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Oct 28

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IRS wasted billions in fraudulent refundable tax credits

In September, the Treasury Inspector General for Tax Administration (TIGTA) issued a report entitled “Expansion of Controls over Refundable Credits Could Help Reduce the Billions of Dollars of Improperly Paid Claims”. The report is necessary to see how the Internal Revenue Service fared in collecting billions of dollars of fraudulent refundable credits had the IRS not been asleep at the switch.

Refundable credits, unlike other tax credits, not only have the potential to reduce a taxpayer’s TIGTA recommended that the IRS implement tax liability to zero, but also allow the taxpayer to additional controls to identify and stop erroneous receive a cash payment of any remaining credit claims for refundable credits before refunds are amount. This makes refundable tax credits more susceptible to fraud. Without proper controls, billions of taxpayer dollars are vulnerable to erroneous claims and fraudulent tax schemes. …

Two refundable credits, the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC), are designed to help working and low-income families. Some refundable credits such as the First-Time Homebuyer Credit, the American Opportunity Tax Credit, and the Adoption Credit have been offered temporarily to provide incentives for specific activities, such as buying a home, obtaining a college education, and adopting a child. …

The IRS estimates that it has paid between $99 billion and $119 billion in improper EITC payments alone from Fiscal Year 2003 through 2011. It does not have estimates for the other refundable credits.”

The following articles show the unfolding disaster of IRS writing checks for fraudulent claims:

  1. November 2011 – IRS Continues To Mismanage Refundable Tax Credits
  2. September 2011 – Audit Report Discloses $4.2 Billion Annually Is Paid To Illegal Aliens Through A Refundable Tax Credit, With Practically No Offsetting Tax Revenues
  3. January 2010 – IRS Needs Significant Additional Controls In Its Role As Disbursing Agent For Refundable Tax Credits

On claims that have had more than a year to be resolved, TIGTA estimates that 57% of the claims were repaid, almost entirely by offsetting the next year’s refund claim against the previousl fraudulent payment. The remaining 43% remains uncollected.

Now that the losses are pretty much established, the IRS agrees that it should tighten controls over refundable tax credits. While it is better late than never to make these easy-to-implement changes, the additional controls should have been in place all along.

 

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

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