IRS’ Earned Income Tax Credit Program Continues to Make Billions in Erroneous Payments
Published: April 24, 2013
The IRS estimates that 21-25% of Earned Income Tax Credits (EITC) payments were issued improperly in FY2012, according to a recent Treasury IG report, equating to between $11.6 billion and $13.6 billion.
EITC is the government’s single largest tax-credit program by providing tax breaks to low and moderate income Americans who work. Due to its exponential growth in recent years, it has been ripe with fraud and erroneous payments, reaching the government’s highest error rate of 26.3% in FY2010. The program often sends refund checks to multiple adult members of the same family, and frequently allows extended family members to claim the same children as dependents as long as they live together for at least six months of the year.
According to Paymentaccuracy.gov, the government’s website for tracking federal improper payments, the EITC program made $12.6 billion in improper payments in FY2012 or 22.7% of total program outlays. Both Treasury’s IG and Paymentaccuracy.gov show that the EITC improper payment rate is on the decline. However, it is the highest error rate federal benefits program based on percentage of program outlays, followed by the National School Lunch Program at 15.5%. According to the Treasury IG report, the agency “has made little improvement in reducing EITC improper payments.”
Deltek recently included the EITC program as one of the high-risk federal programs profiled in its report, Technology Strategies for Federal Waste, Fraud and Abuse. Many of the improper payments for the EITC program stem from the complexities of the tax code and the fact that the program relies on self-reporting. In some instances, applicants make unintentional mistakes rather than committing outright fraud.
70% of the EITC recipients have their tax returns done by tax preparers. Additional efforts to reduce WFA have included more training and oversight for preparers, as well as a $500 penalty for each failure to comply with tax due diligence rules.
Taxpayers can be assessed penalties and interest for EITC errors and in some cases, taxpayers can be barred from claiming EITC for 2 or 10 years.
The EITC program has a dual problem in that it wants to encourage those who are eligible for the program to participate, while also reducing improper payments. To date, only 1 in 5 people who are eligible claim it.
The IRS will continue to address EITC noncompliance through its aggressive compliance program which includes examinations, reviews of income misreporting, systemic corrections during tax return processing, and an enhanced focus on paid return preparers. Because tax return preparers handle two-thirds of returns claiming the EITC, the Department of the Treasury expects the implementation of new preparer requirements for registration, competency testing, continuing education, and compliance checks will improve EITC compliance, decrease fraud, and reduce overall program noncompliance.