IRS wastes billions in bogus claims for Earned Income Tax Credit

The Internal Revenue Service paid up to $13.6 billion in bogus claims for the Earned Income Tax Credit last year and as much as $132.6 billion over the past decade, according to an internal audit that already has some members of Congress questioning how the agency will be able to administer Obamacare.

IRS problems with the tax credit aren’t new. In fact, the Treasury inspector general for tax administration said it warned officials about the problems in 2011 — but two years later, the agency still hasn’t solved the situation and remains in violation of one of President Obama’s executive orders.

Indeed, the IRS has not established annual targets for reducing the payments, which is required by law, nor is the agency complying with requirements that it report to auditors each quarter on any EITC payments totaling more than $5,000.

“The IRS should be commended for implementing numerous processes to educate Americans and identify and prevent improper EITC payments,” said J. Russell George, Treasury inspector general for tax administration. “Unfortunately, it is still distributing more than $11 billion in improper EITC payments each year, and that is disturbing.”

Mr. George and his investigators said 21 percent to 25 percent of all EITC payments in 2012 were erroneous, meaning $11.6 billion to $13.6 billion was paid to people who shouldn’t have received the credit, or received the wrong amount.

The EITC is a refundable tax credit designed to transfer money to the working poor through the tax system. It allows the working poor to pay less in taxes or, if they have no tax liability, to get money.

Both the IRS and the auditors agreed it is a complex program and checking eligibility is difficult.

The program is popular with many lawmakers on both sides of the aisle who say it’s an effective anti-poverty tool, rewarding those who work.

But the large error rate left some lawmakers questioning whether the agency will be able to administer the tens of billions of dollars in health care tax credits that are part of the Affordable Care Act.

“That the IRS can’t figure out how to rein in the improper Earned Income Tax Credit payments doesn’t bode well for the $1.1 trillion in ObamaCare subsidies,” said Sen. Orrin G. Hatch of Utah, the ranking Republican on the Senate Finance Committee.

He said if the error rate in Obamacare subsidies is as big as it is in the EITC, that could mean $250 billion would be wasted in health care payments.

The size of the erroneous payments was staggering to lawmakers. At more than $13 billion a year, the bogus tax claims are more than the entire budget of the Environmental Protection Agency or the Interior or Labor departments.

“The waste outlined in this report — more than $13 billion a year — equals or exceeds the annual budgets of some federal agencies,” said Sen. Tom Coburn, Oklahoma Republican and Congress‘ chief waste-watcher. “Before we ask taxpayers to send even more of their own money to Washington, we must do more to prevent these egregious examples of waste.”

The IRS said it does try to crack down on bad EITC payments. Americans who claim the tax credit are already audited at twice the rate of other taxpayers.

“The IRS protects nearly $4 billion in improper claims each year and is committed to continuing to work to reduce improper claims,” the agency said in a statement.

The agency said it’s working with the White House budget office to try to come up with other ways to weed out bad payments, and promised to soon comply with reporting requirements.

And it’s already shown some progress in cutting the problem. In 2010, as much as 29 percent of EITC payments were erroneous, accounting for up to $18.4 billion.

Analysts said the large error rate stems from the complexity of the program, which leaves taxpayers confused about who is able to claim it.

Then there are the competing goals Congress and Mr. Obama have set.

For example, in a 2009 executive order the president told agencies to do more to make sure Americans know they are eligible for tax credits. But he also told agencies to crack down on bogus payments, laying out the reporting goals that the inspector general said the IRS is violating.

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