The U.S. Internal Revenue Service (IRS) was unable to reduce improper payments for some of its tax credit programs to less than 10 percent in fiscal 2023, according to an audit report conducted by agency watchdog Treasury Inspector General for Tax Administration (TIGTA).
The IRS had a goal of bringing down the improper payment rate for four of its “high-priority programs” to below 10 percent. The programs are the Additional Child Tax Credit (ACTC), American Opportunity Tax Credit (AOTC), Earned Income Tax Credit (EITC), and the Net Premium Tax Credit (PTC).
However, for fiscal year 2023, the IRS has been “unable to reduce improper payment rate estimates to less than 10 percent for each of its high-risk programs,” the report said. ACTC was found to have an improper payment rate of 14 percent, Net PTC 26 percent, AOTC 32 percent, and EITC 33 percent.
The Office of Management and Budget defines “high-priority programs” as those that suffer annual monetary losses in excess of $100 million.
Out of the $65.4 billion in claims for EITC, $21.9 billion were improper payments. $1.7 billion out of $5.2 billion for AOTC, $1 billion out of $3.7 billion for Net PTC, and $500 million out of $3.8 billion for ACTC were also improper payments.
According to the Treasury, estimated improper payment rates in EITC ranged from 22.8 percent to 33.5 percent for a 17-year period between fiscal year 2006 and fiscal year 2023, the report noted. “This is despite the IRS’s efforts to reduce these rates.”
The Treasury’s “risk assessment template” was found to not accurately reflect the level of improper payment risk for IRS’ refundable credit programs.
In one instance, the Treasury indicated two tax credit programs were not susceptible to improper payment risk, only for the IRS to revise the assessment and classify these programs as being vulnerable.
TIGTA speculated that this flaw in the Treasury’s risk assessment could be due to the agency applying a general view of risk onto IRS’ refundable credit programs that are of a “unique nature.”
The IRS has taken several steps to tackle the high rates of improper payments, including conducting outreach among taxpayers and tax preparers.
The outreach initiative targeting taxpayers aims to raise awareness and encourage eligible people to claim refundable credits. The agency also plans to boost its enforcement activities targeting “unscrupulous tax preparers.”
TIGTA noted that such initiatives may not make an “immediate impact” on improper payment rates “due to the time it takes for taxpayers to file returns and for the IRS to examine those returns.”
After TIGTA submitted the draft version of the report to the IRS, the tax agency responded that improper payments on refundable credits are “not the result of internal control weaknesses.”
Such credits “do not fit within the improper payment framework due to their complex eligibility requirements and IRS reliance on taxpayer self-certification of RTC (refundable tax credits) claims,” the IRS said.
Improper Payment Issue
Lawmakers have taken action to address the issue of improper payments by the IRS. In March last year, Sen. Mike Braun (R-Ind.) introduced S 1054, the IRS Improper Payments Act. The bill instructs the IRS to set annual targets for reducing improper tax payments.The tax agency is required to designate an official who would be responsible for ensuring that the IRS meets reduction targets. The official would develop recommendations and legislative proposals to reduce improper payments.
After the bill was introduced, it was referred to the Committee on Homeland Security and Governmental Affairs. Since then, no action has been taken on the bill.
Several agencies in the federal government are plagued by the improper payments issue.
The $236 billion improper payments were made by 14 agencies across 71 programs. Medicare had the highest payment error amount, accounting for $51.1 billion of the total.
This was followed by Medicaid at $50.3 billion, the Federal Pandemic Unemployment Assistance at $43.6 billion, the Earned Income Tax Credit at $21.9 billion, and the Paycheck Protection Program Loan Forgiveness seeing $18.7 billion in improper payments. All other federal programs accounted for the remaining $50.1 billion.
Previously, if the agency overpaid a beneficiary, it would withhold 100 percent of their monthly benefits until the overpaid amount was recovered.
However, beginning March 25, the agency decided it would only collect “ten percent (or $10, whichever is greater) of the total monthly Social Security benefit to recover an overpayment.”
According to the SSA’s fiscal year 2023 financial report, the agency paid approximately $1.26 trillion in social security benefits in fiscal year 2022, which includes the Old Age, Survivors, and Disability Insurance programs.
Out of this, the agency estimates it made $6.5 billion in overpayments, accounting for 0.51 percent of the $1.26 trillion disbursal.
