Watchdog: IRS lacks authority needed to correct many erroneous tax-credit claims

The IRS is unable to address billions of dollars of potentially incorrect earned income tax credit (EITC) claims due to a lack of authority from Congress, a federal watchdog said in a report issued Thursday.

“The IRS’s fiscal year 2017 budget submission contained a legislative proposal for correctable error authority,” said Treasury Inspector General for Tax Administration J. Russell George, whose office issued the report. “This authority would help it systemically address many of the erroneous claims it identifies.”

The EITC benefits low and middle income working families and consistently has a high improper payment rate. The IRS estimates an EITC improper payment rate of 23.8 percent in fiscal year 2015.

In tax year 2014, the IRS identified 5.7 million returns with potentially erroneous claims but only systematically corrected about 167,000 of them, according the report.

The IRS cannot correct most of the possibly incorrect EITC claims at the time tax returns are processed. While the IRS could audit the claims, this is more costly than stopping claims when returns are processed, and the IRS has limited resources, the inspector general said in its report.

Under a law enacted in December, the IRS has more time to verify EITC claims before it issues refunds. However, Congress did not give the IRS expanded authority to correct inaccurate claims when returns are processed, the inspector general said.

The inspector general also found that the IRS incorrectly considers two other refundable tax-credit programs to have a low risk for improper payments. TIGTA estimated a potential improper payment rate for fiscal 2015 of 24.2 percent for the refundable Child Tax Credit and 30.7 percent for the American Opportunity Tax Credit.

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