the unused exemption amount could be sold would be less than the amount needed for anything more than bare subsistence and would not deter the ambitious or the proud from seeking employment.

Precedent for the sale of governmental benefits can be found in the transfer system permitting businesses to sell or transfer sulfur dioxide pollution allowances. In terms of the policy of permitting transfers, the unused exemption amount is essentially the same as the pollution allowance, because a person without the need for it can sell it to someone who does have such a need. [footnotes omitted]

The issues Jim raises suggest a possible less radical solution, which would be to allow custodial parents to share the benefit of an EITC with a noncustodial parent, along the lines suggested by Professor Mary Pareja at University of New Mexico Law in her article EITC Portability: Respecting the Autonomy of American Families. To be sure, from the release it is not clear if the Missouri man used the kids just for dependency exemptions or also the EITC, which would be harder to get through given its relationship requirement. Nonetheless, the temptation to improperly share kids with those who could benefit is enhanced when the tax system may not reflect the fluid living arrangements that many working poor face.

One of the other interesting parts of the Craigslist story is that there is a prosecution in the first place. Many years ago I researched states’ approaches to welfare fraud, and I was mildly surprised at how many states vigorously prosecuted food stamp and other benefits’ crimes as compared to the paucity of federal prosecutions for lower-income taxpayer abuse. Apart from federal prosecutions directed at preparers, there have been few prosecutions of individuals themselves who have [ab]used the tax system to generate undeserving refunds.

As Congress seems intent on using the tax system to deliver direct benefits to families, and also possibly expanding the EITC to subsidize childless workers, I believe it is important to reflect the administrative realties associated with using the tax system to deliver benefits. Interestingly, a possible expansion of childless EITC will greatly reduce the temptation to share kids, as well as the related sense of unfairness that many low-wage workers feels is connected to the current system which provides an all or nothing approach to some tax benefits based on arbitrary lines of physical attachment.

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. Chris Kenefick says:

    Would the Missouri man have basis in his purchased dependents?

  2. Jason T. says:

    There must be something in the water at Villanova. Prof. Maule’s article on tax trafficking in (mainly) children is absurd.

    Prof. Maule cites a “precedent” for trading tax exemptions in the sale of pollution allowances (or, in the more recent language, carbon credits). Nonsense.

    The international agreement that created the carbon credit regime sets a total so-called greenhouse gas emission allowance target. It then apportions that allowance target among the various entities that produce emissions. Those entities that emit less than their proportion have a credit balance that they may then sell to others who also produce emissions.

    In contrast, the laws that create the dependency exemption regime do not set a total dollar amount limit for exemption claims. Those laws therefore do not apportion a total dollar limit among those who may claim exemptions. As a result, no one has an “excess” dependent exemption amount that he or she could sell at all—let alone sell to someone who has NO dependent exemptions. How, then, is the carbon credit regime anything like the Maule tax exemptions trading “plan?”

    Prof. Maule supports his “plan” with a bizarre forecast. He says that if the “impoverished” cannot sell their unused exemption amounts then tax revenues (or budget deficits) would need to be increased to provide funds for public welfare programs. How so? The public has no obligation to support the purported “impoverished” at all, let alone at a certain level.

    More to the point, wouldn’t the exemption sales create reduced tax revenues (or budget deficits)? I presume one could use his purchased tax exemptions for both federal and state income tax purposes. So after the purchases both the federal government and all but a few state governments would lose tax revenues in proportion to the sold tax exemptions’ value. That is smart government?

    Besides, who would police the details of Prof. Maule’s “plan?” The IRS, the FTC, or perhaps the SEC? We have enough problems now with unscrupulous tax preparers and fraudulent exemption claims. If Prof. Maule has his way, we would have a chaotic and fraud-riddled tax exemption “open market.” No thank you.

    Can someone please check the Villanova University water supply?

    • Bob Kamman says:

      Water supply jokes are not in favor these days, except perhaps at the Rick Snyder governor mansion in Michigan. But perhaps there is something in the Villanova water that causes tongues to stick firmly in cheeks. Elsewhere, some other substance might cause damage to the part of the brain where the sense of humor is located.

  3. Deborah Percell says:

    I don’t think it is the water but I would agree with allowing a larger amount for real dependents IF and only IF Congress sees fir do do away with the EITC altheogether which is so full of fraud by itself it is amazing that it has survived so far.

    I know EITC is a sacred cow in our dysfunctional government but an easy fix is to allow more of a tax exemption for children who qualify as dependents and then do a random sample of audits based on certain criteria such as income to support the deduction.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind

*