The Treasury Inspector General for TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Administration (TIGTA) this week released yet another report on the issue of improper payments in refundable tax credits. Improper payments are any sort of payment made by the IRS in error – whether from an honest mistake or from deliberate fraud by the tax filer. The report concluded that “significant changes in IRS compliance processes would be necessary to make any significant reduction in improper payments.”
Treasury has covered this issue repeatedly, as has Tax Foundation. (For example, here and here.) The estimate for 2013 – that 24% of all EITC payments were made in error – is essentially in line with the trend of improper payments for the past decade.
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Estimated EITC Improper Payments for Fiscal Years 2003 Through 2013 |
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|
Year |
Minimum Improper Payments Percentage |
Maximum Improper Payments Percentage |
Minimum Improper Payments, 2013 Dollars (Billions) |
Maximum Improper Payments, 2013 Dollars (Billions) |
|
2003 |
25% |
30% |
$12.07 |
$14.61 |
|
2004 |
22% |
27% |
$10.58 |
$13.16 |
|
2005 |
23% |
28% |
$11.42 |
$13.57 |
|
2006 |
23% |
28% |
$11.37 |
$13.46 |
|
2007 |
23% |
28% |
$11.65 |
$13.78 |
|
2008 |
23% |
28% |
$11.99 |
$14.15 |
|
2009 |
23% |
28% |
$12.21 |
$14.50 |
|
2010 |
24% |
29% |
$16.37 |
$19.69 |
|
2011 |
21% |
26% |
$14.25 |
$17.37 |
|
2012 |
21% |
25% |
$11.72 |
$13.74 |
|
2013 |
22% |
26% |
$13.30 |
$15.60 |
In other words, in terms of actual results, no progress been made yet on the issue.
However, the Treasury reports have slowly gotten closer to identifying the problems with the EITC, and this year, they further identify the Additional Child Tax Credit as having similar issues. The results of the reports suggest that a legislative fix may be in order.
One issue is that refundable tax credits are extremely complex. Publication 596, which tells taxpayers how to file the earned income credit, is 39 pages long. Making the EITC simpler would both reduce error rates among honest tax filers, and help the IRS in enforcement against unscrupulous fraudsters.
One surprising area of complexity, for example, is what constitutes a “child,” and how to verify that. The Treasury report covers this issue in detail. This may seem like a ridiculous problem, if you’re an ordinary human being, but it’s actually a big deal for the IRS. Not all children have stable, year-round living situations. Some spend time with two parents who live separately. Some live with non-biological relatives. And then there are even stranger edge cases; the IRS actually has to provide filing guidance for parents of kidnapped children. The IRS really isn’t built to handle things like this.
Another area of complexity is the eligibility requirements, which are numerous, difficult, and overlapping. The motive behind complex eligibility requirements is understandable – though ultimately misguided. Refundable credits are supposed to spend money to help people, and you don’t want that help going to “the wrong people.” But as the audit shows, billions of dollars are quite literally going to the wrong people anyway.
Refundable tax credits are long overdue for simplification and consolidation.
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