The Internal Revenue Service is not fully compliant with a federal law requiring the agency to eliminate and report improper payments made to taxpayers, according to a new government report.

The report, released Thursday by the Treasury Inspector General for Tax Administration, found that the only program the IRS has identified for improper payment reporting is the Earned Income Tax Credit Program. The IRS estimates that 21 to 26 percent of EITC payments were issued improperly in fiscal year 2011, equating to $13.7 to $16.7 billion in improper EITC payments.

The Improper Payments Elimination and Recovery Act of 2010 increased agency accountability for reducing improper payments in all Federal programs. The law requires TIGTA to assess the IRS's compliance with improper payment requirements.

"The IRS's failure to fully comply with this important Federal law is troubling," said TIGTA Inspector General J. Russell George in a statement. "The law requires the IRS to establish annual reduction targets for improper payments; however, it has not done so."

TIGTA determined that the IRS did not comply with all of the improper payment requirements included in the Improper Payments Elimination and Recovery Act.  The IRS has not established annual EITC improper payment reduction targets and has not computed a gross estimate of EITC improper payments as the estimate does not include underpayments. The IRS already had plans in place to establish EITC reduction targets and is exploring the feasibility of computing an mproper payment estimate for EITC underpayments.

TIGTA made no recommendations in its report. However, the IRS noted in its response that TIGTA had given it credit for doing some things right with the EITC improper payments.

“We are pleased with your acknowledgment that the method used to compute the FY 2011 EITC improper payment rate provides a reasonable estimate of the percentage and amount of EITC overpayments,” wrote CFO Pamela LaRue. She noted that the IRS is continuing to implement its tax return preparer initiative to substantially reduce erroneous EITC payments. Fiscal year 2011 was the first year of a three-year ramp-up of this initiative, she added, and the IRS expects to have a baseline against which it can set meaningful reduction targets after the program is fully established by fiscal year 2014.

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