The IRS is still paying more than $10 billion a year in bogus payments to the poor under the Earned Income Tax Credit, the agency’s auditor said in a new report released Tuesday that says about a quarter of all payments are improper.
Despite a 2010 law requiring agencies to crack down on improper payments, the Internal Revenue Service is still deeply in arrears, the Treasury’s Inspector General for Tax Administration said.
In 2013, the agency paid out between $13.3 billion and $15.6 billion in bad payments, accounting for up to 26 percent of all Earned Income Tax Credit payments.
The credit is one of the government’s chief poverty-fighting programs. It is a refundable tax credit paid to the working poor, particularly those with children, as an incentive to keep them in the workforce.
But it’s also rife with illegitimate claims — indeed, it’s the IRS’s only program deemed “high-risk” by the Office of Management and Budget.
The IRS acknowledged it’s been slow to respond to the 2010 federal law requiring it to come up with a strategy to combat bad payments, but said it is making progress in meeting White House guidelines.
IRS officials also disputed some of the way the inspector general calculated the bogus payments, saying that rather than being counted as improper payments, they should be considered part of the “tax gap,” the amount that taxpayers underpay to the IRS.
A number of bogus Earned Income Tax Credit claims are submitted by tax preparers on behalf of their clients. The IRS had tried to come up with a licensing scheme to cut down on bad payments, but federal courts struck that program down, leaving the agency struggling with ways to police tax preparers.
The maximum Earned Income Tax Credit that a person or couple could be eligible for in 2013 was slightly more than $6,000 for taxpayers with more than two children.
Even as the IRS pays out billions in bad claims, there are a large number of taxpayers who would probably qualify for the credit, but who never claim it.
Earlier this year Congress’s chief tax-writer, House Ways and Means Chairman Dave Camp, proposed a reform that would change the Earned Income Tax Credit into a refund of payroll taxes.
Mr. Camp, Michigan Republican, said it would cut down on fraud because it would be easy to see how much a worker paid in payroll taxes, just by looking at his W-2 form.