IRS erroneously paid out $132.6 billion in tax credits since 2003

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The Internal Revenue Service improperly paid up to $13.6 billion in Earned Income Tax Credits (EITC) last fiscal year alone, according to a government report.

For the uninitiated, the EITC is a refundable tax credit for low to moderate-income individuals and families. An individual or family does not have to pay taxes to qualify for the credit, but must file a tax return.

According to the Treasury Inspector General for Tax Administration (TIGTA), the Internal Revenue Service’s rate of improper EITC payments for fiscal year 2012 was between 21 to 25 percent. That year, EITC payments totaled $62 billion.

Inspector General J. Russell George called the level of improper payments “disturbing.”

“The IRS must do a better job of reining in improper payments in this and in other programs,” he said in a statement.

An improper payment is defined as “any payment that should not have been made or was made in an incorrect amount” and includes overpayments as well as underpayments.

The report notes that the IRS was able to prevent an estimated $4 billion in improper EITC payments in FY 2012, however the agency has “made little improvements in reducing improper EITC payments as a whole since it has been required to report estimates of these payments to Congress.”

“The IRS should be commended for implementing numerous processes to educate Americans and identify and prevent improper EITC payments,” George said of efforts aimed at reducing erroneous payments.

Since FY 2003, the level of improper payments has hovered between 30 percent and 21 percent. When all the improper EITC payments are added together from FY 2003 –  FY 2012, the total ranges from $110.8 billion on the low estimate side to $132.6 billion on the upper end.

TIGTA, in its review, further found that the IRS had also failed to put in place error reduction goals as required by law and that the agency is also not in compliance with the requirement that it report high-dollar improper payments — or payments defined as over $5,000 — on a quarterly basis to TIGTA and the Council of the Inspectors General for Integrity and Efficiency.

The review further found that an estimated 10,400 or more EITC claims — totaling more than $52.8 million — should have been reported to TIGTA. TIGTA recommended that the IRS take steps to rectify this. According to the report, the IRS agreed.

“Every year, the IRS conducts 500,000 EITC audits as part of a broader enforcement strategy, and EITC claims are twice as likely to be audited as other tax returns,” the IRS explained in an emailed statement.

“The IRS protects nearly $4 billion in improper claims each year and is committed to continuing to work to reduce improper claims. As the data in the TIGTA report shows, there has been a significant decline in the improper payments since 2010,” the agency added, noting that it continues to work with OMB to develop a quarterly report of overpayments.

*This article has been updated with comment from the IRS.

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Caroline May