While it is known the IRS is having a hard time preventing overpayments to individuals claiming a tax credit typically awarded to low-income families, they could be underreporting improper payments being made to taxpayers claiming other credits, too.
A report from the Treasury Inspector General for Tax Administration released this week found that the agency is incorrectly rating the improper payment risk – or the likelihood that payments made were incorrect or should not have been made – associated with the Additional Child Tax Credit (ACTC), the American Opportunity Tax Credit (AOTC) and the Premium Tax Credit (PTC). The Premium Tax Credit is given to households that have obtained health insurance through a healthcare exchange in the tax year, while the AOTC is for reducing the costs of college.
Each of these programs was incorrectly identified as medium-risk by the agency, however, both were said to warrant a high-risk rating.
“As a result, the IRS continues to significantly understate its estimate of improper payments in its reports to the [Office of Management and Budget] and Congress,” the report stated.
Between tax years 2009 and 2011, it is estimated 33 percent of ACTC payments were improper. During the 2014 tax season, the IRS estimated 41 percent of net PTC payments were improper. The Treasury reported in December that a total of $3.7 billion claimed in advance PTCs was in excess of what taxpayers were entitles – $1 billion of which was not required to be repaid.
The Earned Income Tax Credit is the only program identified by the IRS as high-risk. This credit subsidizes working families with low-to-moderate incomes – who generally receive a credit equal to a percentage of their earnings up to a certain maximum amount.
In fiscal 2018, the IRS estimated about 25 percent of EITC payments made were either incorrect, or should not have been made. That’s equal to $18.4 billion.
The report also found that the IRS is not doing a great job verifying incomes against third-party data – and incomes are directly tied to the ability to receive credits like the Earned Income Tax Credit or the Additional Child Tax Credit. As such, the report concluded, “some taxpayers may be motivated to erroneously report more or less income to increase the amount of refundable credits they could receive.” However, that is in part due to limited compliance resources at the tax agency.
The IRS said it could accomplish more with more tools and President Trump's fiscal 2020 budget puts forth a couple legislative changes that could help facilitate tax administration.
The Earned Income Tax Credit, in particular, has become a sticking point among lawmakers, since the data regarding overpayments is widely available. IRS Commissioner Charles Rettig testified before lawmakers on Capitol Hill last month, where he was peppered with questions about the overpayments – and why these taxpayers were more likely to be audited than people with incomes between $200,000 and $500,000. Complexities pertaining to the program were identified as the cause – including criteria to identify qualifying children.