Treasury Inspector General for Tax Administration
May 19, 2016
TIGTA - 2016-14
Contact: Karen Kraushaar, Director of Communications
WASHINGTON — Billions of dollars in potentially improper payments will continue to go unaddressed unless the Internal Revenue Service (IRS) is allowed expanded error correction authority.
This is a finding in an audit report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).
The Improper Payments Elimination and Recovery Act (IPERA) of 2010 and subsequent legislation strengthened agency reporting requirements and redefined “significant improper payments” in Federal programs. The Office of Management and Budget (OMB) has declared the Earned Income Tax Credit (EITC) Program a high-risk tax program that is subject to reporting in the Department of the Treasury (Treasury) Agency Financial Report.
OMB considers the EITC the only IRS revenue program fund to be a high risk for improper payments. The IRS estimates that 23.8 percent ($15.6 billion) of EITC payments were issued improperly in Fiscal Year 2015.
This audit was initiated because TIGTA is required to assess the IRS’s compliance with the reporting requirements contained in the IPERA; Executive Order 13520, Reducing Improper Payments and Eliminating Waste in Federal Programs; and the Improper Payment 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 2015.
The IRS provided all required improper payment information to Treasury for inclusion in the Department of the Treasury Agency Financial Report Fiscal Year 2015 with the continued exception of not reporting an overall EITC improper payment rate of less than 10 percent.
The Consolidated Appropriations Act of 2016 provides the IRS with additional tools to reduce EITC improper payments. However, it did not expand the IRS’s authority to systemically correct the erroneous claims it identifies.
Without this authority, the IRS continues to be unable to address the majority of potentially erroneous EITC claims it identifies. The number of potentially erroneous EITC claims the IRS can audit is limited by resources. As a result, billions of dollars in potentially erroneous EITC claims go unaddressed each year.
“The IRS’s Fiscal Year 2017 budget submission contained a legislative proposal for correctable error authority,” said J. Russell George, Treasury Inspector General for Tax Administration. “This authority would help it systemically address many of the erroneous claims it identifies,” he added.
In addition, although the IRS completed risk assessments of the 22 program fund groups identified by the Treasury, the risk assessment process still does not provide a valid assessment of refundable credit improper payments. For example, the IRS continued to incorrectly rate the risk of improper payments associated with the Additional Child Tax Credit and the American Opportunity Tax Credit in Fiscal Year 2015 as low, despite the IRS’s own enforcement data.
From those enforcement data, TIGTA estimates that the potential Additional Child Tax Credit improper payment rate for Fiscal Year 2015 is 24.2 percent, with potential improper payments totaling $5.7 billion, and estimates that the potential American Opportunity Tax Credit improper payment rate for Fiscal Year 2015 is 30.7 percent, with potential improper payments totaling $1.8 billion.
TIGTA recommended that the IRS ensure that the revised Additional Child Tax Credit improper payment risk assessment process includes a quantitative assessment. TIGTA also recommended that the IRS ensure that the results of the American Opportunity Tax Credit Improper Payment risk assessment accurately reflect the high risk associated with American Opportunity Tax Credit payments. The IRS agreed with the recommendations and plans to take corrective action.
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.