The Internal Revenue Service (IRS) has issued a stark warning to taxpayers across the United States: avoid common tax credit mistakes or risk losing up to $5,000 in valuable refunds. With tax season always looming in the background and many individuals relying on credits like the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) to offset costs or increase refunds, the IRS is urging filers to be more cautious than ever.
Tax credits can significantly reduce your tax liability or even result in a refund. However, the IRS has found that thousands of taxpayers each year lose out on substantial amounts due to errors, omissions, or ineligible claims. In the most severe cases, these mistakes can lead to delayed refunds, IRS audits, and even penalties or bans from claiming certain credits in the future.
Common Tax Credit Errors That Could Cost You
According to the IRS, the most frequent tax credit mistakes involve misreporting income, claiming dependents incorrectly, or misunderstanding eligibility requirements. The following credits are particularly prone to errors:
- Earned Income Tax Credit (EITC)
- Child Tax Credit (CTC)
- American Opportunity Tax Credit (AOTC)
- Premium Tax Credit (PTC)
- Saver’s Credit
Even a small mistake—like entering the wrong Social Security Number for a dependent or miscalculating income—can result in the IRS disallowing your credit, leading to the loss of thousands in refunds.
Top 5 Tax Credit Mistakes and Their Impact
| Mistake Type | Credit Affected | Possible Cost (Up to) |
|---|---|---|
| Claiming Ineligible Dependents | EITC, CTC | $2,000–$5,000 |
| Incorrect Income Reporting | EITC, AOTC, PTC | $1,500–$4,500 |
| Filing Status Errors | EITC | $500–$3,000 |
| Missing or Invalid SSNs | EITC, CTC | $2,000–$4,000 |
| Not Filing Schedule 8812 or 8863 | CTC, AOTC | $1,000–$2,500 |
The IRS Is Stepping Up Enforcement
In recent years, the IRS has increased enforcement and audit efforts related to refundable tax credits. According to agency officials, EITC-related audits account for nearly half of all individual income tax audits. “While we want people to receive the credits they’re entitled to, we also have a responsibility to ensure that claims are accurate and legitimate,” an IRS spokesperson stated.
Ineligible claims—whether due to honest mistakes or deliberate fraud—can trigger audits and lead to serious consequences. If the IRS determines that a taxpayer improperly claimed a credit, they may be required to repay the amount received, pay additional penalties, and could be barred from claiming that credit for up to 10 years.
How to Avoid These Costly Errors
To avoid losing out on valuable tax credits, the IRS recommends the following steps:
- Verify Dependent Eligibility: Make sure the person you claim meets the IRS criteria for a qualifying child or relative. This includes residency, age, relationship, and support tests.
- Double-Check Social Security Numbers: Ensure that all SSNs entered on your return match exactly what’s on the Social Security card.
- Choose the Correct Filing Status: Filing as Head of Household instead of Single or Married Filing Separately can affect your credit eligibility.
- Use Reliable Tax Software or a Certified Professional: Electronic filing with reputable software helps catch mistakes. If your situation is complex, consider using a tax professional.
- Keep Accurate Records: Retain documentation for income, dependents, and any educational or childcare expenses you report.
Special Alert for Self-Employed and Gig Workers
The IRS has highlighted that self-employed individuals and gig economy workers are especially at risk of making errors in income reporting. Misreporting earnings can directly affect credits like the EITC and Premium Tax Credit. These taxpayers should make sure they:
- Report all 1099 income.
- Maintain clear records of expenses.
- File estimated taxes if required.
IRS Tools and Resources Available
To help taxpayers, the IRS provides a range of online tools and publications:
- EITC Assistant Tool: Helps determine EITC eligibility.
- Interactive Tax Assistant: Guides you through various tax topics including dependents, credits, and filing status.
- Free File Program: Offers free tax prep software for qualifying filers.
Final Thoughts
While tax credits offer significant financial relief, careless or uninformed filing can cost you dearly. The IRS is not only warning filers but also cracking down on misuse. If you’re not cautious, you could miss out on up to $5,000 in credits or worse, face penalties that go beyond just losing your refund.