Erroneous EITC Payments Total Billions

The Internal Revenue Service paid between $10 billion and $12 billion in tax year 2006 to taxpayers who erroneously claimed the earned income tax credit despite IRS efforts to step up compliance.

A new report from the Treasury Inspector General for Tax Administration found that the IRS has improved its oversight and management, and developed some successful processes for catching the erroneous EITC claims after earlier TIGTA audits pointed out problems. However, the majority of improper claims are still getting paid. In tax year 2006, the IRS received $43.7 billion in EITC claims. The IRS has been heavily promoting the EITC to lower-income taxpayers, and hosted an EITC Awareness Day last week (see IRS Marks EITC Awareness Day).

The TIGTA report noted that the IRS’s compliance resources are limited and additional alternatives to traditional compliance methods have not been developed, resulting in the majority of potentially erroneous EITC claims being paid in error.

“The IRS has numerous compliance priorities in addition to the EITC program, which it must balance against its limited resources,” said TIGTA Inspector General J. Russell George in a statement. “However, this is a significant revenue loss to the federal government and that must be addressed. Closing the nation’s estimated $345 million annual tax gap requires taking steps on a number of levels.”

TIGTA made several recommendations, including that the IRS conduct a study to identify alternative processes that will expand its ability to effectively and efficiently identify and adjust erroneous EITC claims for which data show that the taxpayer does not meet EITC requirements. The IRS should also work with the Treasury Department to obtain the authority necessary to implement alternative processes to adjust erroneous EITC claims, TIGTA suggested. The IRS agreed with all of TIGTA’s recommendations.