April 20, 2015

The Treasury Inspector General for Tax Administration says that a quarter of all of Earned Income Tax Credit payments made in 2012 were not proper payments. Is this announcement from the Inspector General  IRS tax news or an indication of more deeply rooted problems? Either way, it appears the agency needs better oversight in administering EITC credits, which benefit so many low and moderate-income taxpayers and their families.

A Change In Payment Protocols Is Needed

Many EITC payments were made to people who were not entitled to them, while some legitimate recipients received the wrong amount. The total amount of improper EITC payments totaled an astonishing $14.5 billion of the $63 billion in credits paid, according to the report. It appears that the EITC represents one of the biggest risks for placing billions of dollars in the wrong hands.

The federal watchdog agency that monitors the Internal Revenue Service (IRS) operates under the Improper Payment Elimination Recovery Act of 2010. Its most recent report notes that agency oversight is seriously lacking. The amounts of those incorrect payments, unacceptably high at 25%, are significant and considerably above the government expectations for an error rate of 2.5%. Lax oversight is a major contributing factor to the total shortfall, estimated to total between $124 billion to $148 billion.

A Change In The System

A high level of mismanagement also occurs with the Additional Child Tax Credit, intended to assist larger low-income families in reducing their tax burden. Improper credits by the IRS totaled 25% to 30% of the program’s total payouts. These improperly administered credits amount to between $5.9 billion to $7.1 billion in total.

Auditors from the watchdog agency contend that the IRS needs to make significant changes in their existing systems. Clearly the present protocols have failed in preventing errors and improper payments

The watchdog agency recommended expanding IRS authority to allow the agency to make corrections in tax returns it receives to prevent improper payment of refundable tax credits. This change alone could avoid improper payments totaling more than $1.7 billion, according to the auditor.  While the IRS reported agreed with the watchdog agency’s recommendations, recent budget cuts continue to make it difficult — if not impossible — to effectively enforce compliance.