The IRS has failed to clamp down on improper refundable tax credit payments, according to a new federal audit. In all, the IRS said it wrongly distributed as much as a quarter of Earned Income Tax Credit (EITC) payments, between $11.6 billion and $13.6 billion, according to Treasury’s inspector general for tax administration. Between 2003 and 2012, the IRS erroneously paid out at least $110.8 billion and as much as $132.6 billion, the new report says.

Due to a 2009 executive order, the IRS is supposed to have targets for rolling back those improper payments. But the agency has yet to do so, and the Treasury inspector general says in its audit that the IRS needs to rethink its methods for cutting down on waste in EITC payments.

Russell George, the tax administration inspector general, noted that the IRS had made some strides in stopping inappropriate payments, and in educating taxpayers about EITC eligibility. Still, George said the billions of dollars lost to waste each year was “disturbing.” The IRS must do a better job of reining in improper payments in this and in other programs,” George said in a statement. Senator Orrin Hatch (Utah), the top Republican on the Finance Committee, called on the IRS to “aggressively crack down on these erroneous payments,” insisting the agency’s issue with the EITC “doesn’t bode well” for its oversight of subsidies for President Obama’s healthcare law.

Hatch said “refundable tax credits are a nightmare to administer and lead to far too much of the American people’s money going out to those who aren’t eligible,” For its part, the IRS said it is doing its best to balance the need to target mistaken payments and to ensure that eligible taxpayers know to claim the EITC, which is aimed at helping low-income workers. Improper payments have also declined since 2010, the IRS added in a statement.

Democrats successfully fought to extend expanded versions of the EITC and other refundable tax breaks in the fiscal-cliff deal signed early this year. Taxpayers who claim the EITC or other refundable tax breaks receive payments from the government if those credits are worth more than their tax burden.

IRS officials told the inspector general that they were meeting with the Office of Management and Budget to search for ways to supplement their efforts to reduce improper EITC payments. The percent 21 to 25 percent figure the IRS uses includes payments that should have never been made and both over and underpayments.

The IRS said “. . . [it] appreciates the Inspector General’s acknowledgment of all our work to implement processes that identify and prevent improper EITC payments,”. “The IRS protects nearly $4 billion in improper claims each year and is committed to continuing to work to reduce improper claims.”

Still, the IRS acknowledges that complexities in the tax law, and confusion and high turnover among those claiming the EITC have hampered its efforts to reduce those payments. Fraud and dishonest tax preparers have also driven up the number of improper payments, the IRS says.

Those sorts of issues have led the tax administration inspector general to say that the IRS probably won’t make any “significant” reduction in erroneous EITC payments due to limited resources have already eaten into the effectiveness of its current methods. While the agency said it is working with the Obama administration to “better gauge the impact of IRS’ compliance and outreach efforts,” the inspector general also noted that the IRS has yet to say when those measures would be implemented.

One method being used by the IRS to reduce erroneous EITC payments is by requiring tax return preparers to verify on all returns claiming the credit that taxpayers are eligible for the EITC. They must complete Form and e-file it with the return or attach it to a paper return. Failure by the preparer to file this form can result in penalties assessed against the preparer and possible denial; of the credit to the taxpayer. Almost all of the fraudulent EITC payments claimed for clients come from returns prepared by unscrupulous and dishonest preparers. The IRS attempted to implement a system to weed out these preparers by requiring all preparers, other than CPAs, attorneys, and enrolled agents to pass a competency test and earn annual CPE on the tax law and ethics. Last year, a lower court ruled the IRS could not do this but the Service has appealed the decision.

By Bernie Becker – Edited and posted by Harold Goedde CPA, CMA, Ph.D. (accounting and taxation)

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