This week Gail reports on a scam to cheat taxpayers expecting an advanced check for the child tax credit.

Dear Readers,

Here's the scenario: Your neighbors just got a check from the U.S. Treasury for $1,200. Like them, you also have three kids. So what happened to your advance check for the child care credit? Hmm. Maybe you'd better contact the agency that called saying they could help you get your check faster? After all, it only costs $39.99.

STOP! There's a scam artist born every minute. And they're darn creative. Now they're trying to cash in on the government's plan to send checks to folks who qualify for the child tax credit. Twenty-five million households with children under the age of 17 this year will receive checks totaling as much as $400 per child. This reflects the fact that the tax credit has been increased from $600 to $1,000 for 2003 and 2004.

A tax credit is a dollar-for-dollar reduction of your income tax bill. Normally, you'd wait until you file your 2003 income tax return to apply the credit. But in an effort to jump-start the economy by putting the extra money in consumers' pockets sooner, you're getting the credit now rather than next year.

The first batch of checks will be mailed on Friday, July 25. Naturally, somebody has come up with a scheme to make money off of those who are impatient to get their check in the mail. Just provide the caller with your credit card information and they'll take care of it for you.

Oh, sure.

That's what Patricia Allen in Louisville, Ky., thought, too. She admits she could use the money — and sooner is always better than later — but she got suspicious when someone named Linda Salona from the National Audit Defense Network called and said, "since you have children you're entitled to the child tax credit." Salona offered to "make sure" Allen received her tax check. All she needed was Allen's Social Security number and a credit card.

That's when Allen called the Better Business Bureau (search) in her area. The folks there confirmed the call was a fraud. According to Cary Lincs at the Greater Louisville BBB, "We have no idea how they know which people have kids."

But it didn't stop there. Salona kept calling Allen back, badgering her for the information, warning that there was a "deadline" for getting this done. Allen says she kept telling her she wasn't interested and to not call back, but she persisted.

My calls to the toll-free number for "National Audit Defense Network" ended up in a voicemail box.

According to the Internal Revenue Service, this scam is similar to the one seen earlier this year that targeted military families. (How do these jerks sleep at night?) Again, the caller promised to make sure the person contacted would receive special benefits in exchange for personal information such as Social Security and credit card numbers.

So, to set the record straight, here's how the Advance Child Tax Credit (search) actually works:

If you paid income tax last year and claimed the credit (when it was $600), you are probably eligible for a check. In addition, the dependant you are claiming must be under age 17 on Dec. 31, 2003.

The IRS already knows who you are. In fact, you should have received a letter in the mail notifying you that the check would soon be on its way.

Lower-income taxpayers might not be eligible for a check. That's because when they applied the credit last year, their federal tax bill ended up being ZERO. The thinking among some in Congress is that since a tax credit is a return of taxes owed, if you don't owe any tax, there's nothing to take a credit against. (Don't blame me; I just try to explain this stuff.)

If you do not get a check and think you ought to, don't panic. You will still get to apply the full credit when you compute your income taxes for 2003.

Here are two examples where you would not receive a check: 1) If you moved this year and did not leave a forwarding address with your post office, the IRS will send your check to your former address. After all, it's the last one on record for you. Then it will get returned.

2) If your child was born this year, don't expect a check. How is the IRS supposed to know that?

In both these cases, you will have to wait until you fill out your 2003 tax return. Then you can subtract the full $1,000 from your tax bill.

Not everyone will get $400 per child because the credit gets gradually phased out once you hit the following income levels:

Phase-Out Begins at:
 Single Taxpayer/Head of Household  $75,000
 Married, Filing Jointly  $110,000
 Married, Filing Separately  $55,000

Because the amount is larger, taxpayers who saw their credit phased out completely last year could receive at least a partial credit this year.

The Advance Child Tax Credit checks are being mailed out in three batches, based on the last two digits of the taxpayer's Social Security number. (In the case of a couple, the Social Security number used will be the one listed first on your tax return.)

 Last Two Social Security Digits  Check Mailed
 00 - 33                              July 25
 34 - 66                              August 1
 67 - 99                              August 8

Folks who did not file their 2002 tax return by April 15 because they took an extension will not get their checks until the IRS processes last year's return.

The main thing to understand is this: Nobody has the ability to get you your check any sooner than the dates listed above. It doesn't matter what you pay them. The IRS never calls asking for personal information over the phone. They always contact you in writing. Do not ever give out your Social Security number of credit card information to someone who calls on the phone. If you get a call like the one Allen received, call the toll-free IRS tax fraud hotline at 1-800-829-0433.

You can find a wealth of information on the Advance Child Tax Credit and learn of other tax scams at the IRS Web site: www.irs.gov.

Last, but not least, before you cash the check think about how you might best use this extra money. The Financial Planning Association (search) suggests using it to pay down higher-interest debt. I agree with the FPA that "putting $400 or $800 toward a credit card charging 13 to 17 percent interest is a better return on your money than investing it in a near-zero percent money market fund."

Or, consider investing in your child's college education by contributing to a Coverdell Education Savings Account (search) or 529 plan. You might also use the money to contribute to your 2003 IRA.

Just don't let some con artist convince you to line their pockets with your money!

Gail

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