IRS Made Improper EITC Payments of $13.3-$15.6 Billion

The Internal Revenue Service allowed an estimated $13.3 billion to $15.6 billion to be paid in improper claims for the Earned Income Tax Credit last fiscal year, or about 22 to 26 percent of all EITC payments, according to a new government report, which found the IRS continuing to be noncompliant with a 2010 law that sought to limit improper payments.

The IRS continues to make little progress in reducing improper EITC payments, according to the report, which was publicly released Tuesday by the Treasury Inspector General for Tax Administration.

TIGTA’s finding came in a review of the IRS’s compliance with the Improper Payments Elimination and Recovery Act of 2010, which requires federal agencies to estimate improper payments for all programs in which such payments are significant. The IPERA requires TIGTA to assess the IRS’s compliance with improper payment requirements.

The Office of Management and Budget has declared the EITC program to be a high-risk program that is subject to reporting in the Treasury Department’s Agency Financial Report. The IRS estimates that 22 to 26 percent of EITC payments were issued improperly in fiscal year 2013. The dollar value of these improper payments was estimated to be between $13.3 billion and $15.6 billion.

“The intent of this law is to help ensure that the Government serves as a responsible steward for the tax dollars it collects,” said TIGTA Inspector General J. Russell George in a statement. “As noted in previous TIGTA reports, the IRS can and must do more to protect taxpayer dollars from waste, fraud and abuse.”

While risk assessments were performed for each of the programs that the Treasury Department required the IRS to assess, the risk assessment process still may not provide a valid assessment of improper payments in tax administration, according to the report. The EITC remains the only revenue program fund to be considered at high risk for improper payments.

TIGTA did not make any recommendations in this report. In response to a draft of the report, the IRS stated that it had received guidance from OMB that will allow it to resolve the non-compliant areas identified by TIGTA.

“The IRS is continuing to develop these measures and anticipates meeting with OMB to obtain their concurrence and provide the measures to Treasury, along with our annual EITC error estimates for reporting in the FY 2014 Annual Financial Report,” wrote IRS CFO Robin L. Canady in response to the TIGTA report.

A spokesperson for the Republican side of the tax-writing House Ways and Means Committee pointed out that earlier this year, Ways and Means Chairman Dave Camp, R-Mich., released a tax reform plan that would simplify the EITC and prevent fraud within the program.  The plan would simplify the current-law EITC by converting it into a refund of payroll (and self-employment) taxes.  The employee’s share of payroll taxes would be offset by a credit against such taxes, while the employer’s share would be rebated through a refundable income tax credit. “By simplifying the EITC and making it based on the actual amount of payroll taxes paid—an amount that can be determined simply by looking at an employee’s W-2—billions in waste, fraud and abuse can be eliminated while making it easier for truly deserving families to claim the credit,” wrote spokesperson Sarah Swinehart.

Last week, IRS commissioner John Koskinen testified before the House Ways and Means Oversight Subcommittee about how the IRS relies on tax preparers to perform due diligence checks for the EITC (see IRS Commissioner Tells Congress about EITC Challenges with Tax Preparers).

“Notably, our increased efforts in regard to identity theft-related fraud detection have helped improve EITC enforcement results,” said Koskinen in his prepared testimony. “In spite of these accomplishments, it is important to note the significant degree of difficulty in enforcing compliance with the EITC, which derives in large part from its eligibility requirements. EITC eligibility depends on items that the IRS cannot readily verify through third-party information reporting, including marital status and the relationship and residency of children. In addition, the eligible population for the EITC shifts by approximately one-third each year, making it difficult for the IRS to use prior-year data to assist in validating compliance. Given this situation, and given that approximately 57 percent of the returns claiming the EITC are prepared by tax return preparers, we believe that one of the keys to driving increased EITC compliance continues to be strategic programs addressed to the return preparer community, such as our return preparer initiative.”

Koskinen said the IRS continues to be concerned that the improper payment rate for the EITC has remained too high throughout the program’s history and acknowledged the EITC improper payment rate of between 22 and 26 percent for fiscal 2013. He said the IRS has recently initiated a major review of its activities in this area. “As part of this review we are assessing our many past and current efforts, and are exploring new possibilities, such as options for simplifying EITC eligibility requirements and finding more-efficient ways to distinguish valid claims from excessive claims,” said Koskinen.

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