By Christina Camara
The IRS may never recover millions of dollars in refundable tax credits that were given out erroneously, a new federal audit report contends.
Refundable tax credits, which include the Earned Income Tax Credit (EITC), the Additional Child Tax Credit (ACTC), the First-Time Homebuyer Credit, and others, reduce a taxpayer's liability or provide direct payments. These payments are vulnerable to fraud, says the Treasury Inspector General for Tax Administration (TIGTA), in its report
released publicly October 22, 2012.
Taxpayers were required to repay $2.3 billion in erroneous refundable tax credits during tax years 2006 through 2009. By the end of last year, the IRS had recovered about $1.3 billion, of which more than 70 percent was collected through refund offsets. The IRS often withholds future tax refunds, which means the IRS has to wait for tax season to collect, and could do so only if the taxpayer is eligible for a refund.
The report says that on average, it took the IRS forty-nine weeks from the time the original refund was issued to review and disallow the erroneous refundable credit. It took another twenty-seven weeks, on average, for collection.
The audit was conducted to test the effectiveness of the IRS's efforts to recover the refundable credits that were given out erroneously. Because the recovery rates are so low, "the IRS should take every reasonable step possible to identify potentially questionable credits and validate those credits before associated refunds are issued," said J. Russell George, TIGTA.
TIGTA recommended that the IRS implement additional controls to identify and stop erroneous claims for refundable credits before refunds are issued, including:
- Implementing an account indicator to identify taxpayers who claim erroneous refundable credits to prevent them from erroneously receiving those claims for a specific period in the future;
- Freezing and verifying claims for the ACTC on all returns for which the EITC is frozen; and
- Coordinating with the Department of the Treasury's Office of Tax Policy to seek legislation to expand the EITC due diligence requirements to include the ACTC.
The IRS agreed with the findings and plans to correct the problems. In addition, the IRS decided that instead of implementing an account indicator to identify taxpayers who claim erroneous refundable credits, it would develop "pre-refund examination filters." Although the IRS's plan is different from what TIGTA recommended, TIGTA believes it to be a viable alternative.
Both the ACTC and the EITC were expanded in the 2009 stimulus package and are set to expire at the end of the year.
Note: The difference between the date TIGTA issues an audit report to the IRS and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with federal confidentiality laws.