Tax Fraud and Errors Cost Taxpayers Billion in Excess Earned Income Tax Credit and Additional Child Tax Credit Payments

Dec 13, 2014


Chart 1 Over a Quarter of Earned Income Tax Credit and Additional Child Tax Credit Payments are Improper Due to Fraud or Error Tax Year 2013.jpg

Table 1 Federal Individual Income Tax Liabilities by State Calendar Year 2012.jpg

The Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) are essentially welfare that is administered through the federal income tax code. The credits are both aimed at low income households with children that offset their individual income tax liability. Additionally, if the taxpayers has a credit worth more than their tax liability, they can have that additional credit “refunded” to them in the form of a cash payment.

Needless to say, the lure of cash refunds has resulted in an explosion of tax fraud in these tax programs. In fact, even illegal immigrants have been able to exploit the ACTC to the tune of $4.2 billion according to a 2011 report from the Treasury Inspector General for Tax Administration (TIGTA). This is compounded by simple math and compliance errors on the tax return. And the stakes are high since in 2012 EITC refunds totaled $63 billion and ACTC refunds totaled $26.6 billion—or $89.6 billion in total.

A new TIGTA study has found that the IRS still does a poor job at minimizing tax fraud and errors in the EITC and ACTC. As shown in Chart 1, for 2013, the EITC had an error rate of 24 percent resulting in $14.5 billion in improper payments while the ACTC had an error rate as high as 7.1 percent resulting in 7.1 billion in improper payments.

Overall, that is $21.6 billion in improper payments that other American taxpayers are having to make up for with higher tax bills. To put that into perspective, according to state tax data from the IRS, this is the equivalent of all the tax dollars collected from taxpayers in Colorado ($21.8 billion) in 2012—or any combination of smaller states such as Maine ($3.5 billion), North Dakota ($3.6 billion), Rhode Island ($3.8 billion), South Dakota ($3 billion), West Virginia ($4.1 billion), and Wyoming ($3.5 billion) (see Table 1) with a combined total of $21.5 billion. I wonder how all of these taxpayers feel about their tax dollars going down the “improper payment” rabbit hole?

The TIGTA report does go into detail on the various reforms that the IRS could implement to reduce these improper EITC and ACTC payments. For instance, greater data integration with resources such as the National Directory of New Hires and Employment Data would help the IRS flag potentially erroneous EITC and ACTC payments.

However, none of these reforms gets to the real problem—the IRS should not be in the welfare business. This mission creep takes away from the IRS’s core mission to collect taxes owed to Uncle Sam in the most efficient manner possible. As such, as this TIGTA study shows, the IRS is now unable to perform all of its activities at a reasonable level of efficiency.

To make matters worse, the IRS is now responsible for enforcing Obamacare penalties—with the IRS’s current track record we already know that they will fail miserably in this new mission. Additionally, Obamacare will force taxpayers to provide the IRS with an historical unprecedented level of information. Combined with the recent IRS scandals, does anyone think this is going to end well?


J. Scott Moody

Scott has nearly 20 years of experience as a public policy economist. He is the author, co-author and editor of over 180 studies and books. His professional experience also includes positions at the American Conservative Union Foundation, Granite Institute, Federalism In Action, Maine Heritage Policy Center, Tax Foundation, and Heritage Foundation.

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