The Internal Revenue Service estimates that 27 percent or $17.7 billion in Earned Income Tax Credit payments were issued improperly in fiscal year 2014, according to a new government report.

The report, from the Treasury Inspector General for Tax Administration, noted that the Office of Management and Budget has declared the Earned Income Tax Credit Program to a high-risk program that is subject to annual reporting. 

TIGTA is required to assess the IRS’s compliance with the reporting requirements contained in the Improper Payments Elimination and Recovery Act (IPERA) of 2010; Executive Order 13520, Reducing Improper Payments and Eliminating Waste in Federal Programs; and the Improper Payment Elimination and Recovery Improvement Act of 2012. The objective of this review was to determine whether the IRS complied with the annual improper payment reporting requirements for fiscal year 2014.

TIGTA found that the IRS is unlikely to achieve an improper payment rate below 10 percent without expanded authorities to address identified erroneous claims.

In addition, although the IRS completed risk assessments of the 23 program fund groups identified by the Treasury, the risk assessment process still does not provide a valid assessment of improper payments in IRS programs.  For example, each year since fiscal year 2011, the IRS has continually rated the risk of improper payments associated with the Additional Child Tax Credit as low.

However, TIGTA’s review of the IRS’s own enforcement data indicates that the ACTC improper payment rate is similar to that of the EITC. TIGTA estimates that the ACTC improper payment rate for fiscal year 2013 is between 25.2 percent and 30.5 percent, with potential ACTC improper payments totaling between $5.9 billion and $7.1 billion.

On March 20, 2014, the Office of Management and Budget issued supplemental improper payment guidance to Treasury clarifying the requirement for annual risk assessments of all refundable tax credits.  The Office of Management and Budget guidance clarified that all refundable credits, i.e., the ACTC, are subject to IPERA requirements as they represent an additional outlay of funds by the government.

TIGTA reported its concern regarding the IRS’s incorrect assessment of the risk associated with the ACTC subsequent to the IRS’s Fiscal Year 2014 risk assessments.  TIGTA will continue to evaluate the reasonableness of the IRS’s assessment of the risk of improper refundable tax credit payments when TIGTA reviews the IRS’s compliance with the improper payment requirements in fiscal year 2015.
TIGTA made no recommendations in this report.

In response to the report, IRS CFO Robin L. Canady took issue with some of TIGTA’s findings.

“In the report, IRS efforts related to assessing the risk of improper payments for the Affordable Care Act (ACA) Premium Tax Credit (PTC) program are mischaracterized,” Canady wrote. “Your statement that the IRS cannot effectively assess the risk of PTC improper payments, estimate the improper payment rate and dollars, or establish corrective actions to address the causes of and reduce improper PTC payments would be correct if done alone, but the IRS is working jointly with the Centers for Medicare and Medicaid Services (CMS), the Department of Health and Human Services (HHS), the Department of the Treasury and the Office of Management and Budget (OMB) on an interagency effort to develop the definition of an improper payment with respect to the ACA Advance Premium Tax Credit (APTC) and PTC programs as well as develop plans for assessing risks. CMS is currently sharing with IRS its Statement of Work for completing work during FY 2015 and the IRS has committed to use its existing Risk Assessment Questionnaire, using a similar methodology to the other refundable tax credit programs, to determine areas that might affect payment accuracy, even though IRS is not required to do a risk assessment in FY 2015 since payments of PTC refunds have just begun. The IRS is modifying the qualitative risk assessment to address the specifics of this program.”

The IRS also disagreed with TIGTA’s findings related to the Additional Child Tax Credit. “Finally, I am concerned with TIGTA's characterization of the Additional Child Tax Credit (ACTC) program based on its analysis of IRS data,” Canady wrote. “As the IRS responded in the formal report, many of the payments TIGTA considers ‘improper’ are merely misclassifications between CTC and ACTC, and not true improper payments. The underlying CTC/ACTC data from the National Research Program are sound, but by focusing only on the ACTC, TIGTA is obtaining results that are incomplete and misleading. Our respective staffs have discussed this issue several times and it appears that we have fundamentally different perspectives on this issue.”

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