The Internal Revenue Service (IRS) made at least $13 billion in improper payments under the Earned Income Tax Credit (EITC) during the fiscal year 2013 and continues to not comply with the Improper Payments Elimination and Recovery Act (IPERA), according to a report from the Treasury Inspector General for Tax Administration that was made public this week.

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Improper payment estimates lag by three years – IRS

Under IPERA, Federal agencies have extensive reporting requirements for any program that has improper payments of more than $100 million, but the IRS has not met all of these requirements nor has it made much progress in reducing these payments: since 2003 they have fallen five percentage points but actually increased in value, although the estimates do lag a bit. The IRS uses information from the National Research Program (NRP) to estimate its improper payments, but because of the delay in gathering NRP data those estimates lag by about three years.

“EITC improper payment rates for Fiscal Year 2013 are based on information from Tax Year 2009 tax returns that were processed in Calendar Year 2010,” says the report.

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EITC seen as a high-risk tax program

The EITC is seen as an attractive target for fraudulent tax claims, but the way IPERA defines improper payments it includes both over and underpayments in a gross amount – so families who leave money on the table because they don’t understand how the system works are contributing to the $13 billion, not just those who get tax refunds that they shouldn’t receive. But that’s not how the Inspector General is approaching the matter.

“The IRS can and must do more to protect taxpayer dollars from waste, fraud, and abuse,” said J. Russell George, the Treasury inspector general for tax administration, the Associated Press reports. The IRS responded that it is concerned about the matter and that a major review is currently underway.

The EITC is an anti-poverty tool that provides tax credits based on a family’s income and number of children. Unlike many other anti-poverty programs, the tax credit grows, up to a point, as the family’s income increases and then gradually tapers off so that another dollar of income is always a net positive for the family so that the program doesn’t create an incentive not to work. The maximum credit this year was $6,413 for a family with three or more children (and not much income), but that falls off for families who either earn more or have fewer children. The EITC is automatically adjusted for inflation each year.