IRS Gave Over $13 Billion in Tax Credits to Unqualified Individuals

A report released by a government investigator on Tuesday noted that the IRS paid tax credits totaling more than $13 billion to individuals who did not qualify for the payments.

The Treasury Inspector General’s report focused on Earned Income Tax Credits.  The Earned Income Tax Credit is a program designed to help families living near the poverty level.  The amount of Earned Income Tax Credit a given family qualifies for, if any, is based on employment, income level, and number of children in the family.

However, the investigator found that over $13 billion and possibly as much as almost $16 billion in tax credit payments made during 2013 were to those who did not qualify.

The IRS paid a total of approximately $60 billion in Earned Income Tax Credit during 2013.  That means approximately 25 percent of those payments were made based on fraudulent claims.  The investigation also estimated that since 2003, the IRS has paid out as much as almost $150 billion in fraudulent Earned Income Tax Credit claims.

“The IRS can and must do more to protect taxpayer dollars from waste, fraud, and abuse,” said J. Russell George, Treasury Inspector General for Tax Administration.

According to the IRS, the organization has taken steps to reduce the payout of monies based on fraudulent claims, including a claimed prevention of fraudulent payments of more than $50 billion since 2011.

“The IRS remains deeply concerned about the level of improper payments, and a major review currently underway is exploring a wide range of options to distinguish valid claims from excessive ones,” noted a statement released by the IRS in response to the report.

However, the Treasury report shows the IRS still has ample room to further reduce such payouts and that the amount of fraudulent payouts the IRS made in 2013 were no less than the payouts made in 2012.

In addition, the IRS appears to be in violation of a law that President Obama signed into effect during 2010, the Improper Payments Elimination and Recovery Act.  The law requires that the IRS take steps to cap fraudulent Earned Income Tax Credit payouts at no more than 10 percent of the total tax credit payout.

“The IRS continues to not provide all required [Improper Payments Elimination and Recovery Act] information to the Department of the Treasury,” noted the treasury report.  “For the third consecutive year, the IRS did not publish annual reduction targets or report an improper payment rate of less than 10 percent for the [Earned Income Tax Credit].”

Earned Income Tax Credits Subject to Fraud Because IRS Pays Out Difference

The Earned Income Tax Credit is an especially attractive vehicle targeted by thieves.  In the event taxpayers’ Earned Income Tax Credit is greater than the income tax they owe, the IRS will refund the difference.  Therefore, thieves who know how to file fraudulent returns that circumvent the IRS’s controls can effectively get paid by the IRS.

For the 2014 tax year, a married couple with a least three children can earn up to $52,427 and still receive up to the maximum Earned Income Tax Credit of $6,143.  A married couple with two children can earn up to $49,186 and still receive up to the maximum Earned Income Tax Credit of $5,460.

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by Mark Johnston

Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.