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IRS overpays billions in EITC claims

By Kay Bell · Bankrate.com
Tuesday, April 23, 2013
Posted: 11 am ET

Three years ago, a federal law was enacted to help reduce the number of incorrect payments issued by Uncle Sam's agencies.

Apparently, it's not working as planned within the Internal Revenue Service.

According to the Treasury Inspector General for Tax Administration, or TIGTA, the IRS is still handing out billions that it shouldn't. In fiscal year 2012 alone, says TIGTA in a report released April 22, the tax agency paid out as much as $13.6 billion in improperly claimed earned income tax credits.

The earned income tax credit, or EITC, was created in 1975 as a way to provide the working poor with more money. In its original form, the EITC was intended to offset the Social Security taxes of low-income workers with children.

Problems with the EITC

The EITC has been expanded over the years. As it has grown, it has become increasingly controversial, both from a political perspective and as tax policy.

The complexity of the credit is a major reason for the complaints. The EITC formula takes into account your salary, filing status and the number of dependent children in your family.

The difficulty in working through the credit calculations often makes it difficult for legitimate taxpayers to claim the tax credit, leading to honest mistakes. The convoluted credit also makes it an easy vehicle for fraudulent claims.

Another problem, acknowledged the TIGTA report, is that EITC claimants are constantly changing, making it difficult for the IRS to make progress on improving the system. Currently, the agency relies on educating taxpayers about the tax credit's requirements, along with its enforcement efforts, which also have been beefed up in recent years.

Improper payment legislation

Issues such as incorrect EITC payouts led to enactment of the Improper Payments Elimination and Recovery Act, or IPERA, of 2010. The law calls for increased agency accountability as a way to reduce improper federal payments.

Federal departments also are supposed to identify programs that are at high risk for improper payments and set annual targets to cut down on the amount of tax money incorrectly paid.

The EITC is the only program the IRS has identified under IPERA. The tax agency estimates that last fiscal year, 21 percent to 25 percent of EITC payments were issued improperly.

But, say TIGTA auditors, the IRS has not established a reduction target for the problematic tax credit. This is the second consecutive year, notes the TIGTA report, that the IRS has not complied with IPERA.

Time to end EITC?

Given the problems with the EITC and now with the IRS' compliance with a law designed to ensure that such payments are properly made, should we consider just doing away with this tax credit?

No.

The EITC demands that taxpayers work to get the credit. That means some income, Social Security and Medicare taxes are paid. And since it is administered as part of the tax code, there are no additional administrative costs.

True, members of Congress routinely pontificate about EITC abuses, but the tax credit also has had bipartisan political support throughout the years. Republican icon President Ronald Reagan called the EITC "the best antipoverty, the best pro-family, the best job creation measure to come out of Congress." Mark Everson, who served as IRS commissioner under President George W. Bush, accorded similar accolades to the tax credit.

When you get members on both sides of the aisle to agree on something, don't mess with it, especially in these politically divisive times.

Let's just make sure, as IPERA demands, that the IRS pays only qualified EITC claims.

***

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You also can follow me on Twitter @taxtweet.

Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and a co-author of the e-book "Future Millionaires' Guidebook."

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