The Earned Income Tax Credit, the Additional Child Tax Credit and the American Opportunity Tax Credit continue to have high rates of improper payments, despite efforts by the IRS.
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The report comes at a time when the Biden administration has temporarily expanded the Earned Income Tax Credit and the Child Tax Credit as part of its American Rescue Plan as a way to help families during the pandemic. More recently, the administration has proposed to make those expansions more permanent as part of its American Families Plan, as well as provide education incentives like free pre-school and community college, rather than relying on tax credits like the AOTC. The Premium Tax Credit from the Affordable Care Act has also been expanded to help more families buy health insurance coverage.
Some lawmakers have complained that refundable tax credits like the EITC and the Child Tax Credit have been prone to abuse, and in 2009 the Obama administration issued Executive Order 13520 in an effort to reduce payment errors, waste, fraud and abuse in federal programs. During the Trump administration, Congress passed the Payment Integrity Information Act of 2019, and in fiscal year 2020, the Office of Management and Budget determined that the EITC, the ACTC and AOTC are high-priority programs that are susceptible to significant improper payments. Tax preparers regularly have to fill out a due diligence checklist for EITC claims, and tax returns claiming the tax credits are frequently held up for several weeks by the IRS for extra scrutiny before refunds will be issued.
The objective of TIGTA’s review was to determine whether the IRS complied with the annual improper payment reporting requirements under those regimens for fiscal year 2020. The IRS pointed to problems with the design of the tax credits themselves by Congress and the difficulty in complying with all the requirements.
“Although error rates for each of these credits remain high, the IRS attributes these refundable tax credit overclaims to their statutory design and the complexity taxpayers face when self-certifying eligibility for the refundable tax credits and not to internal control weaknesses, financial management deficiencies or reporting failures,” said the report.
The IRS described five barriers to reducing improper payments for the refundable credits: complexity and lack of data to verify statutory eligibility requirements, lack of correctable error authority, high turnover of eligible taxpayers, unscrupulous and/or incompetent tax preparers, and fraud. As a result of such factors, the IRS hasn’t managed to reduce the overall improper payment rates for the EITC, the ACTC or the AOTC to less than 10%, although an exception to the IRS’s annual reduction target reporting requirement has been approved.
Those aren’t the only tax credits prone to improper payments. The IRS didn’t calculate the dollar amount and percentage rate of improper payments for its fourth high-risk program: the Net Premium Tax Credit for Obamacare. But the IRS has been busy dealing with the fallout from the COVID-19 pandemic, so it has needed to stop working on those calculations. It has also encountered delays working with the Department of Health and Human Services and the Centers for Medicare and Medicaid Services to develop a joint methodology for assessing improper payment risk for the Premium Tax Credit.
There has been some progress on deterring improper payments after the IRS implemented a previous recommendation from TIGTA and modified its procedures to deal with eligibility for the ACTC when a tax return claiming the EITC has been selected for review. IRS management expects to protect $6.3 million for tax year 2019 tax returns by following those procedures. That would be a significant increase over the $3.2 million it saved on 2018 returns.
The IRS may have its hands full in safeguarding against improper payments as aid continues to rush out the door as part of the Biden administration’s efforts to stimulate the economy and help low-income families through the expanded Child Tax Credit, in hopes of substantially reducing the child poverty rate.
“Programs with RTC [refundable tax credits] present challenges of administering complex social benefit programs, such as the Earned Income Tax Credit, the Additional Child Tax Credit and the Premium Tax Credit component of the Affordable Care Act through the tax administration system,” wrote IRS CFO Teresa Hunter in response to the TIGTA report. “These, and other social programs, have been expanded and will continue to require education, oversight and compliance activities going forward to ensure the correct taxpayers receive the correct benefits.”
