On December 29, 2014 the Treasury Inspector General for Tax Administration (TIGTA) reported on IRS’ efforts to reduce earned income tax credit (EITC) payments made in error. While the percentage of improper payments is down, the total is still up. From $10.5 billion for 2003 to $14.5 billion for 2013. That is about 24% of all EITC payments for 2013. The EITC is a tax credit to encourage (or reward) lower income workers for working. About 80% of taxpayers eligible for the EITC applied for it in 2010.
TIGTA also reports on problems with the Additional Child Tax Credit. Here the improper payment rate is estimated as between 25.2% and 30.5% or $5.9 to $7.1 billion. Not small change but less than gross dollar amounts improperly paid for EITC.
In no particular order, some of the problems are:
- Congress made the rules for qualifying for the EITC extremely complex and then directed the benefits to the working poor who are less able to afford assistance to make sure they follow the rules.
- There is no easy way for IRS to verify, short of an audit, compliance with many of the EITC rules. It is fairly easy for IRS to catch you if you do not report a stock sale as IRS gets a report from your stock broker. How is the IRS to police your home address to make sure there are not two people living together but using different addresses to hide that fact?
- IRS is charged with administering a program to assist the working poor. Perhaps it would be better to have the Department of Health and Human Services run the EITC program. DHHS is in charge of other programs for the poor, such as Aid to Families with Dependent Children. You could say something similar about the Affordable Care Act – why not have it administered by DHHS? What does IRS know about healthcare?
- It is difficult to cost justify auditing all questionable claims due to the time required versus the relatively low return. For example, in 2011 IRS found 6.6 million questionable EITC claims totaling $21.6 billion. That is a little less than $3,300 per questionable claim. Not all the questionable claims would result in erroneous payments. Of a limited enforcement budget, how much should IRS spend to collect $3,300? Would it be better to spend that IRS money going after a larger underpayment?
- Congress will not give IRS access to DHHS’ new hire database so IRS can crosscheck to see if claimants are really working.
- Who is eligible changes due to the change in taxpayers circumstances. For example, in the great recession many middle class people involuntarily shifted to part-time low wage jobs and became eligible for the first time. After getting a new job they ceased to be eligible.
- Refundable credits, such as the EITC and the Child Credit attract fraudulent taxpayers and fraudulent tax preparers.