TIGTA: Lack of Vetting by IRS Resulted in $34.8 Million in Erroneous Tax Credits

Chris Gaetano
Published Date:
Jul 21, 2017

The Treasury Inspector General for Tax Administration (TIGTA) faulted the IRS for not having the required vetting programs in place to confirm eligibility for the EITC and ACTC, resulting in $34.8 million in erroneous tax credits being sent out, according to a recent report.

The IRS was supposed to begin implementing provisions meant to reduce the number of people claiming the credits as part of the Protecting Americans from Tax Hikes Act of 2015. This includes things such as modifying the due dates on the W-2 and 1099-MISC, providing additional time for the IRS to review refund claims in order to reduce fraud, mandating that no refund or credit can be made to a taxpayer before Feb. 15 if they claim either credit, preventing retroactive claims for the credits after the issuance of a Social Security Number, ITIN, or ATIN, forbidding amended tax returns if the SSN, ITIN or ATIN were not issued prior to the return due date, and expanding the preparer due diligence requirement to cover the credits.

TIGTA said that processes were not put in place to identify and disallow retroactive claims as required. 

"Our review of Tax Year 2014 tax returns filed and processed during the 2016 Filing Season as of May 26, 2016, identified more than $34.8 million in CTCs, ACTCs, EITCs, and AOTCs that were paid to 15,744 taxpayers filing tax returns for years prior to when their SSN, ITIN, or ATIN was issued. Each of the refundable credit claims associated with the 15,744 returns we identified should have been disallowed by the IRS," said TIGTA. 

It also identified another $117 million in potentially erroneous EITC sent to people who whose Social Security Numbers were not valid for work. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996, enacted August 22, 1996, requires individuals claiming the EITC to have a valid-for-work SSN and authorizes the IRS to deny claims to those individuals who file using an invalid SSN. 

"We recommended that the IRS develop a process to identify and prevent the issuance of the EITC to taxpayers with nonwork SSNs issued to claim Federal benefits. IRS management agreed with our recommendation. Despite management agreeing to implement such a process, our current review of Tax Year 2014 returns identified 49,310 individuals who are not authorized to work in the United States but who received more than $117.7 million in potentially erroneous EITCs," said TIGTA. 

TIGTA recommended that the IRS review the 15,744 tax returns filed during the 2016 Filing Season with an untimely Taxpayer Identification Number and take the steps necessary to recover credits paid in error; continue to evaluate opportunities to use Forms 1099-MISC to systemically verify income reported on EITC and ACTC claims; conduct a study to quantify the EITC and ACTC claims the IRS identifies with income discrepancies and assess the IRS’s authority to address them; and evaluate the use of nonwork Social Security Number data the IRS currently has available for use in its systemic processes used to identify potentially erroneous EITC claims.

The IRS agreed with TIGTA’s recommendations. The IRS plans to evaluate the 15,744 returns that TIGTA identified for appropriate post-refund treatment, explore options to improve the timeliness of Forms 1099-MISC and Forms W-2 processes, report to Congress the number of returns requesting EITCs or ACTCs that underreport and overreport income, and analyze available nonwork Social Security Number data to evaluate its usefulness in identifying fraudulent EITC claims.

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