Enhanced pre-refund compliance checks would enable the Internal Revenue Service to help confirm taxpayers' identity, quickly and efficiently correct some errors with virtual certainty, and identify and audit some returns before refunds are issued, according to a new government report that fueled a debate in Congress over refundable tax credits.
The report, by the Government Accountability Office, was presented during a hearing of the House Ways and Means Subcommittee on Oversight on Wednesday. A Senate subcommittee also examined taxpayer identity theft during a separate hearing the same day (see IRS Struggles to Control Taxpayer Identity Theft).
Math error checks are among the most beneficial of these checks for both the IRS and taxpayers, the GAO noted. For example, they have the potential to deter billions of dollars in erroneous refunds, especially for refundable tax credits that have increasingly been enacted and that have resulted in significant overclaimed refunds and fraudulent claims.
Taxpayers benefit from pre-refund checks in several ways, including the fact that the IRS identifies those underclaiming benefits.
Last year the GAO reported that the IRS corrected about 7.7 million errors associated with the Making Work Pay credit, including about 60 percent in the taxpayers' favor, meaning that taxpayers received larger refunds (or had lower taxes due) than they had anticipated.
For almost a century, Congress has been expanding the IRS's math error authority, or MEA, on a case-by-case basis. In 2010, the GAO suggested that authorizing the use of MEA on a broader basis with appropriate controls to protect taxpayer rights could help the IRS immediately address compliance problems with newly created tax credits.
In the absence of broader MEA, from 2008 through 2011, the GAO also suggested that Congress expand MEA for more limited purposes.
Longer term, other IRS initiatives, such as matching information returns to tax returns during the filing season and leveraging new paid preparer requirements, could enhance compliance before refunds are issued. One prerequisite, however, would be a major reworking of some fundamental IRS computer systems, the GAO noted.
In 2010, the IRS processed about 137 million individual income tax returns and issued 107 million refunds totaling over $312 billion. The compliance checks it performs before refunds are issued thus could affect millions of taxpayers and billions of dollars in refunds by identifying taxpayers who overclaim or underclaim tax benefits to which they are entitled. Math error authority is just one example of the pre-refund compliance checks that IRS uses. During 2010, IRS sent taxpayers 8.4 million notices for almost 10.6 million math errors identified on their 2009 individual tax returns.
J. Russell George, the Treasury Inspector General for Tax Administration, told the subcommittee that his office had conducted a number of audits that have identified opportunities to reduce improper payments for the Earned Income Tax Credit, the Additional Child Tax Credit, the American Opportunity Tax Credit for college tuition, the Adoption Credit and other credits.
“Based on our review of the various refundable credits, we believe the IRS should require individuals to provide documentation to support eligibility for all refundable tax credits,” he said. “If such documentation is required, the IRS will also need math error authority to deny refundable credits when supporting documentation is not provided.”
However, the hearing also provided an excuse for lawmakers to trade charges over the whole issue of refundable tax credits.
“In the course of less than a decade, improper payments arising from refundable tax credits have cost taxpayers an estimated $106 billion, according to government reports,” said subcommittee chairman Charles Boustany, R-La. “To put this amount of money in perspective, it’s more than the fiscal year budgets of the Departments of Homeland Security, Justice, Treasury, and Transportation – combined. Refundable tax credits not only reduce an individual’s tax liability, they can also result in payments from the government when the credits exceed one’s tax liability; meaning that millions of Americans have been able to eliminate any income tax liability and even get a check back from the government via refundable credits. Not surprisingly, this makes them an attractive target for those willing to claim more than they are legally due or otherwise cheat the system. The problem is so widespread that the Inspector General has even found IRS employees abusing refundable tax credits.”
Democrats on the committee accused Republicans of trying to deprive middle-class families of the tax credits.
“I continue to ask, ‘Who is next?’ ‘Who else is on your list?’” said ranking member John Lewis, D-Ga. “We started the year with seniors and proposals to end Medicare. The committee then moved to teachers and their pensions, and then to women’s health and the uninsured. And, today, the target is middle-class, working families. In 2009, the tax credits discussed today delivered almost $160 billion to more than 100 million Americans. They helped students pay for college. They helped families care for their children. They helped families adopt children. They helped millions buy homes. They helped make work pay. They helped middle-class families do just a little bit better.”
Democrats noted that in 2009, the refundable tax credits delivered almost $160 billion to more than 100 million American families.
Republicans shot back with accusations that Democrats were defending tax fraud. “Today, in a hearing examining the administration of refundable tax credits, Ways and Means Democrats refused to address the rampant waste, fraud and abuse in the current Tax Code which has led to over $100 billion in improper payments — robbing taxpayers of their hard-earned tax dollars,” they said in a press release.
Democrats followed up with their own “fact check” on votes by Republicans opposing crackdowns on wealthy taxpayers hiding their assets in Swiss bank accounts and on government contractors who hadn’t paid their taxes.
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