Banned benefit fraudsters caught trying to return to the country on falsified papers could also find themselves facing a prison term of up to three years, according to further measures envisaged in the draft bill which is set to be drawn up in July.
The news comes as Chancellor Angela Merkel increased the rhetoric against benefit fraud by foreigners before Germans head to the polls for the EU parliamentary elections on Sunday.
"The EU is not a social union," Merkel told the regional Passauer Neue Presse on Thursday.
"We don't want to pay Hartz IV to EU citizens who are just here in Germany to look for work," she added. EU law clearly states that child benefits should also only be paid to those in work, she said. "We are working on the best way to eliminate abuse."
Germany has been given the go-ahead to tighten rules after the advocate general at the European Court of Justice said the country could deny EU citizens Hartz IV unemployment benefits, if the state could prove newcomers planned to rely on them and did not have job prospects.
The government's draft law to potentially ban those who abuse the benefit system is now being discussed by individual ministries, an Interior Ministry spokesman confirmed to dpa news agency on Wednesday.
It will be put to a parliamentary vote and will have to also be approved by the Bundesrat upper house.
The German Labour Ministry released figures this week showing that the state paid €1.7 billion in Hartz IV to EU citizens living in Germany last year.
Meanwhile Germany's statistics office on Thursday put out figures showing that Germany received more new net immigrants last year than in any year since 1993.
Over 1.2 million newcomers were registered in 2013, up 13 percent on the previous year. Meanwhile 789,000 people left the country to live elsewhere; resulting in a net migration of 437,000.
And German President Joachim Gauck weighed into the debate on Thursday, advising Germans to be more accepting of immigrants.
"Our country needs immigration," Gauck told a crowd at an event at Schloss Bellevue in Berlin. "We won't lose ourselves if we accept variety."
Gauck further pointed out that although Germany had made steps forward in terms of integrating foreigners into society, there were still big problems with German attitudes.
"A young woman from a Vietnamese family would be accepted without hesitation in the United States or Britain as an American or Briton, but in Germany she would probably be asked where she 'really' came from," he added.