With improper payments government-wide estimated to be more than $124 billion, and the latest estimate for the annual net tax gap at $385 billion, Senate Finance Committee Chairman Orrin G. Hatch, R-Utah, held a hearing on October 1 to examine solutions addressing overpayments of the Earned Income Tax Credit (EITC), as well as with Medicare and Medicaid, whose oversight is conducted by the committee. The Government Accounting Office (GAO) has reported for several years that the federal government is unable to determine the full extent to which improper payments occur and reasonably assure that actions are taken to reduce them.
“While some progress has been made to address these concerns, any successes we’ve seen have been overshadowed by a persistently growing mountain of waste, fraud, abuse, and mismanagement,” said Hatch in his opening statement.
The sole witness testifying before the committee, GAO Comptroller Gene L. Dodaro, told the panel that, in the face of large and growing structural deficits, it will be “especially important” to understand the causes of tax noncompliance and continue to develop new approaches to minimize it. “Reducing the tax gap would raise revenue that could be put toward a host of purposes, but there are no easy fixes to this problem,” said Dodaro. “Incomplete, unreliable, or understated estimates; risk assessments that may not accurately assess the risk of improper payment; and noncompliance with criteria listed in federal law hinder the government’s ability to understand the scope of the issue.”
The GAO found that, in fiscal year 2014, the IRS reported program payments of $65.2 billion for the EITC. The IRS estimated that 27.2 percent, or $17.7 billion, of these program payments were improper. Dodaro told lawmakers a root cause of EITC noncompliance is that eligibility is determined by taxpayers themselves or their tax return preparers and that IRS’s ability to verify eligibility before issuing refunds is limited. According to the Center for Budget and Policy Priorities (CBPP), commercial taxpayers make a majority of the errors. In a recent white paper, the CBPP stated that they “file close to 60 percent of all EITC returns, and the IRS has found that the majority of EITC errors occur on commercially prepared returns.”
Hatch had initially planned a markup of legislation to prevent identity theft and tax refund fraud that included a provision giving the IRS more power to regulate commercial tax preparers. The markup was postponed after the American Institute of Certified Public Accountants (AICPA) sent Hatch and ranking member Ron Wyden, D-Ore., a letter expressing concern over giving the IRS such authority (TAXDAY, 2015/08/16, M.1). “We have concerns regarding the provision that grants the Department of the Treasury and Internal Revenue Service (IRS) broad authority to regulate paid tax return preparers,” wrote the AICPA.
The IRS typically uses audits to help identify EITC payments; in June 2014, the GAO reported that about 45 percent of correspondence audits—audits done by mail—that closed in fiscal year 2013 focused on EITC issues. The IRS reported that tax returns with EITC claims were twice as likely to be audited as other tax returns. “However, we found that the effectiveness of these audits may be limited because, since 2011, there have been regular backlogs in the audits, which have resulted in delays in responding to taxpayer responses and inquiries,” testified Dodaro. “Legislative action and significant changes in IRS compliance processes likely would be necessary to make any meaningful reduction in improper payments.”
The Improper Payments Elimination and Recovery Improvement Act of 2012 (IPERIA) is the latest in a series of laws Congress has passed to address improper payments. IPERIA directs the Office of Management and Budget (OMB) to annually identify a list of high-priority programs for greater levels of oversight and review, including establishing annual targets and semiannual or quarterly actions for reducing improper payments. Dodaro pointed out that, in April 2015, the Treasury Inspector General for Tax Administration (TIGTA) continued to report that the IRS’s risk assessment process did not provide a valid assessment of improper payments in certain IRS programs and did not adequately address specific risks commonly associated with verifying refundable credit claims (TAXDAY, 2015/04/02, T.1).
Implementing strong preventive controls can serve as the frontline defense against improper payments, according to a GAO report. “Proactively preventing improper payments increases public confidence in the administration of benefit programs and avoids the difficulties associated with the “pay and chase” aspects of recovering overpayments,” the report stated. Moreover, the GAO report found that there are preventative measures to reduce overpayments and fraud, including: up-front eligibility validation through data sharing; predictive analytic technologies; program design review and refinement; data mining; and recovery auditing.
By Jeff Carlson, Wolters Kluwer News Staff
SFC Press Release: Hatch Statement at Finance Hearing on Improper Payments
SFC Press Release: Wyden Statement at Finance Committee Hearing on Improper Payments
GAO Testimony: Fiscal Outlook—Addressing Improper Payments and the Tax Gap Would Improve the Government’s Fiscal Position, Statement of Gene L. Dodaro, Comptroller General of the United States (GAO-16-92T)