IRS hands out billions in improper tax breaks

The IRS is improperly handing out as much as $7 billion a year through a tax break designed to help working families, according to a new federal report.

{mosads}The findings from the Treasury inspector general for tax administration could add a new wrinkle to the debate over President Obama’s recent actions on immigration. The watchdog found that the IRS needs to strengthen the protections in the Additional Child Tax Credit, after the agency had previously downplayed the risk of improper payments.

The inspector general found an improper payment rate of roughly 25 percent to 30 percent for the tax credit in 2013, roughly in line with the Earned Income Tax Credit (EITC), another incentive designed to help the working poor.

The IRS has said the EITC program, which wrongly distributed approximately $14.5 billion in 2013, is at a higher risk of improper payments.

J. Russell George, the inspector general, said in a statement that his office found “the potential for improper payments in this program indicates that its improper payment rate is similar to that of the Earned Income Tax Credit.

“It is imperative that the IRS take action to identify and address all of its programs that are at high risk for improper payments,” George added.

The report comes just weeks after Democrats pushed to permanently extend expansions of the child tax credit and the EITC, which expire at the end of 2017, as part of a broader package to restore dozens of lapsed tax breaks.

Republicans objected to extending those incentives in the wake of Obama’s immigration actions, in part because of the improper payments given out through the EITC. The White House later torpedoed a tax deal that didn’t include extensions of the EITC and the child tax credit because Obama thought the package was too weighted toward the business community.

George’s office recommended that the IRS show more urgency about reducing the money wrongly given out under the child tax credit, pushing the agency to find out more about why the improper payments were happening and to create a plan to stop them.

But the IRS generally disagreed with those recommendations, saying in its response that overpayments from refundable tax credits were a smaller part of the “tax gap,” the difference between what taxpayers owe and what the IRS collects.

The IRS noted that, in addition to abuse of the tax credits, many taxpayers also miss out on rightfully claiming the incentives.

“The IRS continues to aggressively explore new ways to detect and stop potentially fraudulent claims while maximizing the use of limited compliance resources,” the agency said in a statement.

The inspector general previously found that overpayments in the EITC program mostly occurred because the IRS couldn’t verify a taxpayer’s income or authenticate his or her claims.

In 2011, the watchdog also found that the IRS gave billions of dollars in child tax credits to people who weren’t authorized to be in the United States.

—This story was updated at 1:16 p.m.