IRS estimates over a quarter of EITC payments were improper

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The Internal Revenue Service estimates that 25.06 percent of Earned Income Tax Credit payments (translating to about $18.4 billion) were issued improperly in fiscal year 2018.

But refundable tax credits like the EITC still aren’t being classified and reported properly by the Internal Revenue Service as a high risk for improper payments, according to a new government report.

The report, from the Treasury Inspector General for Tax Administration, noted that the federal Office of Management and Budget has declared the EITC a high-risk program that’s subject to specific reporting requirements by the Treasury Department.

The IRS provided all the required information regarding EITC improper payment information for inclusion in the Department of the Treasury's Agency Financial Report Fiscal Year 2018. While the agency hasn’t reduced the overall EITC improper payment rate to less than 10 percent, it has been approved for an exception to the annual reduction target reporting requirement.

As an alternative, the Treasury and the OMB collaborated on the development of a series of EITC supplemental measures for use, instead of meeting reduction targets. The IRS actually holds up payment of the EITC and other refundable tax credits for an additional period of time during tax season in order to double-check the information. Tax preparers are also required to fill out a due diligence checklist before filing tax returns claiming the tax credits.

The IRS reportedly has a higher audit rate for low-income taxpayers claiming the EITC and other refundable tax credits than for much wealthier taxpayers, according to recent reports from the investigative news site ProPublica. “In 2017, EITC recipients were audited at twice the rate of taxpayers with income between $200,000 and $500,000,” said ProPublica. “Only households with income above $1 million were examined at significantly higher rates.”

Not only the EITC is a problem for the IRS, according to the TIGTA report. The agency continues to incorrectly rate the improper payment risk associated with other refundable credits like the Additional Child Tax Credit, the American Opportunity Tax Credit, and the Premium Tax Credit. The incorrect rating allows the IRS to circumvent reporting required information for these programs to the Department of the Treasury for inclusion in the Agency Financial Report.

TIGTA identified over 2.2 million tax returns that showed an income discrepancy of $1,000 or more from what was reported on the tax returns that weren’t selected for further review by the IRS. These taxpayers received over $10.1 billion in credits, including $6.0 billion in EITCs and over $1.9 billion in Additional Child Tax Credits.

TIGTA acknowledged the IRS has started taking corrective actions to address earlier deficiencies reported by the inspector general. Those efforts are leading to better identification and recovery of erroneous EITC payments.

In its latest report, TIGTA suggested the IRS implement a process to systematically identify and evaluate tax returns filed by individuals who have non-work Social Security numbers to prevent erroneous refunds of EITCs and ACTCs. IRS management agreed with this recommendation and plans to take appropriate corrective actions to identify and evaluate tax returns filed by individuals who use non-work Social Security numbers.

“We reach out to and educate taxpayers and tax practitioners to reduce fraud and errors and to protect revenue, and we pursue traditional compliance activities where incorrect payments are made,” wrote IRS CFO Ursula Gillis in response to the report. “However, we could accomplish more with additional tools.”

She pointed to some of the proposals in the Trump administration’s budget plan for fiscal year 2020, which call for increasing oversight of paid tax preparers to help “reduce the need for post-refund enforcement activity,” as well as providing more flexible authority for the IRS to address correctable errors when taxpayers claim credits for which they’re ineligible or they exceed the lifetime limits, or when they fail to submit the required documentation.

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EITC Tax credits Tax audits Tax returns IRS TIGTA