$13.6 billion bad EITC claims

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The Internal Revenue Service issued at least $11.6 billion and possibly as much as $13.6 billion in improper Earned Income Tax Credit, or EITC, payments during fiscal year 2012, according to a recent audit by the tax agency watchdog.

Those erroneous payments represented up to a quarter of EITC claims that fiscal year.

The Treasury Inspector General for Tax Administration, or TIGTA, report also found that in the last 10 fiscal years (2003 through 2012), more than $132 billion in wrong EITC claims were paid.

As distressing as those figures are, TIGTA has more bad news. Those estimates may be understated because laws that extended increases in the EITC were not factored into the calculations. Plus, says the oversight office, the IRS has not made any progress in reducing false EITC claims.

The EITC was created in 1975 as a way for lower-paid workers to offset the Social Security taxes that take a relatively big bite out of their smaller paychecks. It was expanded under both Democratic and Republican presidents, with President Ronald Reagan lauding EITC as a “sweeping victory for fairness” and “perhaps the biggest antipoverty program in our history.”

But, as TIGTA’s data shows, it is a tax claim that’s prone to abuse.

Better compliance ordered

In November 2009, President Barack Obama issued an executive order requiring increased accountability by federal agencies for reducing improper payments while continuing to ensure that their programs serve and provide access to intended beneficiaries.

The IRS walks a fine line here when it comes to the EITC.

The agency estimates that only about 80 percent of individuals eligible for this tax credit claim it. Over the years, the IRS has made a concerted effort to get the word out about EITC and to get qualified taxpayers to claim it.

But the tax credit is complicated, and many eligible taxpayers can’t afford to hire professionals to help with all the computations. Yes, there are low income tax help clinics, but these too are often underused.

So mistakes are made on EITC claims.

One step forward, two back

TIGTA notes that the IRS has taken steps to improve EITC participation by eligible individuals. But, according to the report, the IRS still is not in compliance with the requirements of the executive order.

Basically, the agency has not established annual improper payment reduction targets as required.

The good news is that the IRS knows it is falling short in its efforts to reduce improper EITC payments. Agency management also has, reports TIGTA, “agreed with our recommendation and plans to take appropriate corrective actions.”

Let’s hope that the appropriate actions do indeed happen and soon. Talk is cheap, but erroneously paid tax benefits definitely are not.

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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.”