The IRS squandered $143 billion over the last decade in improper Earned Income Tax Credits — money taken directly from taxpayers — according to a new federal investigation.
Federal investigators revealed that in 2015 alone, the IRS wasted $15.6 billion on erroneous and fraudulent EITC payments.
These payouts included overpayments to taxpayers who qualified for the EITC, outlays to Americans who were ineligible for the program and payments to individuals who intentionally filed bogus tax returns.
The EITC lets working Americans with modest incomes lower their tax bills or even receive more money back than they pay the IRS. More than 27 million people qualified for the EITC in 2015. These Americans pocketed an average of $2,400 each.
After its annual review of the program, the Treasury Department reported in April that 23.8 percent of all EITC refunds were improper.
This should trouble taxpayers, said Pete Sepp, president of the D.C.-based National Taxpayers Union. He considers the EITC a massive welfare program.
“The words behind the letters ‘EITC’ may not advertise it, but the Earned Income Tax Credit is as much a spending program as it is a tax program,” Sepp says. “Because the EITC can give more money to recipients than they actually paid in taxes, there’s a direct impact on federal spending.”
Under federal rules to prevent improper payments, a program is considered non-compliant when faulty expenditures exceed both 2.5 percent and $10 million of its outlays per fiscal year.
The 23.8 percent of EITC expenses deemed improper last year equaled almost 10 times this 2.5 percent legal standard. The $15.6 billion in bad outflows totaled 1,560 times this $10 million threshold.
“It’s outrageous that the IRS wastes more than $15 billion a year on bogus EITC handouts,” said David Williams, president of the Taxpayers Protection Alliance. “That’s money that American taxpayers should get to keep in their pockets.”
Occasionally, the IRS busts tax preparation services and individuals engaged in large-scale EITC fraud.
Liberty Tax Service franchisees in Baltimore were caught in 2015. They allegedly falsified tax returns for homeless people in order to skim hundreds of thousands of dollars in EITC payments. Philadelphia’s Mohamed Mansaray was indicted last year for stealing the names and Social Security numbers of children and using them as phony dependents on tax returns.
Erroneous EITC checks are nothing new. Improper-payment rates have fluctuated between 20 and 30 percent of total EITC costs for more than a dozen years. Faulty outlays have averaged $14.3 billion annually over the past decade.
Lawmakers and federal officials have achieved little success by begging the IRS to curb unmerited EITC disbursements.
The U.S. Treasury “provided the IRS with specific actions that could be taken to reduce improper payments,” Treasury Inspector General for Tax Administration J. Russell George told Congress in 2011. The IRS had “not taken action to address key recommendations aimed at preventing or reducing improper EITC payments,” George said.
The IRS replied that it lacked the funds to stop wasting money, according to George. Treasury recommended cheaper money-saving procedures, but “the IRS has not made any significant progress in developing and implementing these alternatives,” George said.
Not only has the IRS failed to fix this problem, it’s getting worse.
The IRS paid an average of $13.6 billion a year in improper EITC payments in 2012 and ’13. That amount spiked 23 percent, to an average of $16.7 billion annually, in 2014 and ’15.
However, IRS spokesman Eric Smith said that legislation enacted last year should help.
“[Congress] moved up the deadline by which employers and other payers must send W-2s and certain 1099s to the federal government to January 31,” said Smith. This target has run as late as March 31. “This will help improve the information available to the agency when it processes tax returns of all kinds – not just those claiming the EITC.”
This earlier deadline should help curtail bad EITC payments, Smith said. So should new rules that give the IRS more time to detect identity theft and refund-fraud-related fabrication of wages and withholdings.
Sepp hopes that Smith is right. “Other taxpayers – current and future – are directly financing EITC,” Sepp said.