Fix the $140 billion problem of improper tax payments

In just about three weeks, most people’s tax returns are due. For these individuals and families, the tax code is not an abstract policy — the payment they make or refund they receive is often their largest financial transaction of the year. It has a significant effect on their financial well-being and is a deeply personal experience.

While Washington has been dominated recently by discussions over proposed tax reforms — changes to brackets, credits, deductions and the like — a critical component that has a significant impact on individuals and the system’s ability to function often gets lost in the conversation. That issue is addressing the problem of improper payments arising from refundable tax credits, which have cost the U.S. Treasury more than $140 billion over the last 10 years, according to government data. At a time when the federal budget is being squeezed across the board, this is simply not acceptable.

{mosads}The existence and scope of these refundable credits, like the Earned Income Tax Credit (EITC) and the American Opportunity Tax Credit, are themselves frequent subjects of discussions among policymakers. Putting aside the merits of any particular credits or their qualification requirements, everyone can agree that they should function as intended and help those they are designed to help.

For example, there should be no debate that corrective action is needed when government statistics show more than one dollar out of every four paid through the EITC in fiscal 2012 was improper, at a cost of more than $13.6 billion. 

Until now, the issue of improper payments — which include payments made due to deliberate fraud, confusion about complex rules and basic math errors — has been relegated to debate among tax administration officials, academics and industry experts. But strong public support from taxpayers is finally beginning to emerge on common-sense ways to expand and strengthen safeguards to protect against this kind of waste. 

Recently, we learned that taxpayers are willing to do more to help combat tax fraud — a lot more. In a national survey of taxpayers conducted by ORC International for The Tax Institute at H&R Block, 93 percent said they are willing to take at least one action to help prevent fraud, such as providing additional documentation or answering more questions on their return. That is a powerful statistic that is not part of the current conversation on tax code reform.

We also found that consumers strongly support requiring professional tax preparers to meet minimum training standards — 86 percent of respondents agreed. And when it comes to tax preparation software, eight in 10 consumers thought it should be required to meet minimum standards as well. 

Ensuring that returns are prepared as accurately as possible can significantly reduce improper payments made due to complexity or math errors. This not only helps address the fiscal problem, but also works to better serve and protect individual consumers.

Finally, the survey found tremendous consumer support — 86 percent — for having the same documentation requirements regardless of whether you use do-it-yourself software or go to a professional preparer. This support was even higher among the people who already use software, with 94 percent of them supporting parity across filing methods.

Many Americans might be surprised that this uniformity does not already exist, but when filing with do-it-yourself software today, taxpayers are not asked the questions or required to submit the documents that they must provide when filing for certain credits with a professional preparer. This loophole is an obvious target for fraud, and an easy avenue for mistakes to be made.

As discussion of tax reform proposals continues, we hope policymakers heed the voice of the consumer and focus on addressing some of the easily achievable, but often overlooked, solutions that can have a significant impact on reducing the cost of improper payments, as well as the other important tax administration issues facing our economy.

Cobb is the president and chief executive officer of H&R Block, the world’s largest tax services provider, which has prepared more than 625 million tax returns since 1955.