Treasury Inspector General for Tax Administration
December 9, 2014
TIGTA - 2014-50
Contact: David Barnes
WASHINGTON – Although the Internal Revenue Service (IRS) is required by law to quantify or identify and take actions to address the root causes of improper payments in Federal programs identified as being at high risk, it has only acknowledged one program – the Earned Income Tax Credit program – as being at high risk for improper payments.
According to a report released publicly today by the Treasury Inspector General for Tax Administration (TIGTA), another tax credit program, the Additional Child Tax Credit, is also at high risk of improper payments, although the IRS has not identified it as such.
The Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC) are refundable credits designed to help low-income individuals reduce their tax burden. The IRS estimated that it paid $63 billion in refundable EITCs and $26.6 billion in refundable ACTCs for Tax Year 2012. The IRS also estimated that 24 percent of all EITC payments made in Fiscal Year 2013, or $14.5 billion, were paid in error.
While the IRS has developed processes to identify improper EITC payments and their root causes, it has not developed processes to quantify or identify the root causes of improper ACTC payments, according to TIGTA’s report. The EITC is used to offset the impact of Social Security taxes on low-income families and to encourage them to seek employment. The ACTC is used to adjust the individual income tax structure to reflect a family’s reduced ability to pay taxes as family size increases.
This audit was initiated because the IRS is required to identify and take actions to address the root causes of improper payments in Federal programs identified as being at high risk for improper payments. Under the Improper Payments Elimination and Recovery Act of 2010, a program is defined as having significant improper payments when improper payments exceed both 2.5 percent of program outlays and $10 million of all program payments made during the fiscal year. The overall objective of this review was to assess the IRS’s efforts to identify and address the root causes of erroneous EITC and ACTC payments.
Using IRS data, TIGTA estimates the potential ACTC improper payment rate for Fiscal Year 2013 is between 25.2 percent and 30.5 percent, with potential ACTC improper payments totaling between $5.9 billion and $7.1 billion. In addition, IRS enforcement data show the root causes of improper ACTC payments are similar to those of the EITC.
Significant changes in IRS compliance processes would be necessary to make any significant reduction in improper payments. Expanded authority to allow the IRS to make corrections to tax returns when data obtained from the Department of Health and Human Services indicate the taxpayer’s refundable credit claims are not valid would help reduce improper payments. TIGTA estimates such authority could have potentially allowed the IRS to prevent more than $1.7 billion in questionable EITC payments in Tax Year 2012.
"The IRS has continually rated the risk of improper Additional Child Tax Credit payments as low; however, TIGTA’s assessment of the potential for improper payments in this program indicates that its improper payment rate is similar to that of the Earned Income Tax Credit,” said J. Russell George, Treasury Inspector General for Tax Administration. "It is imperative that the IRS take action to identify and address all of its programs that are at high risk for improper payments."
TIGTA recommended that the IRS ensure that the results of the ACTC Improper Payment Risk Assessment accurately reflect the high risk associated with ACTC payments, identify the root causes of the improper ACTC payments, and establish a plan to reduce erroneous payments. Furthermore, if correctable error authority is granted, the IRS should contract with the Department of Health and Human Services to obtain the complete National Directory of New Hires (NDNH) database.
In addition, the IRS should work with the Assistant Secretary of the Treasury for Tax Policy to consider a legislative proposal to obtain expanded National Directory of New Hires database authority to systemically verify claims for other income-based refundable credits (e.g., the ACTC).
The IRS agreed with TIGTA’s recommendation to pursue expanded National Directory of New Hire authority. The IRS disagreed with TIGTA’s other recommendations, stating that it follows Departmental and Office of Management and Budget guidance in conducting the Improper Payment Risk Assessment for the ACTC. Further, OMB acknowledges that the IRS already conducts an analysis of the Tax Gap that incorporates those credits. Finally, the IRS stated that obtaining the complete NDNH database is not cost effective.
Read the report.
Note: The difference between the date TIGTA issues an audit report to the Internal Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.
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