04.26.2013 1

IRS overpaid Earned Income Tax Credit by at least $110.8 billion since 2000

By Robert Romano — The Internal Revenue Service (IRS) has overpaid the earned income tax credit by at least $110.8 billion since 2000, according to a recent Treasury Department inspector general report.

That is more than double the $53 billion of sequester cuts expected in 2013 totaling less than 2 percent of outlays, and puts the lie to those who suggest there is nothing to cut in the federal budget.

The report covered tax years 1999 through 2008, and thus the overpaid expenditures occurred in the following calendar years through 2009. Current data is not available. According to the report, “Because of the time it takes to complete the annual National Research Program, the IRS’s annual estimate is based on data that are approximately three years old.”

The average minimum overpayment each year was 22.8 percent of all money spent on this particular tax credit, which applies to lower income individuals and couples with children. Originally enacted in 1975, the program has been expanded numerous times over the years, including in 2009, when it was expanded to include those with three or more children, and married couples.

Benefits under the tax credit often exceed an individual’s tax burden, resulting in an effective negative tax rate. Meaning the individual could wind up paying no personal income tax, and yet receive a refund sometimes totaling thousands of dollars.

For example, an individual with an adjusted gross income of less than $37,870 and one child can receive a maximum credit of $3,250. With two children, $5,372, and with three or more children, $6,044.

The report noted that the earned income tax credit was the only program administered by the IRS with “a high risk for improper payments.”

Why? How come as much as 1 in 4 dollars of payments from the credit are made improperly? Apparently, the IRS does not perform much verification of claims made on tax returns.

According to the inspector general report, “the IRS cannot conduct extensive eligibility checks similar to those with other Federal programs that typically certify eligibility prior to the issuance of payments or benefits.”

The report attributes this to the fact that the agency is required to process tax returns and issue tax refunds within 45 days of receipt.

That, despite the fact that the program will spend approximately $55.1 billion in 2013, according to the White House. This means at least $12.6 billion could be wasted in overpayments this year alone.

Remarkably, the inspector general report does not bother to cite some of the likely causes for the overpayments.

Since the tax credit is administered on the basis of income and family size, there would appear to be three probable causes for the waste. Either, filers are 1) understating their actual income; 2) overstating their family size; or 3) parents are claiming the same kid(s) twice on separate tax returns when children are only supposed to be claimed once.

What is even more amazing is that in this modern data-driven age, the IRS cannot perform straightforward pre-refund verification of tax returns. For example, when individuals file for the earned income tax credit, they must provide the name of their child and his or her Social Security number. Moreover, when children are issued their Social Security numbers, their parents are usually the ones who fill out the application.

Therefore, based on data already in the government’s possession, it should be possible to verify in most instances that a parent is not falsely claiming a child for purposes of receiving the tax credit. It should also be possible to make certain that the same child is not being claimed twice or more by different individuals.

Similarly, it should be possible by merely comparing W-2 forms submitted by employers and individuals under the same Social Security number that those individuals are not understating their income.

A simple computer program using spreadsheets could be set up to catch red flags that way.

Based on the inspector general report, the American people are left to assume that none of that is taking place, else the overpayment rate would not be so high. Yet performing pre-refund verification of basic information by the IRS could save more than $100 billion over the next ten years on the earned income tax credit alone.

With a national debt of $16.8 trillion and rising, we’re wasting tens of billions of dollars issuing tax credits to people who do not even qualify for them. And yet, somehow the administration would have everyone believe that the government cannot sustain a less than 2 percent cut without the world ending. What a joke.

Robert Romano is the Senior Editor of Americans for Limited Government.

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