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IRS fails on Earned Income Tax Credit; $11B in faulty refunds issued

| Wednesday, April 24, 2013, 9:21 p.m.

WASHINGTON — The Internal Revenue Service issued more than $11 billion in faulty refunds through its Earned Income Tax Credit last year, according to an inspector general's report released this week.

Treasury Department Deputy Inspector General Michael McKenney found that the IRS has failed for the past two years to comply with a federal law requiring agencies to reduce payment errors to a rate of less than 10 percent. President Obama signed the statute in 2010.

The IRS estimates that at least 21 percent of its EITC payments in 2012 were faulty. That rate represented a decline compared with the previous nine years, but the total value for improper payments increased about 22 percent over that same period to at least $11.6 billion in 2012, according to the inspector general's report.

The Earned Income Tax Credit awards tax refunds to low-income working individuals and families, especially those with children. The report said the IRS uses unreliable processes to assess the risk of improper payments through the program.

“Ineffective risk assessment processes can limit the government's ability to protect taxpayer dollars from waste, fraud and abuse,” said J. Russell George, the Treasury Department's inspector general for tax administration. “In these difficult economic times, all efforts must be made to prevent improper payments in every program.”

The IRS said in a statement on Tuesday that faulty payments result from a variety of causes, including the complex nature of the law, the shifting EITC-eligible population and the nature of the credit.

“The reduction of improper payments is a top priority for the IRS, and we are making progress in this area,” an agency statement said. “We will continue to work hard to get the credit to those who are eligible while protecting against improper payments.”

A House Ways and Means subcommittee plans to explore the issue during a Thursday hearing on IRS operations, according to an aide for Ways and Means Chairman Dave Camp, R-Mich.

Republican lawmakers on Wednesday cited the inspector general's report as evidence that Democrats and the White House should not be calling for tax increases.

“The administration needs to substantially reduce improper payments like this before pushing for tax increases to fund yet more federal spending,” said Sen. Charles Grassley, R-Iowa, a member of the joint congressional committee that reviews tax administration.

Grassley added that Congress should address the abuse of refundable credits during future efforts to overhaul the tax code.

Advocates for the tax credit describe it as one of the government's most effective anti-poverty measures. “It induces many single parents to leave welfare and go to work,” said Robert Greenstein, president of the Center on Budget and Policy Priorities.

Greenstein pointed to the complexity of the EITC as “the single largest cause of the error rate,” adding that Congress should simplify the credit and authorize the IRS to require tax preparers to prove their competency in dealing with it.

Faulty EITC payments are not an isolated problem when it comes to IRS refunds.

In 2011, an inspector general's report said the IRS had awarded $3.2 billion in improper American Opportunity Tax Credits, which helped students pay for higher education during the economic downturn. That same year, an inspector general's report concluded that the agency had issued $4.2 billion in refunds to undocumented workers who are not eligible for federal benefits.

Last year, the IRS began a policy of requiring tax preparers to complete and submit an eligibility checklist for the EITC. The IRS also has engaged in educating preparers, agency spokesman Dean Patterson said.

Patterson said the IRS avoided more than $20 billion in fraudulent refunds last year compared with $14 million in 2011. He also said the agency stopped 5 million suspicious returns in 2012, up from 3 million the previous year.

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