IRS fumbles around $125 Billion in the last decade for incorrect EITC

The Earned Income Tax Credit (EITC) is a refundable tax credit that allows those completing a tax form to get a refund in excess of any tax that might have been paid. The Internal Revenue Service (IRS) is responsible for administering the EITC. Congress originally approved the EITC legislation in 1975.

In an August 28 report, the Treasury Inspector General for Tax Administration memorializes a dismal lack of progress in preventing incorrect EITC payments. A decade ago (in 2003), the IRS estimated that improper EITC payments were between $9.5 billion and $11.5 billion. A decade later, the IRS reports that from 21 to 25% of all payments are improper, causing an annual loss of $ 11.6 billion to $13.6 billion. During this past decade, the estimated total improper payments ranges from $110.8 billion to $132.6 billion.

The IRS and the Inspector General concludes that the easy efforts of educating taxpayers, creating improved instructions, and beating up on paid tax preparers associated with incorrect filings has already occurred, yet these substantial incorrect payments continue. The report states:

“… The IRS has made little improvement in reducing improper EITC payments as a whole since it has been required to report estimates of these payments to Congress. The IRS acknowledges that further reductions in the EITC improper payment rate will be difficult to achieve. … The IRS acknowledged that it cannot fully address EITC noncompliance by examining tax returns and must pursue alternatives to traditional compliance methods. The IRS’s report does not indicate that it has taken any steps to identify or implement alternative compliance methods since we first made our recommendations in December 2008. As we have previously reported, if the IRS does not move beyond its traditional compliance methods, it will be unable to make any significant reduction in the estimated $11 billion to $13 billion issued each year in improper EITC payments.”

The lack of progress is intolerable. The IRS is writing checks to those that fill out a tax form, in a program that is obviously just too much for them to manage as the IRS is currently funded.  Either the IRS needs to be better funded so that is can stem these enormous improper payments, or Congress should eliminate the refundable credit program that is being massively abused.

This article provides a larger perspective on tax-based expenditures, including the EITC.


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