IRS Made $12 Billion in Improper Earned Income Tax Credit Payments in 2008--As Fraud Grew Exponentially

By Matt Cover | April 27, 2009 | 6:04 PM EDT

IRS income tax forms.(AP file photo)

( – The Internal Revenue Service made $12.1 billion in improper Earned Income Tax Credit (EITC) payments in 2008, according to a study by the Government Accountability Office. 

The EITC is essentially a form of welfare. It a "refundable" tax credit designed to supplement the incomes of the working poor by returning to them the amount they paid in payroll (Social Security and Medicare) taxes throughout the year.

However, since the credit is refundable, the government can end up paying someone more through the EITC than the person actually paid in payroll taxes, according to GAO.

In 2008, the EITC program also had one of the government's highest error rates--25.5 percent--meaning that incorrect EITC payments made by the IRS equaled more than a quarter of the value of all EITCs paid in 2008.

"Improper payments," according to the GAO, arise when an ineligible person receives the credit--either through error or fraud.
“(E)rroneous or improper payments generally involve improperly paid refunds, tax return filing fraud, or overpayments to vendors and contractors,” the report stated. “The IRS receives a substantial number of excessive or incorrect EITC claims.”
The GAO attributed EITC’s high error rate to the fact that the IRS was unable to handle the “exponential growth” in fraudulent claims in recent years.
“According to the OIG (Office of the Inspector General), the exponential growth in fraud in processing year 2007 presented a challenge for the IRS, which did not have the resources to handle the volume," the report said.
As a result, the GAO concluded, the growth in fraudulent claims could end up costing taxpayers even more. 
“The OIG noted that if this trend continues over the next few years, the IRS might issue an even greater number of improper refunds, possibly resulting in a significantly increasing annual revenue loss,” the report added.
According to Kay Daly, GAO director of financial management and the report’s author, complex programs like EITC are regulars on the improper-payment list, due to the intricacies of applying for and qualifying for the federal funds.
“Complexity is certainly something that can lend itself to improper payments, (especially) when you have complex eligibility rules,” Daly told
“Sometimes program complexity can cause that (improper payments).”
EITC is the government’s single largest tax-credit program, redistributing tens of billions of dollars each year to low-income working families, often sending refund checks to multiple adult members of the same family, and frequently allowing extended family members to claim the same children as dependents as long as they live together for at least six months of the year.