IRS doles out $11.6 billion in erroneous tax credit checks

By M.D. Kittle | Watchdog.org

It’s another public-relations black eye for the Internal Revenue Service, and this one cost taxpayers at least $11.6 billion in fiscal year 2012.

The federal agency that spent nearly $50 million of taxpayer money on conferences and targeted conservative organizations made nearly $62 billion in Earned Income Tax Credit payments in fiscal year 2012, according to an audit released Tuesday by theTreasury Inspector General for Tax Administration.

The IRS estimated that 21 to 25 percent of the EITC payments were made in error. A TIGTA official tells Watchdog.org the amount likely is higher.

The IRS has made little improvement in reducing improper EITC payments in the three years since the agency has been required to report estimates to Congress.

During the past decade, the IRS has handed out a minimum of $110 billion in improper EITC payments, and as much as $132 billion. That’s the value of at least 4 ½ federal government shutdowns.

“This is just further evidence of a federal government that is a very broken, very dysfunctional and very inefficient entity,” U.S. Sen. Ron Johnson, R-Wisconsin, toldWatchdog.org.

He added a frightening caveat for those worried about what’s to come withObamacare.

“It’s going to be the IRS that is the primary enforcer of the health care law. That should not give any confidence to the Americanpeople.”

EITC is a refundable federal income tax credit for low- to moderate-income working individuals and families.

Last year, more than 27 million “eligible individuals and families” received the tax credit, and some of those individuals had no tax withheld.

The IRS has failed on a number of EITC fronts, according to the TIGTA audit, including failing to establish required annual improper payment reduction targets. And the agency is not in compliance with the quarterly reporting requirement for “high-dollar” improper EITC payments, totaling more than $5,000 each.

The IRS offered several reasons for the improper payments, not the least of which is the “complexity” of the EITC tax law, “including the need for congressional authorization of math error authority,” according to the audit. Part of the problem, according to a TIGTA official, is that the IRS doesn’t have the authority to correct simple math errors on EITC forms without the benefit of an audit.

Other reasons include:

• Confusion among eligible claimants
• High turnover of eligible claimants
• Unscrupulous tax return preparers
• Downright fraud

“EITC eligibility rules are complicated and cause taxpayers to make errors while attempting to interpret and apply the tax laws to their individual situations,” the audit states. “In addition, the changing population of taxpayers who claim the EITC increases the difficulty the IRS faces in improving EITC compliance.”

Studies show that approximately one-third of EITC claimants each year are intermittent or first-time claimants, the audit states.

This is the same agency under fire earlier this year for sending out 23,994 tax refunds totaling $46,378,040 to one address in Atlanta. A TIGTA audit blamed IRS managers for ignoring a tax loophole that allowed individuals to defraud the government. The problem, according to the report, was how the IRS handed out individual tax identification numbers to those not eligible to Social Security numbers.

“ITINs are supposed to be assigned to nonresidents or residents who are not authorized to work in the United States. But the audit found the verification process for ITIN applications was lax, tax fraud was undetectable and managers eliminated processes that weeded out successful processes used to identify potential fraud patterns and schemes,”according to a report from Atlanta’s CBS affiliate. “Complaints by IRS employees alleged management removed those processes to increase the volume of applications that can be processed.”

Taxpayers can expect little relief — with, perhaps, the exception of those who collect illegal EITC payments. Despite numerous efforts, the IRS is “unlikely to achieve any significant reduction in EITC improper payments,” the audit states.

The IRS says it’s trying. In a statement, the agency said it conducts 500,000 EITC audits each year as part of a “broader enforcement strategy,” and EITC claims are “twice as likely to be audited as other tax returns.”

“As the data in the TIGTA report shows, there has been a significant decline in the improper payments since 2010,” the agency said.

For fiscal year 2012, the IRS reported its efforts protected approximately $4 billion in erroneous EITC payments and the agency identified approximately 7,000 paid tax return preparers who were not complying with EITC due diligence requirements.

Auditors say the IRS must develop alternatives to traditional compliance methods if it hopes to significantly reduce improper payments.

In December 2008, for example, the auditor reported the IRS’ Dependent Databaseidentified almost 600,000 potentially erroneous tax year 2005 EITC claims, totaling $1.3 billion. But the IRS didn’t have the resources to address 93.7 percent of the cases, with claims totaling $1.2 billion.

While the tax collector has admitted the error of its ways, the latest IRS report to TIGTA “does not indicate that it has taken any steps to identify or implement alternative compliance methods” since the auditor made its recommendations in 2008.

The audit noted that if the IRS doesn’t move beyond “traditional compliance methods, it will be unable to make any significant reduction in the estimated $11 billion to $13 billion issued each year in improper EITC payments.”

An executive order signed by President Barack Obama in 2009 was supposed to increase federal agencies’ accountability for reducing improper payments while making sure their programs serve and provide access to their intended beneficiaries. The IRS, according to the audit, has done the latter, achieving a participation rate between 78 percent and 80 percent of those eligible for the tax credit.

The IRS still is not in compliance with the executive order, failing to deliver a required EITC report for fiscal years 2010 or 2011. The agency blamed personnel changes. In March, the IRS delivered its fiscal year 2012 report, with information on 2010-11, but failed to include all of the required information, according to the auditor.

In its statement, the IRS pledged it will continue to work with the White House’s Office of Management and Budget to “develop supplemental measures to better gauge the impact of IRS’ compliance and outreach efforts.” The agency said it will comply with the other requirements as outlined in the audit.

Contact M.D. Kittle at [email protected]