Treasury Report: Improper Payments Remain a Problem in EITC, Child Credit

December 10, 2014

Alan Cole

Alan Cole

The Treasury Inspector General for Tax 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.

Estimated EITC Improper Payments for Fiscal Years 2003 Through 2013

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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A 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.

A tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return.

A refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.