IRS overpaid up to $13.6B in low-income tax credits, report finds

The Internal Revenue Service (IRS) overpaid between $11.6 billion and $13.6 billion in tax credits designed to help low-income families in fiscal 2012 , the Treasury Department announced in a report released Monday.

The overpayments account for 21 percent to 25 percent of the tax credits issued under the Earned Income Tax Credit (EITC), the IRS estimated.

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The report from the Treasury Inspector General for Tax Administration, the department's IRS watchdog, highlights the difficulties faced by the agency in properly issuing refunds and credits under the popular program.

Though the fiscal 2012 overpayment was among the agency's lowest in a decade, since 2003, as much as $132.6 billion has been improperly distributed as part of the EITC.

The varying number of tax credit claims and a change in the way improper payments are estimated have hampered the IRS’s efforts to decrease the amount of improper payments, the report says.

The inspector general's report claims that "the annual EITC improper payment amount has consistently been one of the largest of all Federal programs."

The refundable credit, calculated to be based on income and family size, allows low-income working families and individuals to pay less in federal taxes or receive a refund. Economists claim the program has lifted millions out of poverty.

Despite the program's frequent overpayments, it is one of the few tax provisions that receives praise across partisan lines.

Richard Burkhauser, an adjunct scholar at the free market American Enterprise Institute, told NPR in March that the program "actually works."

And Joe Valenti, the director of asset building at the left-leaning Center for American Progress, called the program "universally supported."

"I think it's always going to be a challenge to make sure that the payments are correct," he added, noting that many overpayments are often attributed to tax preparers. "One of the issues are that it's a fairly complicated credit to calculate, but when you are looking at a credit that has lifted millions of families above the poverty line, there's always going to be some error involved."

The IRS has not established annual goals to reduce its improper payments or reduced improper payments below 10 percent, both of which are violations of the 2010 Improper Payments Elimination and Recovery Act, which aims to reduce unnecessary payments.

The Treasury's oversight office claims that the IRS "faces significant and unique challenges" to reducing overpayments. The two main factors preventing a reduction are the "ever-changing population" of families and individuals claiming the credit, which makes enforcement and outreach difficult, and tax return processing time limits, which restrict the IRS from being able to verify each EITC claim before it is paid out.

The report advises, "Establishing incremental reduction targets that can be used to evaluate the benefit of the IRS’s compliance and outreach efforts would be a good first step to reducing EITC improper payments."

This story was last updated on April 23 at 2:33 p.m.