The Internal Revenue Service has made little improvement in reducing improper Earned Income Tax Credit payments since 2002, when it was first required to report estimates of these payments to Congress, according to a new government report.

J. Russell George

The report, from the Treasury Inspector General for Tax Administration, noted that the IRS estimates that 23 to 28 percent of EITC payments are issued improperly each year, which equated to $11 billion to $13 billion in EITC improper payments in fiscal year 2009.

“This is an outrageously high improper payment rate," said Sen. Chuck Grassley, R-Iowa, in response to the report. "It’s higher than Medicare’s improper payment rate. The taxpayers can’t sustain a failure rate of one-fourth and on the way to one-third.  For more than eight years, the IRS hasn’t made a dent in this problem. It’s more than enough time to figure out a way to fix it. The report says the IRS doesn’t have the resources to go after all of the improper payments in this program. This is a good indication of how the IRS is poorly equipped to handle the huge new responsibilities of health care reform. If the IRS can’t handle its existing responsibilities, it won’t be able to handle its new responsibilities under health care reform. Maybe if the White House focused more on what’s already owed, it wouldn’t need to propose tax increases, such as the one on employers to pay for unemployment benefits just disclosed this week.”

Executive Order 13520 requires the IRS to intensify its efforts and set targets to reduce EITC improper payments and to report its activities to the Office of Management and Budget and TIGTA.

The order also requires TIGTA to assess the level of risk associated with the EITC program, determine the extent of oversight warranted and provide the IRS with recommendations to reduce EITC improper payments.

In its June 14, 2010 report to the OMB and TIGTA, the IRS did not provide any quantifiable targets to reduce EITC improper payments. IRS management noted that it did not set reduction targets because of the need to balance its enforcement efforts among different taxpayer income levels.

The IRS also noted that its new efforts to regulate tax return preparers will reduce the improper payment rate. However, it is unknown whether the regulation of tax return preparers will result in a significant reduction in improper EITC payments, and this strategy will not go into full effect until 2014.

“I am troubled by the IRS’s delay in setting reduction targets,” said TIGTA Inspector General J. Russell George in a statement. “As noted in our report, the IRS has just begun implementing the tax return preparer strategy and it does not anticipate the  strategy will be fully implemented until 2014. According to its own estimates, it is likely that the IRS will issue anywhere from $55 billion to $65 billion in improper payments between 2010 and 2014.”

“While the Earned Income Tax Credit helps many deserving Americans, it is well past time for the IRS to reduce the amount of improper payments in the program,” George added. “The loss of billions of dollars in improper EITC payments annually calls for aggressive and immediate action. The Improper Payment Act of 2002 and the president’s Executive Order 13520 require the IRS to intensify its efforts and set targets to reduce EITC improper payments. It is unacceptable that the IRS has not met this requirement.”

TIGTA has conducted a number of audits that have provided the IRS with specific actions that could be taken to reduce improper payments. While the IRS has implemented some of TIGTA’s recommendations, it has not taken actions to address key recommendations aimed at preventing and reducing EITC improper payments.

TIGTA recommended that the IRS establish quantifiable reduction targets and strategies to meet those targets and use a National Research Program sample to estimate underpayments, in which the IRS incorrectly pays less in the EITC than the taxpayer claims.

In response, IRS officials agreed with TIGTA’s first recommendation and agreed in concept with its second. Specifically, the IRS said that the tax return preparer initiative will enable the IRS to have a baseline against which it can set meaningful reduction targets. The IRS said it would explore whether the recommendation on estimating underpayments is possible and practical.