The Internal Revenue Service’s risk assessment process does not provide a reliable assessment of the risk of improper payments in the IRS’s revenue funds, according to a new report.

The report, released Thursday by the Treasury Inspector General for Tax Administration, found that the IRS has determined that only the Earned Income Tax Credit Program was at high risk for improper payments. All other programs were rated low risk. However, prior TIGTA reports indicate otherwise.

Improper payments cost taxpayers billions of dollars annually across federal programs, TIGTA noted. The Improper Payments Elimination and Recovery Act of 2010, or IPERA, requires federal agencies to estimate improper payments for all programs in which such payments are significant. The first step is for agencies to conduct an assessment of their risk for significant improper payments.

TIGTA’s audit concluded that the risk assessment process resulted in a reasonable assessment of the risk of improper payments for IRS administrative programs. However, the results of the risk assessment may not accurately reflect the risk of improper payments in the IRS’s revenue program funds.

TIGTA’s audit found that the IRS’s risk assessment used a questionnaire that does not provide an adequate assessment of the risk associated with tax refunds and does not include areas of potential risk within tax administration. The IRS selected programs for evaluation based on fund groups, such as the type of tax credit, as opposed to significant broad-based activities, such as verifying the withholding claimed by the taxpayer. In addition, the IRS did not follow Department of the Treasury guidance.

In September 2011, TIGTA reported that the IRS may have erroneously allowed approximately $3.2 billion in American Opportunity Tax Credits. In 2012, TIGTA reported that the Individual Taxpayer Identification Number program is so deficient that there is no assurance that ITINs are not being assigned to individuals submitting questionable applications. In 2011, the IRS processed claims by filers using an ITIN totaling $4.2 billion for the refundable credit known as the Additional Child Tax Credit. Another 2012 TIGTA audit found that the IRS may have paid $5.2 billion in potentially fraudulent tax refunds due to identity theft. The IRS had not assessed the risk of improper payments in this area at all.

“In these difficult economic times, all efforts must be made to prevent improper payments in every program. Ineffective risk assessment processes can limit the Government’s ability to protect taxpayer dollars from waste, fraud, and abuse,” said TIGTA Inspector General J. Russell George in a statement.

TIGTA made several recommendations for improvement. It suggested the IRS should work with the Treasury Department to better identify the IRS programs to be assessed for improper payment risk and refine the questionnaires to ensure that all questions are applicable to tax administration and more accurately reflect the risks associated with tax refund payments. TIGTA also recommended that the IRS establish a formal process for assigning responsibility for the completion of the annual risk assessments for the selected IRS programs to the appropriate IRS executive, and develop a process to ensure that the Treasury Department guidance is being followed. The IRS agreed with TIGTA’s recommendations and plans to take the suggested corrective actions.

However, IRS CFO Pamela LaRue also differed with one reference to her in the report. The report said, “The IRS Chief Financial Officer indicated that the Office of Management and Budget has exempted tax refunds from the improper payment reporting requirements. However, the IRS was unable to provide us with a copy of the exemption.”

LaRue took exception and wrote in response to the report, “While the documentation we provided TIGTA from the Office of Management and Budget (OMB) does not exempt tax refunds from the requirements, it does confirm the decision made by OMB that the Earned Income Tax Credit (EITC) is the only IRS program that should be reported under the Improper Payments Elimination and Recovery Act (IPERA). This decision was based on the fact that payments from tax refunds are included in the tax gap estimates in the over-claim rates and should continue to be reported and addressed as part of the overall plan for reducing the tax gap.”