IRS Pressed to Fix Noncompliance with Refundable Tax Credits

The Internal Revenue Service needs to expand its use of data and develop a comprehensive strategy to address noncompliance by taxpayers claiming refundable tax credits such as the Earned Income Tax Credit, according to a new report.

The report, from the Government Accountability Office, pointed out that in 2013, the most recent year available for the GAO’s research, taxpayers claimed $68.1 billion in Earned Income Tax Credits, $55.1 billion in nonrefundable Child Tax Credits and refundable Additional Child Tax Credits, and $17.8 billion in American Opportunity Tax Credits. However, the eligibility rules for claiming the tax credits are difficult since they need to take into account often complicated family relationships and living arrangements to decide which children qualify.

The error rates are relatively high for claims of refundable tax credits. For 2009 to 2011, the average total amount overclaimed each year was $18.1 billion for the EITC, $6.4 billion for the nonrefundable CTC and refundable ACTC, and $5.0 billion for the AOTC.

To reduce such overclaims, the IRS resorts to audits and automated filters to spot errors. It also requires tax preparers to fill out due diligence checklists before submitting EITC claims on behalf of clients.

The GAO recommended the IRS develop a comprehensive compliance strategy that encompasses all the refundable tax credits. The IRS should also use third-party data on educational institutions to verify claims for the AOTC, which provides assistance to students at colleges and universities, the GAO suggested. The IRS agreed with most of the GAO’s recommendations, but raised some concerns about the cost of one recommendation for studying collections data for post-refund enforcement.

Legislative authority from Congress for expanded error correction authority is also an issue, an IRS official pointed out.

“Without additional authorities granted by Congress, it is difficult for the IRS to make significant improvements in reducing improper payments of refundable tax credits under current budget constraints,” wrote IRS Deputy Commissioner for Services and Enforcement John M. Dalrymple in response to the report. “The issues identified in the draft report illustrate some of the challenges we currently face in trying to reduce payment errors in benefit programs administered through the tax system. Our past experience with the Earned Income Tax Credit (EITC) demonstrates this difficulty. Despite years of studies, audits, and considerable resources invested, the estimated EITC improper payment rate has remained relatively constant.”