The Internal Revenue Service needs to do more to reduce the risk of improper payments of the Earned Income Tax Credit and the Additional Child Tax Credit, according to a new government report.
While the IRS is required by law to quantify or identify and take actions to address the root causes of improper payments in federal programs identified as being at high risk, it has only acknowledged one program—the Earned Income Tax Credit program—as being at high risk for improper payments, the report from the Treasury Inspector General for Tax Administration noted. However, TIGTA’s report pointed out that the Additional Child Tax Credit is also at high risk of improper payments, although the IRS has not identified it as such.
Using IRS data, TIGTA estimated the potential 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. In addition, IRS enforcement data show the root causes of improper ACTC payments are similar to those of the EITC.
The IRS estimated that it paid $63 billion in refundable EITCs and $26.6 billion in refundable ACTCs for tax year 2012. The IRS also estimated that 24 percent of all EITC payments made in fiscal year 2013, or $14.5 billion, were paid in error.
The Earned Income Tax Credit and the Additional Child Tax Credit are refundable credits designed to help low-income individuals reduce their tax burden. While the IRS has developed processes to identify improper EITC payments and their root causes, it has not developed processes to quantify or identify the root causes of improper ACTC payments, according to TIGTA’s report. The EITC is used to offset the impact of Social Security taxes on low-income families and to encourage them to seek employment.
The ACTC is used to adjust the individual income tax structure to reflect a family’s reduced ability to pay taxes as family size increases.
TIGTA initiated the audit because the IRS is required to identify and take actions to address the root causes of improper payments in federal programs identified as being at high risk for improper payments. Under the Improper Payments Elimination and Recovery Act of 2010, a program is defined as having significant improper payments when improper payments exceed both 2.5 percent of program outlays and $10 million of all program payments made during the fiscal year. The overall objective of TIGTA’s review was to assess the IRS’s efforts to identify and address the root causes of erroneous EITC and ACTC payments.
Significant changes in IRS compliance processes would be necessary to make any significant reduction in improper payments, TIGTA pointed out. Expanded authority to allow the IRS to make corrections to tax returns when data obtained from the Department of Health and Human Services indicate the taxpayer’s refundable credit claims are not valid would help reduce improper payments. TIGTA estimates such authority could have potentially allowed the IRS to prevent more than $1.7 billion in questionable EITC payments in tax year 2012.
"The IRS has continually rated the risk of improper Additional Child Tax Credit payments as low; however, TIGTA’s assessment of the potential for improper payments in this program indicates that its improper payment rate is similar to that of the Earned Income Tax Credit,” said TIGTA Inspector General J. Russell George in a statement. “It is imperative that the IRS take action to identify and address all of its programs that are at high risk for improper payments.”
TIGTA recommended that the IRS ensure that the results of the ACTC Improper Payment Risk Assessment accurately reflect the high risk associated with ACTC payments, identify the root causes of the improper ACTC payments, and establish a plan to reduce erroneous payments. Furthermore, if correctable error authority is granted, the IRS should contract with the Department of Health and Human Services to obtain the complete database of the National Directory of New Hires.
In addition, TIGTA suggested, the IRS should work with the Assistant Secretary of the Treasury for Tax Policy to consider a legislative proposal to obtain expanded National Directory of New Hires database authority to systemically verify claims for other income-based refundable credits, such as the ACTC.
The IRS agreed with TIGTA’s recommendation to pursue expanded National Directory of New Hire authority. The IRS disagreed with TIGTA’s other recommendations, stating that it follows Departmental and Office of Management and Budget guidance in conducting the Improper Payment Risk Assessment for the ACTC. In addition, OMB acknowledges that the IRS already conducts an analysis of the tax gap that incorporates those credits. Finally, the IRS stated that obtaining the complete NDNH database is not cost effective.
“The IRS has compliance processes in place to identify questionable refunds and stop their issuance,” wrote Debra Holland, commissioner of the IRS’s Wage and Investment Division, in response to the report. “To the extent permitted by law, the IRS uses other government data sources to identify questionable claims for refundable tax credits and address them appropriately. For claims of EITC, CTC and ACTC, refunds are stopped and the returns are referred to the IRS Examination functions for review. Examiners will contact taxpayers to request documentation to support their claims for the credit(s) and, when taxpayers are found to be ineligible, the examiners will make the requisite adjustments to the return to eliminate the unallowable credit. Claims disallowed by these pre-refund examinations are not improper payments because the refunds were not issued.”
An IRS spokesman forwarded a further statement to Accounting Today on Tuesday. “The IRS continues to aggressively explore new ways to detect and stop potentially fraudulent claims while maximizing the use of limited compliance resources,” said the IRS statement. “The IRS strongly believes more needs to be done in this area. Several legislative proposals would give the IRS new tools to help administer the EITC, an important credit that has helped millions of working families. In addition, IRS funding limitations severely hamper our efforts on these and other compliance areas. Since 2010, the IRS budget has been reduced by $850 million and we have 13,000 fewer employees. The IRS also notes the complexity of these two credits affects taxpayers in other ways. For example, taxpayers overlook billions of dollars of legitimate EITC claims each year. We urge taxpayers and tax preparers to review the EITC and child tax credit guidelines before filing.”
Separately, the Government Accountability Office released a reportTuesday on Inspector General reporting on compliance with the Improper Payments Elimination and Recovery Act across various federal government agencies. The GAO report found that Inspector Generals reported that many agencies did not meet their planned improper payment reduction targets or achieve and report gross improper payment error rates below 10 percent for each agency program or activity. For fiscal year 2013, federal agencies reported an estimated $105.8 billion in improper payments, a decrease of $1.3 billion from the prior year's revised estimate of $107.1 billion.
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