TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Highlights

IMPROPER PAYMENT REPORTING HAS IMPROVED; HOWEVER, THERE HAVE BEEN NO SIGNIFICANT REDUCTIONS TO THE BILLIONS OF DOLLARS OF IMPROPER PAYMENTS

Final Report issued on April 30, 2020

Highlights of Reference Number:  2020-40-025 to the Commissioner of Internal Revenue.

IMPACT ON TAXPAYERS

The Improper Payments Elimination and Recovery Act of 2010 and subsequent legislation strengthened agency reporting requirements and redefined “significant improper payments” in Federal programs.  The Office of Management and Budget has declared the Earned Income Tax Credit (EITC) Program a high-priority program that is subject to reporting in the Department of the Treasury Agency Financial Report.  The IRS estimates 25.3 percent ($17.4 billion) of the total EITC payments of $68.7 billion made in Fiscal Year 2019 were improper.

WHY TIGTA DID THE AUDIT

This audit was initiated because TIGTA is required to assess the IRS’s compliance with the reporting requirements contained in the Improper Payments Elimination and Recovery Act of 2010; Executive Order 13520, Reducing Improper Payments; and the Improper Payments Elimination and Recovery Improvement Act of 2012.  The objective of this review was to determine whether the IRS complied with the annual improper payment reporting requirements for Fiscal Year 2019.

WHAT TIGTA FOUND

The IRS provided all required EITC improper payment information for inclusion in the Department of the Treasury Agency Financial Report Fiscal Year 2019.  The IRS has not reduced the overall EITC improper payment rate to less than 10 percent; however, it has been approved for this exception to the annual reduction target reporting requirement.  As an alternative, the Office of Management and Budget advised that a reduction target may remain constant given the complexities of the program, as long as the complexities are clearly explained in a footnote.

For Fiscal Year 2019, in response to TIGTA recommendations, the IRS correctly rated the Additional Child Tax Credit (ACTC), the American Opportunity Tax Credit (AOTC), and the Net Premium Tax Credit (PTC) as being susceptible to significant improper payments, i.e., high risk, similar to the EITC.  However, the IRS did not report the Net PTC improper payment estimates in the Agency Financial Report and will begin reporting in Fiscal Year 2020, as required by the Office of Management and Budget.  The IRS estimates that 27.4 percent ($540.9 million) of the total Net PTC payments in Fiscal Year 2019 were improper.

In addition, the IRS does not use the tools provided by Congress to the extent possible to address erroneous credit payments.  For example, erroneous refund penalties are not being assessed, the majority of taxpayers who are recertified to receive a refundable credit do not meet eligibility requirements, and bans are not being used effectively.  Furthermore, limited resources result in the majority of refundable credit claims with income discrepancies not being addressed.

Finally, revising the nonwork Social Security Number case selection methodology could increase revenue protected.  Our review of Processing Year 2019 tax returns identified that the IRS could have increased the amount of revenue it is protecting by approximately $3.1 million if it included the ACTC in its selection criteria and prioritized its case selection.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS work with the Department of Health and Human Services to develop a comprehensive risk assessment of improper PTC payments, which includes the risk of the Advanced PTC improper payments.  In addition, the IRS should continue to refine its selection criteria to ensure that the tax returns with the greatest potential are selected and worked, and implement a process to systemically identify and evaluate tax returns filed by individuals with nonwork dependent Social Security Numbers to prevent erroneous refunds of the ACTC.

IRS management agreed with all three recommendations and plans to take appropriate corrective actions.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

https://www.treasury.gov/tigta/auditreports/2020reports/202040025fr.pdf.

 

Phone Number   /  202-622-6500

E-mail Address  /  TIGTACommunications@tigta.treas.gov

Website             /  https://www.treasury.gov/tigta