IRS Still Behind on Curbing Improper Tax Credit Claims

This story has been updated. 

The Internal Revenue Service has fallen behind in its ongoing efforts to reduce misrouting of earned income tax credit funds, resulting in $11.6 billion to $13.6 billion in lost revenue, according to an audit released Tuesday.

The agency has made “no significant improvement in” curbing misuse of the credit designed to alleviate poverty, and as much as one-quarter of the fiscal 2012 total of $68 billion in EITC payments may have been misspent, said the Treasury Inspector General for Tax Administration.

“TIGTA also found that the IRS has not established annual improper payment reduction targets as required by law,” auditors said. “The IRS is also not in compliance with the quarterly reporting requirement for high-dollar improper EITC payments (payments totaling more than $5,000) to TIGTA and the Council of the Inspectors General for Integrity and Efficiency.”

The Obama administration in November 2009 issued an executive order calling for reductions in improper payments governmentwide, but the IRS has not fully complied with the order because it has not set up a timetable of improper-payment reduction goals, TIGTA said. Auditors also suggested that the agency’s own estimates of the improper payment problem may be understated.

The IRS is under pressure to educate the public about the credit, with estimates that the participation rate for individuals who are eligible to receive the EITC is only 80 percent.

Previous reports of scant progress on curbing improper claims of the credit have drawn criticism from lawmakers, among them Senate Finance Committee members Orrin Hatch, R-Utah, and Charles Grassley, R-Iowa, as well as Rep. Charles Boustany Jr., R-La., chairman of the Ways and Means Oversight Subcommittee.

“The IRS should be commended for implementing numerous processes to educate Americans and identify and prevent improper EITC payments,” said J. Russell George, Treasury inspector general for tax administration. “Unfortunately, it is still distributing more than $11 billion in improper EITC payments each year, and that is disturbing.”

TIGTA recommended that the IRS develop processes to identify high-dollar improper EITC payments. IRS managers agreed with the report, saying while the agency is not currently in compliance with the executive order, it is working with the Office of Management and Budget “to develop supplemental measures in lieu of reduction targets.”

In a Tuesday statement, an IRS spokesman said, “The IRS appreciates the inspector general’s acknowledgement of all our work to implement processes that identify and prevent improper EITC payments. Every year, the IRS conducts 500,000 EITC audits as part of a broader enforcement strategy, and EITC claims are twice as likely to be audited as other tax returns. The IRS protects nearly $4 billion in improper claims each year and is committed to continuing to work to reduce improper claims. As the data in the TIGTA report shows, there has been a significant decline in the improper payments since 2010.”