Improper Payments in the EITC Program

May 19, 2014

The Earned Income Tax Credit (EITC) had an improper payment rate of 22 to 26 percent in 2013, costing taxpayers $13.3 to $15.6 billion, writes Kyle Pomerleau, economist at the Tax Foundation.

Historically, the EITC -- a tax credit for low-income, working Americans -- has been supported by lawmakers of all stripes. However, the latest report from the Treasury Inspector General for Tax Administration (TIGTA), which uncovered the payment error rate, indicates that the program is in need of reform.

TIGTA defines an improper payment as one that should not have been made, was made in an incorrect amount or was made to an ineligible recipient. The payments may be due to fraud or to taxpayer error.

Fraud within the EITC program is not new:

  • According to a report from economist Jeffery Liebman, who analyzed improper EITC payments in 1996, 45 percent of that year's improper payments were due to fraud, while 55 percent were due to taxpayer error.
  • Looking at EITC payments over the last decade, 2003 saw the highest improper payment rate, between 25 and 30 percent. The cost to taxpayers totaled between $12 and $14.6 billion in 2013 dollars.
  • When the EITC was expanded in 2009, the improper payment rate began to increase. In 2010, the error rate sat between 24 and 29 percent, at a total cost of $16 to $19 billion in 2013 dollars.

Congressional proposals to reduce the improper payment rate have ranged from simplifying the program to doubling penalties on tax preparers that submit incorrect information.

Pomerleau proposes that Congress replace the EITC with a spending-side wage subsidy.

Source: Kyle Pomerleau, "Earned Income Tax Credit Still Plagued with High Error Rate," Tax Foundation, May 14, 2014.

 

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