U.S. taxpayers are losing tens of billions of dollars a year to “improper payments” of tax refunds, and it looks like investigators have thrown in the towel.
The Treasury Inspector General for Tax Administration (TIGTA) regularly reports on programs that have been determined to be at “high risk” for improper payments. One of these programs, the Earned Income Tax Credit, paid out a total of $68.2 billion in fiscal year 2020, and 24% of that money, $16 billion, went to people who were not supposed to receive it.
TIGTA’s report for fiscal year 2020 also revealed that 26% of the payments for the American Opportunity Tax Credit were improper, a loss to taxpayers of $2.3 billion. Another $4.5 billion went out the door in improper payments of the Additional Child Tax Credit.
This has been going on for years, but the inspector general is waving the white flag. In the section of the report titled, “What TIGTA Recommended,” the auditor writes, “TIGTA did not make any recommendations.”
They’re just watching. They check in periodically to make sure the IRS is meeting its obligation to estimate the total amount of improper payments and report on how bad the problem is becoming. This is the official policy of the U.S. government.
What’s going on here?
If you don’t know, you’re obviously not a criminal. Piles of cash can be extracted from the federal government by obtaining social security numbers and filing fictitious tax returns that claim refundable tax credits. Back in 2003, the Justice Department brought charges against a San Diego man who filed 620 false individual tax returns and collected $2,412,162 in tax refunds.
How is it done? “For the taxpayer listed on the return to appear eligible for the Earned Income Tax Credit refund, defendants fabricated the income reported for that year,” the Justice Department said in a news release. “Defendants typically would attach a false Form W-2 to the return in an attempt to substantiate the income.”
The IRS can catch these discrepancies, but the policy now is to do nothing about it because these are not ordinary tax refunds. Teresa Hunter, chief financial officer of the Internal Revenue Service, wrote in response to the TIGTA report, “The programs examined in this report are refundable tax credits (RTC) designed to achieve specific economic and social objectives, such as reducing poverty and increasing the affordability of higher education.”
RTC programs “present challenges of administering complex social benefit programs, such as the Earned Income Tax Credit, the American Opportunity Tax Credit, the Additional Child Tax Credit and the Premium Tax Credit component of the Affordable Care Act through the tax administration system,” Hunter wrote, noting that the IRS is primarily set up for collections, not payments.
It would be much simpler to call the programs what they are, government aid checks, and pay the benefits directly to eligible individuals, but then taxpayers would see a budget line labeled “government aid checks,” and there might be an uproar over the total outlays.
By calling these benefits “tax refunds,” and paying them to anyone who fills out a tax return with the right combination of numbers, real or imagined, the Treasury is getting raided by fraudsters every year. In 2020, the IRS estimates that the EITC, AOTC and ACTC accounted for a combined $22.8 billion in “improper payments,” which describes both error and fraud. The IRS didn’t even try to calculate how much was improperly paid out in the Premium Tax Credit program. The relevant government agencies said they were too busy dealing with COVID to produce the required data.
The problem of “improper payments” could grow exponentially. The American Rescue Plan legislation made the EITC more generous for 2021 and made more people eligible, and now there are calls on Capitol Hill to extend the EITC expansion or make it permanent. Rep. Gwen Moore, D-Wisconsin, has introduced a bill called the Worker Relief and Credit Reform Act that would increase the maximum credit to $4,000 per individual or $8,000 per married couple.
It’s documented that this program is at high risk for fraud, but the government doesn’t want to hassle people who are legitimately entitled to the money. What can be done?
The Biden administration is proposing a crackdown on tax preparers. The president wants to give the IRS the authority to regulate paid tax preparers and increase the agency’s funding to do more tax audits. He also would require banks to share more account information with the government.
This isn’t the first attempt to regulate tax preparers. During the Obama administration, the IRS began the Registered Tax Return Preparer program, requiring registration, testing and continuing education. There was a lawsuit over it, and in 2013 a federal court invalidated the program, stating that the IRS had no statutory authority to regulate tax preparers.
Congress would have to pass a law to give the IRS that authority, and it’s likely that this will not happen. Lawmakers seem more interested in pushing the money out than in setting up a system to claw it back.
So the “improper payments” totaling tens of billions of dollars per year are likely to continue indefinitely, all because politicians want to use the term “tax refund” to describe government aid checks. The insane complexity of the ever-changing tax code is probably responsible for a lot of innocent mistakes, but the hands-off enforcement policy is also enabling massive fraud that adds up, year after year, to a staggering amount of money.
California has a state EITC that’s vulnerable to the same problem. We’ve already seen the Employment Development Department pay tens of billions of dollars in fraudulent claims. The CalEITC program is another shoe that’s waiting to drop.
Criminals are looting the public treasury, and politicians are letting them do it so taxpayers can’t easily see how much the government spends on welfare payments. They all know what’s happening.
And now, so do you.
Write Susan Shelley: [email protected] and follow her on Twitter: @Susan_Shelley
This content is published through a licensing agreement with Acquire Media using its NewsEdge technology.