IRS to beef up oversight of refundable credits

For instance, the audit found that the IRS could have prevented hundreds of millions of dollars from being sent out if it had checked claims for one of the refundable credits, the Additional Child Tax Credit (ACTC), against those for another, the Earned Income Tax Credit (EITC).

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It also found that 80 percent of the money the IRS recovered from wrongly issued claims was by taking money out of a future refund, with only around 20 percent coming from a payment from a taxpayer.

“Because of the susceptibility of these credits to fraud, and the low success rates in recovering erroneous credits once refunds have been issued, the IRS should take every reasonable step possible to identify potentially questionable credits and validate those credits before associated refunds are issued,” Russell George, the tax administration inspector general, said in a statement. 

The report comes as Democrats and Republicans have sparred this year over the future of refundable credits like the ACTC and the EITC, both of which were expanded in the 2009 stimulus package. Like a host of other tax provisions, those expansions are scheduled to expire at the end of the year. 

With refundable credits, taxpayers can receive a payment from the government, in addition to having their tax burden erased. In addition to tax breaks for raising children, the government has previously enacted refundable credits for actions like buying a house (the First-Time Homebuyer Credit) and paying for college (the American Opportunity Tax Credit).

GOP lawmakers, citing reports from the tax administration inspector general, have pushed to stop unauthorized workers from claiming refundable tax credits. 

Mitt Romney, the Republican nominee for president, also famously referred to the “47 percent” that don’t pay income taxes, and other top Republicans have also called for forcing more people to pay income taxes. According to the Tax Policy Center, around 30 percent of those who didn’t pay income taxes in 2011 used credits for children or the working poor to erase their liability.

In its response to the audit’s findings, the IRS said that many erroneous claims are not filed intentionally, and that a filer who was not eligible for a refundable credit one year could easily be in subsequent years. 

But the agency’s Peggy Bogadi also acknowledged that “additional scrutiny should be considered for returns of taxpayers who improperly claim refundable credits for past years.”

The IRS added that it would develop a screening method to ensure that a taxpayer’s history would be available when considering a refundable credit claim, and that it hoped to have those filters in place by the upcoming filing season. 

The tax administration inspector general had called for a different screening method, but said the IRS idea was a “viable alternative.”

The estimated $2.3 billion in erroneous credits found by the report also accounted for only about 0.5 percent of the almost $470 billion in refundable credits claimed from 2006 to 2009.