Tax Practitioners' Perceptions Regarding Fraudulent Earned Income Tax Credit Claims: A Descriptive Case Study to Investigate the Phenomenon of Tax Practitioner Filing Fraudulent Tax Claims

By Dr. Michael Fidelis-Nwaefulu

This descriptive case study investigated the phenomenon of tax practitioner filing fraudulent earned income tax credit claims on behalf of a client. The study took place in Dallas/Fort Worth metropolitan area in Texas in the United States and thirty tax practitioners in the Dallas/Fort Worth area in Texas, were recruited in a non-probability purposeful sampling technique. Eighteen professional tax preparers with an average age of 50.5 years and tax practitioner experience of 11.05 years were interviewed face-to-face, in a one-on-one setting within the Dallas/Fort Worth metropolitan area were necessary to reach data saturation. Half of the participants were females and all participants had college degrees.

The research explored paid tax practitioners’ perception regarding fraudulent earned income tax credit claims (EITC). The following categories were determined: practitioners have EITC rules about compliance and due-diligence, knowledge and training of EITC due-diligence program are vital elements for successful program, workplace culture is influenced by external environment factor, and tax practitioners' decision-making choices influence taxpayer behavior.

This result of this study may inform stakeholders of behavioral factors that might be necessary to improve EITC claims compliance among all stakeholders.

• Language: English
• Publisher: Xlibris US
• Release date: Nov 21, 2019
• ISBN: 9781796073430

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Copyright © 2019 by Dr. Michael Fidelis-Nwaefulu.

ISBN:                  Hardcover                        978-1-7960-7345-4

                            Softcover                           978-1-7960-7344-7

                            eBook                                978-1-7960-7343-0

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Rev. date: 11/21/2019

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CONTENTS

Abstract

Dedication

Acknowledgments

Chapter 1   Introduction

EITC Fraud Definition

What is Income Tax Fraud?

EITC Overview

Background of the Problem

Statement of the Problem

Reasons for EITC Compliance Errors

Education/Competence

Knowledge of Incorrect Information

Purpose of the Study

Significance of the Study

Nature of the Study

Research Question

Theoretical Framework

Definitions of Terms

Assumptions

Limitations

Delimitations

Summary

Chapter 2   Literature Review

Title, Searches, Articles, Research, Documents, and Journals

Literature Review

Historical Overview

Theoretical Foundations: Fraud diamond theory

Human behavior as it relates to perception.

Overview of Theories for Explaining EITC Fraud

Wages or working hours reported.

Marital status.

Child benefits.

Theory of greed.

Current Findings

Discussion of Research Methods Used

Conclusion

Summary

Chapter 3   Methodology

Research Method and Design Appropriateness

Research Method

Design Appropriateness

Research Questions

Population and Sample Size

Informed Consent

Confidentiality

Geographic Location

Trustworthiness

Expert Panel

Credibility, Dependability, Confirmability, and Transferability.

Data Collection and Instrumentation

Primary Data Collection

Triangulation

Data Storage and Preparation

Chapter Summary

Chapter 4   Findings and Results

Review of the Problem Statement and Research Question

Pilot Study

Data Collection and Analysis Procedures

Data Collection Process

Research Questions

Data Analysis

Theme 1: Practitioners have EITC rules about compliance and due-diligence

Sub-theme: Perceived communications barriers.

Theme 2: Knowledge is a vital component for successful due-diligence

Sub theme: Demographic differences.

EIC Compliance Training by Demographic Groups

Theme 3: Workplace culture is influenced by external environmental factors

Sub theme: Financial Motivation.

Theme 4: Practitioners’ Decision-Making Choices Influence Taxpayer

Chapter Summary

Chapter 5   Conclusion and Recommendations

Introduction

Summary of the Findings

Discussion of Findings

Significance of the Findings

Limitations of the Study

Implications of the Findings

Recommendations for Future Actions

Improvements to Existing Education

Revisions to Forms in Consideration of Illiteracy

Survey Tax Preparers on Their Employers’ Practices

Rethinking Current Policies

Recommendations for Future Research Studies

Summary and Conclusion

References

Appendix A: Informed Consent Form

Appendix B: Interview Guide

LIST OF FIGURES

Figure 1.0: The fraud diamond (Ruankaew, 2016, p. 475)

Figure 4.1: Themes emerged from nodes in NVivo 12 software (QSR International, Pty Ltd)

Figure 4.2: Frequency Distribution of EITC compliance knowledge

Figure 4.3: EIC compliance training by demographic groups

Figure 4.4: Taxpayers’ perceptions of external environmental influences

LIST OF TABLES

Table 4.0. Participant Demographics

Table 4.1. Themes and Sub Themes

Table 4.2. Frequency distribution of environmental factors affecting workplace culture

Abstract

Earned Income Tax credit (EITC) fraud is widespread and includes fraud perpetrated on the government by both taxpayers and paid tax preparers. The Internal Revenue Service has reported an increase in tax return preparers’ failure to apply EITC due-diligence compliance requirements. The specific problem in this descriptive case study was EITC fraud was committed by paid tax preparers. This descriptive case explored the perceptions of professional paid tax preparers who might file fraudulent EITC claims on behalf of a client. The main research question was: What are tax practitioners’ perceptions regarding why a paid tax preparer might file a fraudulent EITC claim on behalf of a client? Data collection consisted of semi-structured in-depth interviews consisting of eight open-ended questions. Thirty professional tax preparers in the Dallas/Fort Worth area in Texas, were recruited in a non-probability purposeful sampling technique. A one- on-one, face-to-face interview was conducted until data saturation was achieved after 18 interviews. The theoretical framework that was used to underpin this study incorporated characteristics of the theory of reasoned action, systems theory, and network theory. Themes emerging from the analysis were in four categories: (a) practitioners have EITC rules about compliance and due-diligence with a sub-theme of perceived communications barriers, (b) knowledge, training, and education are vital components for successful due-diligence with a sub-theme of demographic differences, (c) workplace culture is influenced by external environmental factors with a sub-theme of financial motivation, and (d) practitioners’ decision-making choices influence taxpayer compliance behavior. The findings of the case study may inform government and policy makers of additional social (education, income, demographics) and behavioral factors that may be needed in order to improve compliance among both taxpayers and paid tax preparers.

Dedication

I dedicate this dissertation to almighty God for giving me the courage, strength, and wisdom to undertake this challenging doctoral journey that came to a successful end. I also dedicate this dissertation to my late parents Fidelis Nwaefulu and Margaret Nwaefulu, and to my late sister Apolonia Emefiene who passed to glory on February 11, 2018. My sister encouraged me to leave for the United States of America for a better life. To make my departure to the United State possible, she sacrificed her chances of going to school by helping to provide the needed financial resources for my trip. I am thankful to God for my family who supported me with words of encouragement, proofreading my proposal, making suggestions to improve my dissertation, and providing needed moral support. I dedicate my dissertation to the following members of my family: my lovely wife Anne Nwaefulu, my daughters Wevine Fidelis-Nwaefulu and Whitney Fidelis-Nwaefulu, and my son Wilton Fidelis-Nwaefulu for forming an incredible support system needed to push me to successful completion of the doctoral journey.

I have no doubt that I would not have completed my dissertation without the friends I met along the way. I thank my brother Victor Nwaefulu and sister Doris Ochei for their encouragement and motivation throughout the difficult times of the dissertation program. I thank my aunt Christiana Osadebe for her financial support towards my coming to the United States, and I am grateful to my mother-in-law Comfort Ebuehi for her role in my success. I am particularly grateful to my interview participants who accommodated me into their busy schedules for a one- on-one interview. My sincere gratitude to Dr. Michael Taku for his contributions toward the successful completion of my dissertation. Again, I am thankful to the almighty God for giving me great friends and family who were willing to put up with my deficiencies during my doctoral journey.

Acknowledgments

I acknowledge my committee members Dr. Michael Taku, Dr. Maja Zelihic, and Dr. James Beeks for their contributions through their moral support, feedbacks, encouragement, and motivation through the dissertation development process. My sincere gratitude to my committee and committee chair, Dr. Michael Taku for their patience and contributions towards the successful completion of my doctoral program. Dr. Michael Taku encouraged and motivated me to produce a scholarly study that adds value to the tax community. He played a vital role in my gradual growth throughout my doctoral journey by providing valuable feedback and suggestions towards the successful completion of my doctoral program.

I am thankful to all the tax practitioners who participated in my interview and to the multiple experts in tax practice who assisted in formulating the interviews questions. My sincere gratitude to Dr. Allieu M. Shaw for his advice and positive contribution to my dissertation process. Thank you for your guidance and contributions, and for the late nights you spent encouraging me to produce the best dissertation. I thank my wife Anne Nwaefulu, my daughters Wevine Fidelis- Nwaefulu and Whitney Fidelis-Nwaefulu, my son Wilton Fidelis-Nwaefulu, my brother Victor Nwaefulu, and my sister Doris Ochei, who provided feedbacks to assist in the completion of my dissertation.

Chapter 1

Introduction

According to the Internal Revenue Service (IRS), financial losses resulting from both taxpayers’ errors and deliberate misrepresentation has surpassed $450 billion annually in 2014 (Bobet, Hageman, & Kelleher, 2013). Earned income tax credit (EITC) claims from 1040 returns comprise a substantial portion of the annual losses. According to the IRS (2014) the Treasury’s inspector general for tax administration reported a 28% increase in EITC claims, with overpayments of more than $13 billion annually (Bobet et al., 2013). This dissertation examines why paid tax preparers deliberately file fraudulent tax returns on behalf of their clients. In 2014, the IRS reported an increase in tax return preparers’ failure to apply EITC due-diligence compliance requirements, and prior to 2012, the IRS reported an increase in the prevalence of such fraud (Todd Deport, Harrison, & Scene, 2012). Chapter 1 presents the background, problem statement, study significance, research question, and theoretical approach used. Discussion of the proposed design, methodology, rationale, and procedures’ assumptions, limitations, and delimitations are discussed. Ethical and validity issues are also presented.

EITC Fraud Definition

Earned Income Tax Credit (EITC) is a refundable tax credit that is eligible for low- to middle-class, working persons and couples, notably couples with children. EITC is essentially a federal tax credit established by the United States Congress that is granted to eligible low- and middle-income individuals and families, particularly families with children (Center on Budget and Policy Priorities, 2019). In 2018, 25 million individuals and families were awarded $63 billion through the EITC program (IRS, 2019).

Penalties for noncompliance include $500 for each taxpayer for which the tax practitioner is found noncompliant as well as a possible $1,000 or $5,000 penalty (Balafoutas et al., 2015; Batrancea et al., 2012; Bernasconi, Levaggi, & Menoncin, 2015; Button et al., 2012; Drucker et al., 2012; McGowan & Seetharaman, 2012).

What is Income Tax Fraud?

Income tax fraud is the willful attempt to evade tax law or defraud the IRS. Tax fraud occurs when a person or a company does any of the following: Intentionally fails to file income tax return, willfully fails to pay taxes due, intentionally fails to report all income received, makes fraudulent or false claims, prepares and files a false return, and criminal Tax Penalties.

The general tax fraud penalty structure is up to five years in prison or $100,000 in fines ($500,000 for a corporation), or both. In addition, the IRS can pursue both criminal and civil penalties for the same offenses. The standard of proof is higher for criminal charges, so if you are convicted of criminal tax fraud, that conduct could also support civil tax fraud charges. The reverse is not always true. Many other actions or omissions can lead to criminal tax penalties: Filing a fraudulent return can result in one year in prison or a $10,000 fine ($50,000 for corporations), or both.

EITC Overview

EITC has been a part of the United States Tax Code since 1975. Currently, 29 U.S. states, as well as the District of Columbia and Puerto Rico, have established EITC policies (Center on Budget and Policy Priorities, 2019). EITC is a refundable tax credit that is eligible for low- to middle-class, working persons and couples, notably couples with children. In the 2019 fiscal year, those eligible for EITC included working families with children, who earned a combined annual income of $41,100 to $56,000, with the range based on the number of children under the age of 18 (Center on Budget and Policy Priorities, 2019). Working, childless individuals with an annual income of $15,570 or below, or $21,370 or below for a married couple, are eligible to receive EITC, albeit much smaller than that provided for qualifying families (Center on Budget and Policy Priorities, 2019). During the 2017 fiscal year, the average EITC provided for a working family with dependent children was $3,191, while the average EITC provided for a working family without children was much lower at $298 (Center on Budget and Policy Priorities, 2019).

EITC amounts are determined based off income levels up to a maximum value. As income surpasses a maximum value, EITC declines back to zero. The credit applies to any tax-due balance, including zero, so that a taxpayer who does not owe federal taxes but is eligible for the credit can claim a refund of the EITC credit that is due; otherwise, the credit can be used to pay tax liability (Crandall- Horlick, 2015). The stratified scale determining EITC amounts and the threshold for qualifying for EITC is adjusted annually. EITC was originally designed for low-income individuals who do not have investment income exceeding $3,400 annually. It serves as an incentive to work while simultaneously providing supplemental income for individuals with low earnings (Crandall-Horlick, 2015). Initially, this credit was only available to individuals with children; however, recent changes have expanded eligibility allowing individuals without children to qualify for the credit.

Although the credit available per individual is a maximum of a few hundred dollars, it can make a substantial difference to someone of limited means. According to the Center on Budget and Policy Priorities (2019), the individuals and families who receive EITC often use the added funds to pay for basic needs, such as food and shelter, to acquire vehicles to commute to jobs, to pursue continued education or to provide maintenance to their homes or vehicles (Center on Budget and Policy Priorities, 2019). Individuals who file on their own are provided with a simple chart and form to fill out to determine the amount of EITC they can claim (IRS, 2014). This amount is subtracted from the taxpayer’s total tax liability; if the net amount of tax is less than zero, the taxpayer is entitled to a payment of that amount as a tax refund. The amount of EITC claimed