WASHINGTON - Although a new law enacted in December 2015 included provisions to reduce improper payments for refundable tax credits, the Internal Revenue Service (IRS) did not effectively implement certain provisions, according to an audit report issued today by the Treasury Inspector General for Tax Administration (TIGTA). As a result, the IRS erroneously paid refundable tax credits totaling more than $152 million to individuals who were not entitled to receive them.
The objective of TIGTA's review was to evaluate the effectiveness of IRS efforts to implement the integrity provisions of the Protecting Americans from Tax Hikes (PATH) Act of 2015. These provisions are intended to reduce improper payments of the Earned Income Tax Credit (EITC), Child Tax Credit, Additional Child Tax Credit (ACTC), and American Opportunity Tax Credit. These credits help low-income individuals reduce their tax burden or provide incentives for other activities such as obtaining a college education.
Effective for the 2016 Filing Season, taxpayers can no longer file an original or amended tax return for prior years (referred to as retroactive claims) to claim certain refundable credits if the Taxpayer Identification Number used to claim the credit was issued after the due date of the tax return. However, TIGTA found that the IRS did not have the information it needed to timely implement processes to prevent such claims. As a result, the IRS erroneously paid refundable credit claims totaling more than $34.8 million to 15,755 taxpayers whose Taxpayer Identification Number was not timely issued.
The PATH Act also changed the date for employers and third-parties to file Forms W-2, Wage and Earnings Statement, and certain Forms 1099-MISC, Miscellaneous Income, to January 31, making these forms available for IRS use in verifying refundable credit claims at the time tax returns are processed. While the IRS has developed processes to systemically verify tax returns to available Forms W-2, Wage and Earnings Statement, it has not developed processes to effectively use Forms 1099-MISC, Miscellaneous Income, that report nonemployee compensation to prevent unsupported refundable credit claims.
"An estimated $24.3 billion in refundable tax credit payments were issued improperly during Fiscal Year 2016," said J. Russell George, Treasury Inspector General for Tax Administration. "As such, it is imperative that the IRS effectively implement the PATH Act provisions that are intended to reduce such payments," he added.
TIGTA made four recommendations to the IRS in the report. The IRS agreed with all of TIGTA's recommendations.