If you're a small business owner, self-employed filer, or individual taxpayer, refundable tax credits can offer big savings—but mistakes can also lead to serious IRS penalties. A recent Government Accountability Office (GAO) report shows that four major tax credits had improper payment rates over 10% in fiscal year 2024, often due to missing documentation or unverified income.
Four Tax Credits with High Error Rates
The GAO flagged these credits with significant issues:
- Premium Assistance Credit – 28.5% improper payments
- American Opportunity Credit – 27.7% improper payments
- Earned Income Credit (EIC) – 27.3% improper payments
- Additional Child Tax Credit – 10.7% improper payments
While the EIC saw improvement (a $6 billion decrease in errors), the Additional Child Tax Credit saw a $3 billion spike in improper payments.
What Small Business Owners and Schedule C Filers Must Know
If you're filing a Schedule C and claiming any of these credits, the IRS expects additional due diligence to verify:
Additional Due Diligence for Schedule C Filers
- Proof of income and expenses
- Legitimate business activity (e.g., business cards, licenses, website)
- Client and payment records (especially for cash-based services)
- Consistency between income reported and credit eligibility
Consequences of Non-Compliance:
- Refund denials
- Audits and repayment of credits with penalties
- Potential bans (2-10 years) from claiming credits
Due Diligence for Individual Taxpayers
Even if you’re not self-employed, you still have responsibilities when claiming credits like the EIC, AOTC, and ACTC.
Your Responsibilities:
- Provide accurate income, dependent, and schooling information
- Keep supporting documentation such as:
- W-2s, 1099s, or other income statements
- School records (AOTC)
- Residency proof for dependents (leases, school docs)
- Form 1095-A for health coverage (ACA credit)
- Understand eligibility rules for each credit
- Review your tax return for accuracy before filing
Risks of Improper Claims:
- Refund delays or denials
- IRS audits
- Repayment of credits with penalties
- Bans from claiming future credits
Don’t Let Tax Credit Mistakes Cost You
Whether you're self-employed or an individual taxpayer, we’re here to help you claim the credits you deserve—safely and correctly.