The Corner

The IRS Made $110 Billion in Improper EITC Payments over Ten Years

I explained earlier in the week that the federal government makes around $100 billion a year in improper welfare payments — a large portion of which is fraud in the Earned Income Tax Credit (EITC), a program administered by the IRS. Almost a quarter of the EITC’s cost in 2012 – $12.6 billion — was due to improper payments, making it the worst of the programs examined.

A 2013 report on the issue from a Treasury Department inspector general has some pretty striking numbers about the scale of the problem. According to their data, between 2003 and 2012, the amount of improper payments for the EITC alone is over $100 billion – somewhere between $110.8 billion and $132.6 billion. The reasons listed for the gigantic amount of improper payments:

Complexity of the tax law, including the need for congressional authorization of math error authority

Structure of the EITC

Confusion among eligible claimants

High turnover of eligible claimants

Unscrupulous tax return preparers


This report also seems to imply that fixing the problem won’t be easy since none of these factors alone is the primary driver of the EITC improper payments. It’s the combination of all of them, compounded by the increasing complexity of the tax code. (Of course, that does mean simplifying the tax code could help with the problem, and such a move would lower compliance costs and confusion elsewhere.)

The report also notes that “the IRS has made little improvement in reducing improper EITC payments as a whole since it has been required to report estimates of these payments to Congress.” The IRS also isn’t in compliance with the requirement that it provide an annual report to Congress detailing specific information on improper EITC payments. 

Interestingly, one of the reasons for the non-compliance, the IRS argues, is that the agency was trying to solve some of the EITC issues by creating education and licensing requirements for small tax preparers (in reality, the requirement was onerous and unnecessary, I wrote about it here). Unfortunately for the IRS, this power grab — and its excuse for non-compliance regarding EITC reform — was squashed when a D.C. Circuit Court of Appeals ruled that the IRS had no legal authority to impose a nationwide licensing scheme on tax-return preparers.

The IRS never managed to explain how abusing small tax preparers was the solution to its improper payment problem, according to the Treasury report:

The IRS again stated in its Fiscal Year 2012 report that the regulation of tax preparers will drive increased EITC compliance, decrease fraud, and reduce the improper payment rate. However, we have expressed concern with this same assertion the IRS has made in the past because the IRS does not provide details relating to the specific reductions in improper payments as a result of tax preparer regulations nor does it provide details on when or how the IRS plans to measure the impact of tax return preparer regulations on EITC improper payments.

We still have this same concern.

And so do I. Some $111 billion in improper payments over ten years by the IRS — a body that doesn’t have any problem going after taxpayers with all the means at their disposal when the little people make improper tax payments — is disconcerting to say the least.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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