Increased scrutiny of tax credits could mean more audits for Wisconsin's poor

As Tax Day approaches, some low-income taxpayers in Wisconsin will notice smaller refunds -- and increased scrutiny on claimed tax credits -- because of changes in state law and a new effort by the Wisconsin Department of Revenue to ferret out fraud.

Wisconsin is the first state chosen under a federal push to detect mistakes and fraud in the earned income tax credit program, Revenue spokeswoman Stephanie Marquis said.

The credit, available from both the state and federal governments, is designed to provide relief to low-wage taxpayers and to encourage work by allowing them to claim refunds, even if they have paid little or no income taxes.

This year, Wisconsin cut the amount of credit available to such taxpayers by $27.3 million to $113.3 million. The Legislature reduced the projected credit for next year by $28.9 million to $119.5 million.

The state also stopped adjusting the homestead tax credit for inflation, saving an estimated $3.1 million this fiscal year and $10.5 million next year. In 2011, the state paid $132.9 million in homestead tax credits.

The homestead tax credit is designed to provide tax relief for low-income homeowners and renters by allowing them to file for a rebate on some or all of the property taxes they pay.

Although some dispute whether the cutback in credits amount to a tax increase, the reductions are the only changes in the state's two-year budget identified by the nonpartisan Legislative Fiscal Bureau as "tax increases."

State Rep. Robin Vos, R-Burlington, co-chairman of the Legislature's budget committee, maintained the changes do not amount to tax increases on the poor. Such credits can result in taxpayers getting back more in rebates than they paid in taxes, he said, adding that Wisconsin's earned income tax credit is one of the nation's most generous.

Vos said the changes mean "you get less free money than you did before. "The state budget includes an estimated $25.3 million in additional tax breaks this year and $68.1 million next year, the fiscal bureau said, most of it targeted toward businesses and individual taxpayers who invest in Wisconsin companies.

Bigger rewards elsewhere?

Under the changes in the state's earned income tax credit program, a single mother with three children earning minimum wage will lose out on about $518 when filing for the credit this year, a roughly 20 percent reduction from 2010, according to the Wisconsin Council on Children and Families.

Some critics have labeled the cut in the tax credit and efforts to crack down on its use as unfairly targeting low-income taxpayers.

"We're happy to see fraud exposed any time," council spokesman Bob Jacobson said. "It just seems like there's a bigger reward available that we're not going after in terms of taxes not being paid by non-low-income people and companies."

Marquis said the $40,000 grant from the federal government will allow the revenue department to better investigate fraudulent claims, saving the state a projected $2.4 million this year.

"The way we look at it, we need to prevent any fraud we can," Marquis said. "Regardless of who is submitting a fraudulent claim, whether it's a higher-income earner or a lower-income earner ... that's $2.4 million that we don't pay out that stays in the budget for other things -- including helping the poor."

But Milwaukee tax preparer John Brennan said the crackdown is harming honest, low-income taxpayers who don't have bank accounts. Many earn cash and pay their rents in cash, meaning they may lack the paperwork to satisfy the state that they qualify for the credits, said Brennan, co-owner of J & J Tax and Accounting.

He cited one client who may have to pay back $3,000 in tax credits because she can't locate a former landlord and she has no canceled checks to show.

"This is the biggest fraud area there is. I understand the scrutiny," Brennan said. "The problem I have is ... they're asking for documents that people can't provide."

The state estimates that $1 of every $10 claimed under the earned income tax credit program is fraudulent. Top reasons that the department denies or reduces a claim:

--Taxpayers claiming as dependants someone else's children or children who don't live with them;

--Falsified or understated income; and

--Part-year or nonresidents claiming the credit, which is available only to year-round residents.

Last year, the Revenue Department denied $12.2 million worth of claims while paying out $124 million under the program. The average tax credit was $462.

(c)2012 The Wisconsin State Journal (Madison, Wis.)

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