NCPA - National Center for Policy Analysis

Fraud in the Tax Code

December 19, 2014

According to a new report from Senator Tom Coburn (R-Okla.), America's tax gap -- the difference between the amount of taxes owed to the federal government and the amount actually received -- will be close to $483 billion in 2014. While complexity and inadvertent errors are a large part of the reason for the tax gap, some of the gap is due to fraud.

How much of the gap is due to fraud? It's not clear. While the IRS refers suspected tax fraud cases for investigation, Coburn's report says the agency does not actually track the outcomes of those cases -- how many of them turn out to be intentional wrongdoing is unknown. There are certain tax credits and deductions, however, with high "improper payment" rates:

  • The Earned Income Tax Credit (EITC) provides credits to working adults in poverty. In 2014, the EITC is estimated to cost taxpayers $69.2 billion. According to a 2013 government report, between $13.3 billion and $15.6 billion in improper payments were made in 2013. Between 2003 and 2013, between $124.1 billion and $148.2 billion improper payments were made.
  • Since 2009, the American Opportunity Tax Credit (AOTC) has given credits -- up to $2,000 -- to students enrolled in higher education. But the Inspector General of the U.S. Treasury reported in 2011 that 1.7 million AOTC claimants received $2.6 billion in credits but offered no evidence they were actually enrolled in school, over 370,000 taxpayers received $550 million in credits but were not eligible for them and even 250 prisoners received the AOTC. The report concluded there were $3.2 billion "erroneous" education credits paid to 2.1 million taxpayers as of May 2010.
  • Federal fuel tax revenues are used to fund the highway system, but taxpayers who use fuel for off-road purposes (such as fishing, farming, or nonprofit educational operations) can receive a credit for the taxes. Of the $176 million in fuel credits claimed in 2011, one-fifth "had questionable characteristics, such as little or no reported income from self-employment or farming," according to a government report.
  • Divorce alimony payments can be deducted from a person's taxable income and must be reported in the recipient's income. In 2010, almost half (47 percent) of the 568,000 tax returns with alimony deductions did not match the amount reported by recipients. The government estimates that $2.3 billion in taxable income was never taxed.

In addition to these tax expenditures, Coburn notes that identity theft is a growing problem, with perpetrators using taxpayer information to claim refunds. More than 1 million tax returns filed in 2011 were identified as the product of identity theft. A government report found an additional 1.2 million returns that appeared fraudulent but were not caught by the IRS' fraud filters.

Source: "Tax Decoder," Office of Senator Tom Coburn, December 2014. 


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