President Obama’s plan to expand the earned income tax credit could see billions of dollars wasted due to problems with the program that have gone unresolved for years.
The Internal Revenue Service has known about the program’s high rate of improper payments, resulting from both fraud and errors in returns, since at least 2004, thanks to detailed reports from its inspector general.
A report last September found nearly a quarter of all earned income credit payments had been made in error the previous year, potentially squandering $14.5 billion in 2013 alone.
What’s more, the tax agency has estimated it either overpaid, underpaid, forgot to pay or paid to the wrong person as much as $148 billion between 2003 and 2013 through the earned income tax credit program.
But instead of scaling back the only program of its kind that the IRS has seen fit to designate as a “high risk” for improper payments, the White House proposed heaping more responsibility on the tax agency by extending the credits to workers without children.
Ryan Ellis, tax policy director for the group Americans for Tax Reform, said the budget Obama proposed Monday doubles down on programs that are already known to be fraught with error.
“Really what you’re doing at that point is throwing gasoline on a fire,” Ellis said.
He said the rate of improper payments — which hovers somewhere between 22 and 26 percent, according to the IRS inspector general — could logically be applied to the $60 billion of additional costs to the earned income credit program Obama has suggested adding over the next 10 years.
That could drain an additional $14 billion from the program.
The people who rely on the earned income credit can struggle with the complexity of IRS requirements, which are made even more cumbersome by the fact that the people who benefit from those programs often have little education, unstable family situations and low English proficiency, Ellis noted.
“The population who is asked to comply with this doesn’t have disposable income to pay for [accountants] and is often the target of predators,” he said.
While fraud is behind many improper IRS payments, Ellis said “honest mistakes” in filling out tax forms may account for even more of the cases where money is lost in the case of earned income tax credits.
Even so, the frequency of improper payments and lack of IRS oversight has surfaced in reports for years.
A nearly decade-old inspector general’s report discovered “increased taxpayer burden,” “wasted IRS resources,” and a “loss of federal government funds” in the earned income credit program. The losses included $110 million of payments handed out to applicants “without taxpayers demonstrating they were entitled to receive” the credits, according to the 2005 report.
The IRS lost the equivalent of 1.5 million Americans’ income taxes in 2006 to faulty earned income credit payments, another watchdog report found.
“Put simply, the total federal income tax paid by … roughly the population of Phoenix, Arizona, was used to fund erroneous” payments through the program, the inspector general said in the 2008 report.
The IRS watchdog attributed the high error rate to “complicated” rules, which it said “cause taxpayers to make errors while attempting to interpret and apply the tax laws to their individual situations.”
Years later, the IRS continues to find its resources stretched too thin to pare down the error rates of a program that has only become more unwieldy as it has grown in size.
“The IRS’ compliance resources are limited and additional alternatives to traditional compliance methods have not been developed. Consequently, the IRS does not address the majority of potentially erroneous earned income tax credit claims,” the agency’s inspector general said in a report outlining the agency’s top challenges this year.
Lawmakers on both sides of the aisle have expressed support for expanding the credit, including House Ways and Means Committee Chairman Paul Ryan, R-Wis., though Republicans objected to a number of other proposed measures in Obama’s budget.
David Williams, president of right-leaning nonprofit Taxpayers Protection Alliance, said the release of the White House budget Monday presented Congress with a “prime opportunity” to address the waste in such programs.
“There is absolutely no reason to expand the earned income tax credit, especially considering reports of waste, fraud, and abuse,” Williams said.
He said federal officials need to tighten oversight of the program, which he described as “hemorrhaging money,” and address existing issues before they pour more taxpayer dollars into it.
“Considering that federal officials know where the money is being wasted,” Williams said, “there is no reason not to stop it.”
Washington Examiner intern Alicia Hesse contributed to this report.
