Treasury IG: Cheaper to Write Off $13.6 Billion Tax Credit Overpayment That’s More Than IRS Budget

Melanie Arter | June 4, 2013 | 12:22pm EDT
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IRS (AP Photo)

( - Treasury Inspector General for Tax Administration, J. Russell George, told a House Appropriations subcommittee Monday that it was more expensive for the IRS to go after those who cheated the system by improperly claiming low-income tax credits that totaled $13.6 billion in 2012 – more than the agency’s entire budget – than to simply write it off.

Based on a cost-benefit analysis, “in many instances, it’s more expensive for them to go after those who gamed the system or cheated the system than to in effect write it off,” George told Rep. Harold Rogers (R-Ky.) when he asked what was being done to tackle the problem.

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“Mr. George, it was your report that the IRS had overpaid low-income tax credits by up to $13.6 billion in one year – 2012. When Secretary [Jack] Lew was before this subcommittee in late April, I made clear to him in no uncertain terms that this was unacceptable. That sum was more than the entire budget of the IRS. What steps are being taken, Mr. George, to tackle that problem?” Rogers asked.

George called it “one of the intractable problems confronting the Internal Revenue Service.”

“Refundable tax credits, which again are credits that can be paid to people who do not have tax obligations, once the money is out the door, it’s extremely difficult for the Internal Revenue Service to collect it,” he said.

George deferred to acting IRS commissioner Daniel Werfel to “define their procedures and policies.”

“And we’re just talking one instance in terms of the Earned Income Tax credit … the Child Tax credit among many other credits. This is a very, very difficult issue for the IRS to confront, and it’s a longstanding one, sir. This is something that Congress has been looking at for decades,” George added.

“This is not a small problem. This is a huge amount of money. It’s more than the budget of the entire agency as I said. Has anyone been fired over this?” Rogers asked George and Werfel.

 “Not to my knowledge,” George and Werfel replied.

“Will there be?” Rogers asked.

Werfel responded that it would depend on whether those payments were paid out “advertently in error versus inadvertently in error.”

“I think to answer your question in terms of whether anyone should be fired, it really goes to the question of whether those payments were paid out advertently in error versus inadvertently in error,” Werfel said.

“If there is some underlying malfeasance associated with these improper payments, then certainly, but in most cases – and this is an area that I just coincidentally happen to have some expertise on from earlier parts of my career in the federal government – in most cases, the errors that are made are not due to malfeasance of the underlying employee,” he said.

“It’s due to complexity in the programs and complexity in identifying the right eligibility criteria. I’m not making excuses for it – I’m just suggesting that there are more fixes other than employee dismissal,” Werfel added.

He noted that since there is no “global childhood residency database,” it is “extremely difficult to validate” whether someone who claims the earned income tax credit has “lived with their dependent child for more than six months or not.”

“Again on this particular question of improper refund papers – if you can indulge me – I think one of the causes of these improper payments orients around the complexity of the code and the complexity of the eligibility criteria,” Werfel said.

“If you look at, for example, the earned income tax credit, one of the things we look at in terms of to determine eligibility, is whether the individual has lived with their dependent child for more than six months or not. That’s one of the criteria. That is extremely difficult to validate. We don’t have a global childhood residency database. It’s very difficult to validate. When we go in and we check on things, we find mistakes,” he said.

 “Well fix it,” Rogers said, “because one out of every five dollars of earned income tax credit issued – one out of every five – was improper. That’s not a very good record.”

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