Hearing on Improper Payments in the Administration of Refundable Tax Credits
HEARING ON IMPROPER PAYMENTS IN THE
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
May 25, 2011
Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
DIANE BLACK, Tennessee
JOHN LEWIS, Georgia
XAVIER BECERRA, California
RON KIND, Wisconsin
JIM MCDERMOTT, Washington
JON TRAUB, Staff Director
C O N T E N T S
Mr. Steven Miller
Deputy Commissioner for Services and Enforcement, Internal Revenue Service
Honorable J. Russell George
Treasury Inspector General for Taxpayer Administration, U.S. Department of the Treasury
Accompanied by Mike McKenney, Assistant Inspector General for Audit
Mr. Michael Brostek
Director, Tax Policy and Administration, Strategic Issues, U.S. Government Accountability Office
Ms. Nina E. Olson
National Taxpayer Advocate, Internal Revenue Service
HEARING ON TRANSPARENCY AND FUNDING OF STATE
AND LOCAL PENSION PLANS
U.S. House of Representatives,
Committee on Ways and Means,
The subcommittee met, pursuant to notice, at 10:35 a.m., in Room 1100, Longworth House Office Building, Hon. Charles W. Boustany, Jr. [chairman of the subcommittee] presiding.
[The advisory of the hearing follows:]
*Chairman Boustany. This subcommittee hearing will come to order. Good morning to everyone. I would like to welcome everyone to this morning’s hearing on improper payments in the administration of refundable tax credits.
In the course of less than a decade, improper payments arising from refundable tax credits have cost taxpayers an estimated $106 billion, according to government reports. To put this amount of money in perspective, it’s more than the fiscal year budgets of the Departments of Homeland Security, Justice, Treasury, and Transportation, combined.
Refundable tax credits not only reduce an individual’s tax liability, they can also result in payments from government when credits exceed one’s tax liability, meaning that millions of Americans have been able to eliminate any income tax liability, and even get a check back from the government via refundable credits. Not surprisingly, this makes them an attractive target for those willing to claim more than they are legally due, or otherwise to cheat the system.
The problem is so widespread that the inspector general has even found IRS employees abusing refundable tax credits. Some improper payments can also result from honest errors that are an inevitable result of our complex and convoluted tax code. But whether caused by innocent mistakes or outright fraud, improper payments cost the taxpayer dearly.
For instance, the earned income tax credit consistently ranks among one of the most vulnerable federal programs, with improper payments totaling nearly $17 billion in 2010, according to GAO. This is roughly a quarter of the program’s total outlays. And this is not a new problem with this credit, as IRS has issued as much as $83 billion in improper payments since 2003.
Another example is the additional child tax credit for which improper payments have reportedly risen from under $100 million in the year 2000 to well over $4 billion in 2010. And the list goes on.
In the case of the first‑time homebuyer credit, over half‑a‑billion dollars reportedly has gone to individuals who did not qualify for the credit. The inspector general recently found thousands of tax filers who claimed the first‑time homebuyer credit by listing a P.O. box as their qualifying home.
Thousands of prisoners successfully claim the first‑time homebuyer credit, as did hundreds of children. Hundreds more successfully claimed undecided or to‑be‑determined as their address, and still received the credit.
Despite these numbers and examples, not enough is being done to stem the tide of improper payments. Reports suggest that IRS has failed to develop an effective way to measure progress at reducing these improper payments. The Agency has also failed to implement years of inspector general recommendations that, if accepted, could save the taxpayers billions of dollars.
Given these staggering numbers, this morning’s hearing will explore the size and scope of these improper payments, and whether IRS is doing what is necessary to ensure the integrity of refundable tax credit programs. I am hopeful that the testimony provided by today’s panel will also help the committee identify additional actions that might be taken to protect taxpayer dollars.
Before I yield to the ranking member, Mr. Lewis, I ask unanimous consent that all Members’ written statements be included in the record.
*Chairman Boustany. Without objection, so ordered.
I now ‑‑ I like to recognize the ranking member for the purposes of an opening statement.
*Mr. Lewis. Good morning. Good morning, Mr. Chairman. I want to thank you for holding this hearing today. The topic is both timely and important. But I must say that I am troubled. I am concerned by the current path of this committee.
I continue to ask, “Who is next? What else is on your list?” We started the year with seniors and proposals to end Medicare. The committee then moved to teachers and their pensions, and then to women, health, and uninsured. And today the target is middle‑class working families.
In 2009 the tax credit discussed today delivered almost $160 billion to more than 100 million Americans. They help students pay for college. They help family care for their children. They help families adopt children. They help million buy homes. They help make work pay. They help middle class family do just a little bit better.
Today we are here about a program for working families created over 35 years ago, the earned income tax credit, a program that encourages and rewards work and give dignity to people who work hard each and every day, a program that lifts families and their children out of poverty and into the middle class ‑‑ over 70 million family last year alone. A program expanded by both Democrats and Republican, alike, including President Reagan.
The administration of tax benefits for middle‑class and working family is no different than from corporation and the wealthy. Tax benefits are complex. We all agree that we must improve the administration of our taxes. However, we should not use flawed estimates based on old data to single out working family, middle‑class Americans.
Why we here today, putting tax benefit for middle class family in a bad light?
Now, I stand for fairness in tax administration, and I stand for million of working American families. These family need our help today. I support these tax credits. And I will fight to improve these program and give these family a fair shake.
I want to thank each and every one of the witness for being here today. Thank you, Mr. Chairman, and I yield back.
*Chairman Boustany. I thank the ranking member for his statement. I now want to welcome our panel of witnesses.
First we have Mr. Steven Miller, who is deputy commissioner for services and enforcement at the IRS. Mr. Miller, welcome.
We have Mr. Russell George, the Treasury inspector general for tax administration. Mr. George, we welcome you. And you are accompanied by Mr. McKenney, Mr. Mike McKenney, assistant inspector general for audit. Mr. McKenney, welcome.
We also have Mr. Michael Brostek. He is the director for tax policy and administration at the Government Accountability Office. Welcome, Mr. Brostek.
And, of course, Ms. Nina Olson, who is the national taxpayer advocate at the IRS. Ms. Olson, welcome.
We thank you all for being here today.
You will each have five minutes to present your testimony, with your full written statements being submitted for the record.
Mr. Miller, we will now begin with you. You may proceed with your opening statement.
STATEMENT OF STEVEN MILLER, DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT, INTERNAL REVENUE SERVICE, WASHINGTON, D.C.
*Mr. Miller. Thank you, Mr. Chairman, Ranking Member Lewis, Members of the Subcommittee. My name is Steve Miller, Deputy Commissioner at the Internal Revenue Service. I appreciate the opportunity to testify on refundable tax credits.
The IRS currently administers numerous refundable credits, including the earned income tax credit, first‑time homebuyer credit, additional child tax credit, adoption credit, making work pay, and the American Opportunity tax credit. As we administer these credits, we must balance two considerations: first, refundable credits are provided to achieve important Congressional purposes, such as relief from poverty or boosting the economy; second, a refundable credit allows the taxpayer to receive cash without regard to tax liability. As a result of these factors, the IRS must deliver the promised refunds in the intended time frame, while ensuring that appropriate controls are in place to minimize errors and fraud.
To be more specific, let me outline some of the challenges in this area. The first is complexity. Complexity in the rules governing eligibility, and in the operation of certain refundable credits creates challenges for both taxpayers and the IRS. Mistakes in the application of the law are a significant portion of claims made in error.
Second is the lack of third‑party data. In many cases, the IRS lacks real‑time third‑party data to verify eligibility. For example, under one version of the homebuyer credit, an individual must have owned and lived in a house for five consecutive years during an eight‑year period prior to the subsequent purchase of a home. There is no third‑party data to verify that requirement.
Third, the timing of data. Even if third‑party data does exist, the IRS often must decide on the validity of a refund before receiving that data. Now, I want to note that we are continuing to focus on getting more information in earlier than the filing season to do matching. But it is a challenge.
Fourth, hard‑to‑detect fraud. The IRS confronts on an ongoing basis schemes involving erroneous refund claims, including claims made by prisoners, non‑citizens, as well as schemes involving deceased persons. The problem is particularly acute in the case of prisoner refunds, and we have developed systems that provide special scrutiny in this area and, in fact, have doubled the number of refunds being stopped this year.
Finally, tax law changes. The IRS often faces extremely compressed time frames for implementing a new law. Let me take a moment to outline some of our work on the earned income tax credit. Fraud and error in the EITC is a significant problem, and a top priority for us. Because the eligibility requirements are numerous and complex, our work begins with informing people of these requirements before they file.
Our enforcement tools recover or protect billions annually. These tools include examinations, math error, and document matching. The IRS started more than 500,000 EITC exams in 2010, most of which were pre‑refund. Last year, using math error authority, IRS also blocked approximately 350,000 improper refund claims. We do matching of data that is effective, as well, finding 900,000 mismatched returns last year. And we have asked for additional enforcement resources for next year in the 2012 budget.
While traditional compliance efforts are effective, we continue to explore other ways to combat non‑compliance. The cornerstone of these efforts is our return preparer approach. More than 60 percent of EITC returns are from preparers. Our work begins with outreach, but includes thousands of contacts, including 10,000 notices and more than 1,000 due diligence visits. Most importantly, we now require registration of return preparers, and will shortly require testing and continuing professional education. More than 700,000 have registered with us.
Finally, in 2011, return preparers who file an EITC return will have to attach the current form 8867, detailing the due diligence they performed in preparing the EITC claim. More changes in the due diligence requirements will be proposed later this summer.
Let me conclude. Refundable tax credits play an important role in fulfilling congressional policies. But, as I have mentioned, they pose challenges. I believe we are improving our administration of these credits. But much work remains. And toward that end, as part of our 2012 budget, in addition to the enforcement resources that we have outlined above, we have also requested funds to create a refundable credits office that will centralize planning and oversight in this area.
Mr. Chairman, this concludes my prepared remarks. I will be glad to answer any questions.
[The statement of Mr. Miller follows:]
*Chairman Boustany. Thank you, Mr. Miller.
Mr. George, you may proceed.
STATEMENT OF J. RUSSELL GEORGE, TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION, U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, D.C., ACCOMPANIED BY MICHAEL E. MCKENNEY, ASSISTANT INSPECTOR GENERAL FOR AUDIT
*Mr. George. Thank you, Mr. Chairman, Chairman Boustany, Ranking Member Lewis, members of the subcommittee. Thank you for the opportunity to testify on the Internal Revenue Service’s administration of refundable tax credits.
As noted, refundable credits were designed to help low‑income individuals reduce their tax burden, or to provide incentives for other activities. The Earned Income Tax Credit, created in 1975, is used to offset the impact of social security taxes on low‑income families, and to encourage them to seek employment rather than public assistance.
More recent refundable credits provide incentives for other activities such as, as you noted Mr. Chairman, buying a home, obtaining a college education ‑‑ Ranking Member, you pointed that out ‑‑ and adopting a child. The two largest refundable credits, the EITC and Additional Child Tax Credit, receive a much larger appropriation than the IRS’s own budget. The appropriations for these credits in Fiscal Year 2010 were approximately $55 billion for the EITC, and $23 billion for the Additional Child Tax Credit. In contrast, the IRS’s total Fiscal Year 2012 budget request is just over $13 billion.
Although each of these refundable credits provides benefits to individuals, the unintended consequence of these credits is that they are often the target of individuals who file erroneous claims for the credits. In a 2010 report to TIGTA, the IRS noted that refundable credits present an additional avenue for individuals to commit filing fraud.
Nonrefundable tax credits are limited to the amount of an individual’s income tax liability. As such, the maximum benefit an individual would receive if a nonrefundable credit is claimed inappropriately is to fully offset his or her tax liability resulting in owing nothing. Refundable credits do not have such limitations. In essence, individuals can obtain money they did not earn, and to which they are not entitled, simply by claiming a refundable tax credit. Refundable credits can result in tax refunds, even if no income tax is withheld or paid.
The total amount of improper payments relating to refundable credits far exceeds the amount of fraudulent tax returns the IRS identifies and stops as part of its Taxpayer Assurance Program. The IRS continues to report that 23 to 28 percent of EITC payments are issued improperly each year. In fiscal year ‑‑ as pointed out earlier, in fiscal year 2009, this equated to $11 billion to $13 billion in improper EITC payments. Although the IRS has annually reported billions in EITC improper payments, little improvements have been made in reducing these payments.
TIGTA has conducted a number of audits that have identified opportunities to reduce EITC improper payments. We have provided the IRS with specific actions that could have been taken to reduce improper payments, and allow the IRS to establish measurable reduction targets. While the IRS has implemented some of our recommendations, it has not taken action to address key recommendations aimed at preventing or reducing improper EITC payments.
The IRS does not require individuals to provide any supporting documentation to verify eligibility for claiming the EITC, although it piloted such a plan a few years ago.
In 2009 we reported a significant increase in the Additional Child Tax Credit claims by filers who were unable to obtain a Social Security Number or were not eligible to receive a Social Security Number. These individuals were not authorized to work in the United States and filed tax returns using an Individual Taxpayer Identification Number, referred to as an ITIN.
The refundable credit claims made by these filers have grown substantially. For Tax Year 2000, a total of 62,000 ITIN filers received $62 million in Additional Child Tax Credits. This has since grown to 2.3 million ITIN filers, claiming the credit totaling $4.2 billion in 2010. As part of our Recovery Act oversight, we are in the process of completing a review assessing the effectiveness of the IRS’s processes to identify erroneous American Opportunity Tax Credit claims.
The Recovery Act amended the HOPE Scholarship Credit to allow a refundable tax credit. This program allows individuals to receive a credit for higher education expenses up to $2,500 per year for Tax Years 2009 and 2010, with up to $1,000 being refundable. The IRS requires no documentation to be provided to verify eligibility, including whether an individual claimed as a student even attends a required accredited educational institution. Our review is identifying significant improper payments being made to taxpayers claiming the credit and using ineligible students.
The Adoption Credit was changed to recognize the amount ‑‑ to increase the amount, and made the credit refundable. Recognizing that this could increase the risk for erroneous claims, the IRS developed a strategy to attempt to reduce this risk. However, our analysis found that while the IRS requires individuals to provide documentation that verifies their eligibility, the IRS does not have the authority to deny the Adoption Credit if the documentation is not provided. Without this math error authority, the IRS cannot deny the credit during processing of tax returns, but must instead deny the credit post‑processing, through the examination process, which is a much more costly, resource‑intensive, and burdensome process.
Mr. Chairman, members of the committee, we take our mandate seriously at TIGTA, and we want to help you conduct your oversight of this most important responsibility. Thank you.
[The statement of Mr. George follows:]
*Chairman Boustany. Thank you, Mr. George.
Mr. Brostek, you may proceed.
STATEMENT OF MICHAEL BROSTEK, DIRECTOR, TAX POLICY AND ADMINISTRATION, STRATEGIC ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, D.C.
*Mr. Brostek. Chairman Boustany, Ranking Member Lewis, and members of the subcommittee, thank you for the opportunity to discuss IRS’s pre‑refund compliance checks.
To provide an idea of the universe that these checks could affect, in 2010 IRS processed 137,000,000 individual income tax returns and issued about 107,000,000 refunds, totaling over $312 billion. Its compliance checks thus could affect millions of taxpayers and billions of dollars of refunds by identifying taxpayers who overclaim refunds and taxpayers who underclaim benefits to which they are entitled.
My statement focuses on pre‑refund checks and their benefits, how those checks can be enhanced immediately, and how they may be enhanced in the future.
Pre‑refund checks take several forms. When tax returns are received, the initial process helps correct taxpayer identification errors, and ensure that taxpayers have filled in all required fields. Then, return information is captured in IRS’s systems.
At this point, IRS applies additional computerized filters. Some filters identify errors that can be corrected using IRS’s math error authority. Others identify errors that can be addressed through audits. Finally, still others identify possible fraud.
When IRS identifies errors that can be corrected with virtual certainty, they are correctable under IRS’s math error authority. Despite the name, math errors encompass much more than simple arithmetic errors. They also include, for instance, identifying incorrect social security or other taxpayer identification numbers, problems with taxpayers’ filing status or claiming of dependents, and missing schedules and forms. Some of these errors are detected from information included on the tax return, and some are detected by comparing the return to IRS databases or to databases obtained from other parties, such as the Social Security Administration.
IRS staff manually review the math errors and enter codes that automatically generate a notice to the taxpayer explaining the error, identifying the revision in the taxpayer’s refund amount, or possibly a new balance due to IRS, and instructing a taxpayer on how to respond if she or he disagrees.
When math error authority cannot be used, the return is placed in queue for possible pre or post‑refund audit. Depending on available resources, IRS will audit a portion of these returns, generally through correspondence, before complete refunds are sent to taxpayers. To the extent returns are not handled in pre‑refund audits, IRS will include them for possible post‑refund audits.
IRS’s computer filters also identify some refund claims that may be fraudulent. These are forwarded to IRS’s criminal investigation division. In some cases, the investigation may be of a taxpayer, and in others it may focus on paid preparers or others who may be engaging in fraud affecting many returns.
IRS’s pre‑refund checks can be enhanced if Congress provides greater math authority, math error authority, to IRS. We have suggested that Congress consider extending a broad math error authority to IRS with appropriate protections for taxpayers. Broad authority would be especially valuable for addressing possible non‑compliance with newly created refundable tax credits.
In terms of protections, Congress can specify the level of certainty that IRS needs to have that it will be correct in identifying and correcting an error. It might also require IRS to report to Congress or to a committee of Congress before or after they use math error authority. Or, Congress could require consultation with the National Taxpayer Advocate before IRS actually uses a new authority.
Congress could also enact specific new math error authorities that GAO has suggested, such as allowing IRS to use prior‑year tax return information to ensure taxpayers do not claim benefits in excess of lifetime limits, and enabling IRS to correct various age‑related errors.
Looking forward, IRS has significant opportunities to move more compliance improvement efforts into the pre‑refund environment. IRS receives a substantial amount of documentation that is used after the filing season. Over time, this documentation may be usable pre‑refund. This would, however, require significant investments in computer systems and likely changes in requirements for those who provide information to IRS. It’s a long‑term endeavor.
Further, IRS’s paid preparer regulatory regime may improve the accuracy of returns prepared by this industry when they are filed, and give IRS the ability to take corrective measures during the filing season as it identifies emerging error trends.
This concludes my oral statement. I would be happy to answer questions.
[The statement of Mr. Brostek follows:]
*Chairman Boustany. Thank you, Mr. Brostek.
Ms. Olson, you may proceed.
STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE, INTERNAL REVENUE SERVICE, WASHINGTON, D.C.
*Ms. Olson. Chairman Boustany, Ranking Member Lewis, and distinguished members of the subcommittee, thank you for inviting me to testify today about improper payments of federal funds.
The tax code authorizes numerous refundable credits that may give rise to improper payments. These include the earned income tax credit, additional child tax credit, first‑time homebuyer tax credit, adoption credit, American Opportunity tax credit, and the fuel tax credit for businesses.
It goes without saying that the job of the IRS in administering these provisions is to ensure that payments are made to eligible persons and only to eligible persons. But for context, it is important to keep in mind that the IRS has a lot on its plate.
For tax year 2001, the tax gap was estimated at 345 billion a year. By comparison, improper payments related to the EITC constitute less than five percent of that amount.
As money is fungible, overstatement of a refundable credit is economically equivalent to underpayment of tax for any other reason. They both have the same impact on the public treasury. The IRS must address both problems. And with limited resources, every additional EITC audit the IRS conducts cuts into the resources it has available to audit other areas of the tax gap. At present, the audit rate for returns with EITC claims is more than twice that for individual returns in general. Moreover, EITC audits constitute about a third of all individual audits, yet they yield, on average, only about a third as much tax per exam.
For tax year 1999, an IRS study estimated that 27 to almost 32 percent of EITC claims should not have been paid. For fiscal year 2009 the IRS estimate of EITC improper payments was 23 to 28 percent. Assuming that these IRS estimates are comparable, the compliance rate would have appeared to have improved by 4 percentage points. Taking a 27 percent non‑compliance rate down by 4 points to 23 percent would have reduced the gap by almost 15 percent. And this is huge for any tax administration program. It suggests that over the last 10 years both the IRS and interested stakeholders may be making progress in addressing EITC non‑compliance.
That said, I believe all of these estimates substantially over‑estimate the percentage of ineligible taxpayers claiming the benefit. Among other things, the EITC requires taxpayers to prove that they have a qualifying relationship with a claimed child, and that they lived with the claimed child for more than half the year. In many cases, these requirements are notoriously difficult to prove, and an IRS denial of claim in these cases proves simply that the taxpayer could not prove these elements, not that he or she didn’t actually meet them.
Two taxpayer advocate service studies have found this to be the case. In one study, taxpayers had been confused by IRS audit procedures, notices, and documentation requirements. When TAS staff explained the requirements, reported eligibility increased. Notably, the percentage of taxpayers who received EITC increased in direct proportion to the number of telephone contacts that TAS had initiated.
In other studies, taxpayers who were represented fared substantially better than taxpayers who were not. TAS has made numerous regulatory and legislative recommendations to improve the administration of refundable credits, particularly the EITC, and to reduce improper payments without unduly burdening taxpayer rights. Regulation of return preparers, including testing and continuing education on EITC and ethics, curtailment of refund anticipation loans, which has been statistically linked with non‑compliance, enhanced preparer penalties, and strengthened due diligence requirements should all have a positive impact.
If the IRS could receive and process third‑party information returns before it issues refunds, and if Congress separated the worker portion of the EITC from the portion of EITC attributable to family size, and consolidated all family‑related benefits into one provision, we could further reduce improper payments, incentives for fraud, and taxpayers’ compliance burden all in one stroke.
Additional legislative action could also reduce improper payments, notably limiting public access to the database of decedents’ social security numbers and other personal information, and authorizing the use of math error authority for revisions that cap either the lifetime amount of a credit or the number of years for which a credit may be claimed.
I appreciate the opportunity to share my thoughts with you, and would be happy to answer your questions.
[The statement of Ms. Olson follows:]
*Chairman Boustany. Thank you, Ms. Olson. Now we will proceed with questions.
Mr. Miller, we are trying to get a handle on the magnitude of the problem. And in your testimony you sort of glossed over the magnitude. But I think there is broad recognition across the board that there is a problem with overpayments. The subcommittee welcomes the move to register the tax preparers. This, I think, is good. And we also recognize the difficulties you have had with some of the newer tax credits, the compressed time frame from implementation and administration, coupled with the complexity.
But could you talk to us a little bit about efforts being made after the fact, after the fact that there have been overpayments? Recognizing that preventing overpayments is easier to do than after the fact, what efforts are being made at IRS to collect on overpayments?
*Mr. Miller. If you are talking about post‑refund, after the money has gone out?
*Chairman Boustany. Post‑refund.
*Mr. Miller. Obviously, it is much more difficult for us to chase down that money once it’s outside, out the door. But we maintain a pretty robust system. So, since the mid‑2000s we have increased our work in the under‑reporter area to the point where, we do something in the realm of 900,000 matches and mismatches, and assess, with respect to those cases, about $1.4 billion, collecting about 90 percent of that. This is relatively new and enhanced.
We also have quite a bit of post‑refund examination. We do hundreds of thousands of exams post‑refund, as well. Both of those are specific to the earned income tax credit. For example, in the child credit, we don’t do specific exams in that area. But within the EITC exams, 65 percent of those exams impact the child tax credit. So we look at that there, as well. The same is true for the American Opportunities tax credit, where some 300,000 exams involve that credit as a secondary issue. So we have major coverage in the area.
But again, as has been made clear by this panel, it is much easier for us to stop the refund at the door, instead of trying to chase after it afterwards.
*Chairman Boustany. There have been recommendations made by TIGTA, some of which you have followed, others which have not been implemented. Would you comment on the reasons behind not implementing some of the things that have been recommended?
*Mr. Miller. So let me start, Mr. Chairman, by saying we have a very good relationship with the Inspector General and his office. And let me sort of put a baseline down, which is, by our count, something like 13 closed TIGTA reports, something just in excess of 40 recommendations. By our count, four of those we have disagreed on. So I don’t want to give you the sense that we disagree very often, because we don’t.
Some of the ones that we have not completed yet include one where I think that TIGTA has requested or suggested that we require documentation on all EITC credits. And we are looking at that. But, quite frankly, that would require something in the realm of 26 million paper filings. This is going to cause a substantial delay, in terms of our compliance efforts, and it’s going to cause a substantial delay in refunds in that area. So we have to go very carefully in terms of what sort of documentation we require.
The other part of this is the suggestion that we look at alternative means of enforcement here, and that we have done. The return preparer is a harbinger for our efforts in that area. TIGTA has also suggested math error authority. That is statutory, and I will rely on the good wisdom of those on the other side there to speak to whether we should have math error authority. But it’s certainly something we look forward to working with you on.
*Chairman Boustany. We recognize that on the math error authority.
Mr. George, your agency found instances where numerous IRS employees were themselves engaging in tax fraud through the refundable tax credits. In this case it was the First‑Time Homebuyer Credit. Can you tell the subcommittee a little bit about this investigation?
*Mr. George. Mr. Chairman, those are active criminal investigations, and so I have been advised by counsel not to address it in a public forum, but would be happy to do so in private with you and your staff.
*Chairman Boustany. We appreciate that. And, Mr. Miller, can you describe any steps you or IRS has taken to safeguard against this type of activity in the future ‑‑
*Mr. Miller. So, Mr. Chairman, it is not a positive, by any means, to have IRS employees engaged in this sort of conduct. It is not welcomed by us. And, in fact, we fire a great number of people for this.
That said, I will say that the Internal Revenue Service, with 100,000 people, is the size of a small city. And we, unfortunately, have people across the spectrum. The IRS’s tax compliance work for their employees is considerable. We are the most compliant federal agency in government, and far outstrip, obviously, the public. But we take these things very seriously. There are going to be instances, unfortunately, where our folks do the wrong thing. We do follow up, we do take quick action. There is statutory authority for us to take aggressive action in those cases and dismiss those people.
*Chairman Boustany. I appreciate that. Thank you, Mr. Miller.
And now, the chair now recognizes the ranking member for questions.
*Mr. Lewis. Thank you. Thank you very much, Mr. Chairman. I want to thank each of you for being here today. For each panelist, please answer yes or no.
Are all EITC overpayment due to fraud or abuse?
*Mr. George. I am happy to start. While I cannot give you a definitive answer ‑‑
*Mr. Lewis. I just want yes or no. I have a limit amount of time.
*Mr. George. Yes and no, sir. Yes and no. I hate ‑‑ I am not being coy here.
*Mr. Lewis. That is okay. Mr. Miller?
*Mr. Miller. I mean they are subject, yes.
*Mr. McKenney. Yes, some of them.
*Mr. Brostek. I think your question was are all claims due to fraud.
*Mr. Lewis. Or abuse.
*Mr. Brostek. All due to fraud. And no, they are not all due to fraud.
*Mr. Miller. Then my answer is no, because I misheard. I apologize.
*Mr. George. Yes. Same here, sir. Not all.
*Mr. Miller. Certainly not all.
*Mr. Lewis. Ms. Olson?
*Ms. Olson. No.
*Mr. Lewis. Mr. Miller, I understand that in 2009 over 100,000,000 tax return claim refundable credits for tax benefits of more than 150 billion. Is this correct? Yes or no.
*Mr. Miller. That is correct.
*Mr. Lewis. Nine million claim education tax credit. Is that yes or no?
*Mr. Miller. In 2009, that is our number, yes.
*Mr. Lewis. Twenty million claimed child’s tax credit. Yes or no?
*Mr. Miller. Again, our numbers would say yes.
*Mr. Lewis. And 101 million claimed a making work pay credit.
*Mr. Miller. Yes.
*Mr. Lewis. Mr. Miller, further, the EITC overpayment estimate are based on tax return from 5 to 10 years ago. Please answer yes or no. Has the IRS made improvement in its computer systems in the way it processes return over the last 5 to 10 years?
*Mr. Miller. We would say yes.
*Mr. Lewis. Ms. Olson?
*Ms. Olson. Yes, sir.
*Mr. Lewis. It is good to see you again.
*Ms. Olson. Thank you, sir.
*Mr. Lewis. Does a refundable nature of a credit increase non‑compliance more than any other tax benefit?
*Ms. Olson. I am sorry. Ask that question again.
*Mr. Lewis. Does the refundable nature of a credit increase non‑compliance more than any other tax benefit?
*Ms. Olson. In my opinion, refundability does not increase non‑compliance, per se.
*Mr. Lewis. Okay, Ms. Olson. Why refundable tax credit important for working American?
*Ms. Olson. Well, first, it lifts ‑‑ the earned income tax credit lifts millions of taxpayers out of poverty. It ensures that a taxpayer who is working at minimum wage full‑time is not below poverty level, and also does not pay income taxes on poverty‑level wages. It serves as an incentive for taxpayers to work, rather than not work. It reduces pressure on increasing the minimum wage. And it basically helps families, working families, be able to enter the work force. It has a very high impact in that threshold of people who are not working to entering the workforce.
*Mr. Lewis. Ms. Olson, the other witnesses have stated that the EITC overpayment rate is estimated to be 23 to 28 percent. Do you have concern with how this estimate was reached? If so, please describe.
*Ms. Olson. Well, the estimate has a low and a high bound. And the high bound assumed that every taxpayer who did not respond to an IRS audit letter was non‑compliant with the earned income credit, was not compliant. And the low bound assumed that the non‑responders had the same compliance rate as the rest of the EITC population.
We then did ‑‑ my office of research did ‑‑ significant studies in which we discovered, through representative samples of EITC taxpayers under audit, and in audit reconsideration, that, in fact, the lower bound estimate, where the non‑responders had the same non‑compliance rate as the responders, was, in fact, the accurate rate.
And one study that we found, which was very telling, was that about 25 percent of the taxpayers who were under audit over a given period did not know that they were under audit when they received the IRS letter. They couldn’t understand that the IRS letter was telling them that they were under audit, which has an impact on whether you are going to respond or not.
*Mr. Lewis. For each panelist, could you please answer yes or no? In any year is the EITC estimate or improper payment based on that year’s current tax return?
*Mr. George. The answer is no, right?
*Mr. McKenney. No.
*Mr. Miller. The answer is no.
*Mr. George. No.
*Mr. Brostek. No.
*Ms. Olson. No.
*Mr. Lewis. Thank you very much. Thank you, Mr. Chairman. And I yield back.
*Chairman Boustany. I thank the gentleman. The chair now recognizes Ms. Black for five minutes.
*Ms. Black. Thank you, Mr. Chairman, and thank you, panelists, for being here today.
I want to go to the issue of requiring documentation. It seems to me that this is a huge issue in being able to get to just how much fraud is there or is not there. Because, obviously, if you don’t have the information to make that determination, you can’t really adequately make that determination.
So, I know that, Mr. George, you did testify about the documentation and the lack thereof in so many of these cases. And some would say, well, this is more burdensome for the individual, and it is too burdensome. I would like for you, first, to speak to that. And then, I would also like any of the other panelists that would like to come behind.
*Mr. George. Thank you, Ms. Black. That is a very important issue. Suffice it to say ‑‑ and again, I am going to give you the abridged answer ‑‑ as the IRS increases its efforts and has the systems in place which will allow for taxpayers to file, to scan in documents, to submit other paper material, it will make it a lot easier for the taxpayer to comply with his or her tax obligation.
There is no question that if the IRS received more information ‑‑ I believe that was acknowledged a moment ago by Mr. Miller ‑‑ third‑party information, that they would have an easier time in assessing whether or not someone is actually eligible for the credit that they seek.
There is no question now that, if taxpayers are given a chance to submit paperwork or not submit paperwork, they are going to do what is easier for them.
And I would just lastly like to point out that there are many other government programs, such as the ones for people seeking food stamps, which require other forms of documentation which are readily provided by the taxpayer.
*Ms. Olson. I think that documentation is possible in certain circumstances. But let me tell you the experience with the first‑time homebuyer credit which seemed fairly simple for the IRS to say, “In order to claim it you have to attach a HUD closing statement.”
After the IRS pronounced that and said, “If you don’t, we will reject returns,” we found that 22 states do not require the use of the HUD closing statement. Therefore, we have to come up with 22 variations of the acceptable documentation, or we will be discriminating against taxpayers who just happen to live in those states that don’t use the HUD closing statement.
You can imagine what that would be like as you try to say, “How are you going to prove that a child lived with you for more than half the year,” or that this child has a proper relationship. We give an example in our testimony of trying to prove a grand‑uncle who claimed a grand-neice, and he has to get four birth certificates.
So, I think in some instances requiring documentation works. In others, it will really harm taxpayers getting the benefit to which they are entitled.
And if I may make one more point, last year we identified a website called falsereceipts.com, where taxpayers could go to generate a HUD closing statement that looked pretty good, and would go ‑‑ so even though taxpayers were attaching that, we would not necessarily catch that that was a false piece of documentation.
*Ms. Black. Ms. Olson, I appreciate your testimony, and I appreciate your comments there. But I happen to really believe that if someone is going to get a benefit, that they do have a responsibility of ‑‑ with documentation, to show that that benefit ‑‑ and there are ‑‑ there is paperwork that can be done in those situations where a child lives with you more than half of the year by court order of the ‑‑ who the primary caregiver is.
I want to just go to another thing very quickly, and my time is very limited. But I wanted to deal with the issue of when someone is fraudulently found to have committed fraud. How vigorous is the penalties, applying those penalties to those individuals, so that we are showing by not only receiving the money back, but also holding them accountable with a penalty, that ‑‑ are they put into the system that they have fraudulently filed a document, so we know that in the future, and we don’t have repeats?
I don’t know whether Mr. George or Mr. McKenney can help out with that one.
*Mr. McKenney. They ‑‑ the IRS does have a recertification program, and there is different levels, depending on the level of non‑compliance. It can ‑‑ it means they have to recertify before they come back into the program. It can also bar them for two years from claiming the EITC, and then have to recertify it when they come to the program, or it can bar them for 10 years, depending on the level of negligence or intent.
And what we found, in many cases, when the taxpayer does come in and try to recertify, in about 80 percent of those cases they are still not eligible.
So, yes, they do have a mechanism for that.
*Ms. Black. Thank you, Mr. Chairman.
*Chairman Boustany. I thank the lady. The chair now recognizes Mr. Becerra for questioning.
*Mr. Becerra. Thank you, Mr. Chairman, and thank you all for your testimony today, and for helping illuminate some of the issues that we all must confront as we try to make the tax code a document filled with laws that most people will voluntarily agree to comply with. And that is obviously what we are trying to get, is voluntary compliance. We don’t have police roaming the streets, forcing you to show how much you earned. And we are hoping that people will do the right thing and pay their taxes.
You all pointed out some very important areas that we can explore. But my sense is that we are exploring more than other areas this issue of refundability and credits. I think, Ms. Olson, you mentioned that we do ‑‑ what was it ‑‑ a third more audits, but we get a third ‑‑ why don’t you restate what you said?
*Ms. Olson. EITC’s taxpayers are audited twice as much as all individual taxpayers.
*Mr. Becerra. And how much ‑‑ do we reap ‑‑ do we yield the benefit of having that many audits on those middle class ‑‑
*Ms. Olson. No. The dollars of the EITC exams are, on average, over the last few years, about a third of what comes from other examination issues in an individual area.
*Mr. Becerra. And I think one of the things that was pointed out by, I believe, most of you was that one of the issues with regards to the earned income tax credit compliance is that, often times, we find that many of the errors or mistakes that are made, or fraudulently claimed EITC reimbursements, are the result of paid preparers who have prepared these returns for, often times, middle and modest income families.
Is it the case that, with these new changes that the IRS has made to require more integrity in the process for these paid preparers, could help us reduce the error rate, or the wrongly submitted EITC claims?
*Mr. Miller. So that is certainly our hope, in rolling out the return preparer initiative. And we hope, in fact, that, as we require the form 8867, which right now, a preparer is supposed to fill out as they question the individual on their eligibility, they are supposed to put that in their drawer. We are now going to require that to be filed with the return. And we hope that has a salutatory effect, as well.
*Mr. Becerra. I hope you move aggressively on the issue of getting people who get paid a good chunk of money to help file returns for folks who are getting a very modest return ‑‑ because, in my city of Los Angeles, and in particular, my congressional district, I have the vast majority of constituents who are working class, make a modest income, who don’t own their homes, and who constantly tell me the stories of how they got ripped off by their preparer, and now they are being audited by the IRS because of some erroneous entry into the form. And ultimately, they correct it, but meanwhile they have got IRS breathing down their necks, and it is costing them probably more money than they paid these preparers, just to correct their tax filings. So, I think it’s a big problem.
*Mr. Brostek. If I could contribute on this, I definitely agree that the paid preparer regime has promise for addressing issues like this.
About six years ago we did some undercover visits to major paid preparer organizations, and had tax returns prepared for us. In 5 of 10 cases, the paid preparers claimed a child for EITC when the child was not eligible. We were honest taxpayers, we made sure they understood that the information we were providing indicated the child wasn’t eligible. Sometimes they ignored our responses, sometimes they changed the answer from what our responses were.
So, I don’t want to impugn that the whole industry has a problem here, but I do think that addressing the industry and improving its understanding and addressing some bad actors is a very important thing.
*Mr. Becerra. Thank you for that point. Because I think what we are looking at here are some extremely important programs. Some of these programs have helped lift families out of poverty, working families. Because now they get to keep a little bit more money that they would have otherwise paid in taxes.
And so, I think it’s important that we not try to undermine programs that have helped a middle class family afford college for their child, working families who are better off working than going on welfare. And so it’s very important that we try to get them right, no doubt.
Now, Ms. Olson, you pointed out something else that I think is important. I think you said that the earned income tax credit overpayments constitute about five percent of the tax gap from all sources of individuals and corporations that either don’t pay their taxes, or pay them incorrectly. It sounds to me like we need to do a lot more research into the 95 percent of other areas where folks aren’t paying their taxes properly or making mistakes before we go after middle class families and target them. So thank you very much for your testimony.
*Chairman Boustany. I thank the gentleman. I think you raise some important points, especially about after‑the‑fact and audits. And as we, in Congress, design these programs, we ought to be cognizant on how we design them with regard to the simplicity in administration. But we will eagerly await the results from the regulation of the tax preparers. I think this is an important step. But at the same time, we all have to ensure that the integrity of these programs is what it should be. So I thank the gentleman for raising those important points.
The chair now recognizes Mr. Buchanan for questioning.
*Mr. Buchanan. Thank you, Mr. Chairman, for holding the important hearing today. I also like to thank all our panelists, witnesses, for being here today.
Mr. Brostek, let me ask you. The GAO has long viewed the EITC as the largest single type of improper refund payment. And I guess it amounts to about $16 billion in 2010. How does that stack up about other programs where you’ve got challenges? Is that the largest area of abuse, or potential abuse? Your number, I think, is ‑‑ or GAO’s number is $16 billion in 2010 of improper payments.
*Mr. Brostek. Unfortunately, I can get back to you for the record on that. I don’t know for sure if that is the largest improper payment.
*Mr. Buchanan. But what’s your thought? I mean why is it such a huge amount? How did you come up with $16 billion? That is a huge amount of taxpayer money that is ‑‑
*Mr. Brostek. Right.
*Mr. Buchanan. ‑‑ that is flowing out ‑‑
*Mr. Brostek. That $16 billion amount is our averaging of the upper and lower bound estimate that Ms. Olson referred to from estimates made by the Treasury Department, by IRS itself.
In terms of what are the causes, there are many causes that are in play here, including the complexity of the credit, where people sometimes don’t understand. There are certainly, as we have heard, cases of fraud that occur. And there are certainly cases where the documentation that is required in order to prove eligibility is difficult for taxpayers to round up.
So, there are lots of different causes. And I think, as is common across the tax gap in general, it is going to take multiple solutions in order to try to address the level of non‑compliance.
*Mr. Buchanan. And is ‑‑ what is your sense of how many people are, you know, deliberating trying to take advantage of a situation, in terms of fraud? How much of it is just mistakes, in general? I know this would be a guess, but I was just curious ‑‑
*Mr. Brostek. I would like to be able to answer that, but there is no solid evidence, one way or the other, on what those proportions might be, that I am aware of.
*Mr. George. Mr. Buchanan, if I may, though ‑‑
*Mr. Buchanan. Yes.
*Mr. George. ‑‑ this is Russell George. If I may, I have an answer to your question ‑‑
*Mr. Buchanan. Yes, go ahead. I appreciate it.
*Mr. George. GAO has estimated that Earned Income Tax Credit is the fourth largest, in terms of improper payments, that medical fee ‑‑ service is $34.3 billion each year, Medicaid $22.5 billion each year, unemployment insurance $17.5 billion, Earned Income Tax Credit, again, around $16 billion to $17 billion, and the Medicare Advantage program $13.6 billion per year in improper payments.
*Mr. Brostek. Thank you for the assistance.
*Mr. Buchanan. And let me ask you, while you brought that up. What are we doing to try to minimize that effort? I know the IRS has, you know, a lot of things it is involved in every day. Someone said 73,000 pages, in terms of the code. But what are we doing to try to move in that direction to minimize some of the abuse?
*Mr. George. Well, first of all, I think it is extraordinarily important, what the IRS is doing as it relates to preparers, paid preparers. They are at the front line of the effort for the IRS to ensure that people can ‑‑ are able to voluntarily comply with their tax obligations.
There is a statistic, sir, that I point out at every opportunity that I can about third‑party information reporting. And by the IRS’s own information, the IRS estimates that individuals whose wages are subject to withholding report 99 percent of their wages for tax purposes, that self‑employed individuals who operate non‑farm businesses are estimated to report only 68 percent of their income for tax purposes. But the striking number is that self‑employed individuals operating on a cash basis report just 19 percent of their income.
So, there is no question that the more third‑party reporting of information, the more likely people are to comply with their tax obligation, and help address both the tax gap issue, let alone this issue of improper payment, seeking credits that they are ‑‑ and the refunds they are not entitled to.
*Mr. Buchanan. Thank you. Mr. Miller, just quickly, you stated that you are doing all you can to try to reduce or minimize improper payments. But it’s not clear in my mind ‑‑ you get a bunch of recommendations, I guess, that were brought up. Are you really implementing a lot of these recommendations, as it relates to protect the $8.2 billion of taxpayer’s money?
*Mr. Miller. Well, we believe we are. We believe a hunk of that ‑‑ if you are referring to Mr. George’s reports talking about $8 billion on the table ‑‑
*Mr. Buchanan. Yes.
*Mr. Miller. ‑‑ We have agreed to some of fthose, some of those are in process. A large hunk of that is math error authority, which is up to you all, and not us. And also, looking at alternatives to traditional enforcement, which we have talked about here. Obviously, the stalking horse for that is the return preparer initiative.
*Mr. Buchanan. Thank you. I yield back, Mr. Chairman.
*Chairman Boustany. I thank the gentleman. The chair now recognizes Mr. Kind for questioning.
*Mr. Kind. Thank you, Mr. Chairman. I want to thank the witnesses for your testimony here today. And let me start ‑‑ maybe Mr. George, Mr. Brostek, you guys might be the ones to have the answer to this. We have been focusing on the amount of improper payments, the amount of money, the number of people applying. But do we have good data on people who are eligible to claim these credits who are not seeking them, not filing and receiving it?
*Mr. George. I am not aware of that information.
*Mr. Kind. Mr. Brostek?
*Mr. Brostek. We have a number of estimates, including estimates that GAO did a little over a decade ago, that the take‑up rate, the number ‑‑ percentage of people who are eligible, is very high for EITC. I believe it was around 90 percent for people with children, and maybe 85 percent or so overall who are eligible.
And that does contrast some with more traditional discretionary spending programs, where take‑up rates tend to be lower, and administrative costs much higher.
*Mr. Kind. And of that who are eligible, how many of them are actually applying? Do you have any percentage bases?
*Mr. Brostek. Well, those were the figures I meant to convey, about ‑‑
*Mr. Kind. Oh, that was ‑‑
*Mr. Brostek. About 90 percent of those eligible with children apply, and about 85 percent overall of those eligible apply.
*Mr. Kind. Okay.
*Mr. Brostek. That is my recollection of those figures.
*Mr. Kind. And, Ms. Olson, in your opinion, is there a greater need or effort, as far as education or outreach for the families that are eligible who, for whatever reason, aren’t applying right now?
*Ms. Olson. Well, I think that there is ‑‑ that outreach and education always help, and that that is a very important component of getting people to file appropriate claims.
A really important fact of the earned income tax credit is that about a third of the population each year becomes ineligible, and a new third is eligible, because people’s family circumstances change. Another child is born, another ‑‑ you know, somebody loses a job and has lower income, or gets a raise. And so that causes confusion with the earned income credit, and leads to some of the claims, too. You were eligible last year, not eligible this year. Why is that?
*Mr. Kind. And I think in your written testimony you indicated that a lot of the improper payments going out isn’t necessarily a result of out and out fraud or ineligibility, but also some other factors that are at play here.
*Ms. Olson. Right. I think it’s very confusing for people. The dollar amount also of the increase in overclaims is attributable to changes in the law that Congress has made, you know, extending it to three children, as opposed to two, extending the phase‑out rate, giving some married filing joint, married relief. And just the effect of inflation over the 10 years, as you look at the dollar and how it’s increased over the last 10 years.
*Mr. Kind. Right. Mr. George, you had indicated in your testimony that IG has made some specific recommendations to IRS to implement in order to deal with improper payments. I sense a source of frustration in your voice that they haven’t been able to make greater progress on all of the recommendations. How many of the recommendations have they, however, moved forward on? Do you know?
*Mr. George. I believe I have that information for you, sir, if you will bear with me for one moment.
In terms of an actual number, I can’t give that to you. But in terms of just broad categories, seeking additional documentation, as we indicated before, making sure that information that is provided ‑‑ that there is more sharing of information between various governmental agencies, such as Health and Human Services and the Department of Agriculture ‑‑
*Mr. Kind. I think it is safe to say, according to your testimony, the IRS has made some progress in some of their recommendations. They haven’t just completed everything that ‑‑
*Mr. George. That is correct.
*Mr. Kind. ‑‑ IG’s office is recommending.
*Mr. George. That is correct.
*Mr. Kind. And have you gotten feedback from them why, or what is holding them up, as far as implementing the ‑‑
*Mr. George. They have cited a lack of resources as a major hindrance to addressing many of our concerns. But I would actually defer to the IRS to respond to that in detail, sir.
*Mr. Kind. Mr. Miller?
*Mr. Miller. So, with respect to requiring documentation for all claims, resources is an obvious issue for us, and whether the cost benefit analysis ‑‑ makes sense to do that or not. With respect to ‑‑
*Mr. Kind. Well, Mr. Miller, I think that is helpful, and helpful to the committee, because some of us were also raising concerns about the budget proposal that was before us earlier in the year. It was talking about another $600 million in cuts to the IRS, about a billion dollars in additional cuts in the next fiscal year.
So, almost eight percent of the IRS budget that was being proposed for cut‑backs under the budget proposal that was voted on by the other side. And now we are having a hearing, in some part criticizing the IRS for not doing a better job of enforcement or compliance issues. I just don’t think they can have it both ways, you know, demanding greater compliance and better enforcement, while at the same time drastically cutting your budget, which you need in order to accomplish what you are being asked to do.
Now, I am not going to ask you to respond, because it is an opinion that I am expressing here. But it just seems logical, hearing the testimony that we had today, that we have to be a little bit more sensitive to the needs of the IRS resources as we move forward on these issues, Mr. Chairman. Thank you.
*Chairman Boustany. I thank the gentleman. The chair now recognizes Mr. McDermott for questioning.
*Mr. McDermott. Thank you, Mr. Chairman. I have taken the liberty of passing out the tax gap map of the year 2001, so everybody could look here. I always think that Willie Sutton kind of had it right, that the reason you rob banks was because that is where the money was. So, when I see us spending a hearing on these folks on EITC, I have to ‑‑ I figure, well, are they the only ones in the process that aren’t paying their taxes? And, lo and behold, we have got $290 billion worth of taxes not collected, and we are talking about $17 billion.
Now, it isn’t as though we want people to file fraudulently. There is nobody up here wants that. But I don’t understand why we are focusing on $17 billion of earned income tax credits and child tax credits. Because I was sitting here, thinking about the fact that, as a Member of Congress, I live in two different places. I live here some and I live in Washington State some. And, on tax bases, I have to figure out every year how many days did I live in Washington, D.C. and how many days did I live in the State of Washington. I say to my secretary, “Will you take my schedule and count the days?”
Now, I have a secretary to do that. So I am thinking about these people who cannot prove how long their kids lived with them, and I, being a child psychiatrist, I also know that when there is a divorce, sometimes the children live with the mother and sometimes they live with the father. And if the father is getting the tax credit because he is working, and he is taking care of the kid, that is one thing.
But if the kid is living with the mother and he has to pay child support payments, does ‑‑ Ms. Olson, how is that figured out? Does he get credit for when the child is living with the mother, but he is paying tax?
*Ms. Olson. No, but this is ‑‑ no, he doesn’t. And this is some of the complexity of the code. The mother can release the dependency exemption, and the child tax credit will follow the dependency exemption. So the mother, the custodial parent, can release it to the non‑custodial parent who is making the money.
However, the earned income tax credit stays with the custodial parent, the person who has the child for more than half the year. And so, some of these errors are from confusion, because it makes ‑‑ why would one provision go to the non‑custodial, but the other doesn’t?
I have seen court orders where family court judges are ordering the custodial parent, against the law, to give up the earned income credit to the non‑custodial parent. And, you know, the federal law says that the non‑custodial parent can’t get it. And yet the family court judge is confused about it. That is just one layer of complexity with the earned income credit, and goes to how difficult it is for people to provide documents in these circumstances.
*Mr. McDermott. Well, as I look at this tax gap map here, I see that individual income tax under‑reporting is $197 billion. Now, why are we doing twice as much scanning of these earned income tax credit folks than we are on others, where they are making almost 10 times ‑‑ where we have got 10 times as much in play? Why would we be doing that? What is the purpose of that?
*Ms. Olson. If you are asking me, I see no reason to do that. Earned income credit audits bring in less dollars than a audit on unreported business income or unreported individual income. That is what our numbers show.
I think that it is just this sense that refundable credits are somehow worse to the public treasury than not ‑‑ you know, overclaiming charitable contributions, or under‑reporting your business income, or overstating your cost of goods sold. They all ‑‑ the last few that I have just stated have a much greater impact on the public treasury in non‑compliance than the earned income credit claims do.
*Mr. McDermott. Mr. Miller?
*Mr. Miller. No ‑‑
*Mr. McDermott. Help me out here. Why do you spend twice as much money looking at these poor folks? They are all making less than a median income in the United States, less than $43,000. Why are you going after them, when you are not going after ‑‑ you are going after them twice as often, as opposed to the business people.
*Mr. Miller. So let me re‑straighten the baseline here.
*Mr. McDermott. Okay.
*Mr. Miller. About 30 percent of our audits are EITC audits.
*Mr. McDermott. Thirty percent of your audits.
*Mr. Miller. Correct.
*Mr. McDermott. Are on EITC?
*Mr. Miller. That is correct.
*Mr. McDermott. For 17 billion? Okay.
*Mr. Miller. Correct. They are ‑‑ the vast majority of them are campus examinations, which are a very efficient way to do an examination. We have purposely said, let’s maintain a balanced program, so that we have resources ‑‑ and I believe we have resources within our constraints ‑‑ to reach other areas. And so, we maintain coverage across all sorts of taxpayers.
The two percent rate versus the one percent rate ‑‑
*Chairman Boustany. Mr. Miller, if you would wrap up, the gentleman’s time has expired.
*Mr. Miller. Absolutely. The coverage rates we are talking about are all individuals versus EITC individuals. There are different coverage rates for different categories within the individual category.
*Chairman Boustany. The gentleman’s time has expired.
I want to make the statement that, yes, we have a tax gap. And we ‑‑ and this committee has the obligation to examine all of the causes of the tax gap.
I also want to make the point that we are talking about an estimated $106 billion over several years, based on GAO and TIGTA estimates. And this committee has an obligation to investigate all of these problems with all these tax credits. And I think everybody has admitted that the refundable tax credits are problematic, from the standpoint of complexity.
And so, yes, we are investigating this. We will investigate other areas of importance, as we look at the tax gap. But I think that point needs to be made. And this hearing is focused on not just the earned income tax credit, a very valuable program, but all of these refundable tax credits, and the problems that are inherent in the administration thereof.
And, with that, the chair now recognizes Ms. Jenkins.
*Ms. Jenkins. Thank you, Mr. Chairman, and thank you for holding this hearing. Thank you all for your participation and being here today.
Mr. George, last week TIGTA released a report showing that the IRS cannot determine whether taxpayers claiming residential energy credits were entitled to receive them. TIGTA was unable to verify home ownership for 30 percent of the sample returns. Home ownership, of course, being required to claim the credit.
More troubling, TIGTA identified 362 ineligible recipients of the tax credit, totaling more than $400,000, including 262 prisoners because, according to the report, the IRS did not have a process in place to identify prisoners or individuals too young to buy a home, despite the IRS having data that could be used to identify the erroneous credits.
In the report I believe you stated that, “I am troubled by the IRS’s continued failure to develop appropriate verification methods for distributing Recovery Act credits.”
Can you just reiterate for the committee what actions the IRS can take to prevent this sort of fraud in the future?
*Mr. George. Yes, Ms. Jenkins. It is a question of seeking information, getting third‑party information, as it relates to who is eligible and who is ineligible for this. As a preface to this report, you rightfully pointed out ‑‑ and I think the chairman did, also ‑‑ the First‑Time Homebuyer’s Credit, which was a complete example of where the IRS, if they had followed recommendations that we had identified early in the process, while they were first implementing that program, and that is requiring some sort of proof, whether it is the HUD‑1 form, which ultimately Congress did require, or some other way of documenting that a person was eligible for the credit, that he or she would be able to receive it.
And so, there seems to be a pattern here where the IRS ‑‑ again, I give them credit in terms of the inability to have resources to address every single one of these on an expedited basis ‑‑ but again, with this modernized eFile system that should be up and running within the next two years, and they should no longer be able to rely on that as an excuse for not ensuring that people who are not eligible for these credits do not receive them.
But there is ‑‑ and again, to Mr. Miller’s credit and to the IRS’s credit, they do require math error authority. They need legislation from Congress which will allow them to prevent mistakes before they go out. Because the bottom line is if ‑‑ once it goes out the door, it is almost next to impossible ‑‑ with a few exceptions, like prisoners, because that is such a defined population, and in some instances, children ‑‑ to identify those people and eventually attempt to recover the money.
And again, I would have to defer to Mr. Miller, in terms of actually how much money they are able to recover, once it goes out the door.
*Ms. Jenkins. Okay. Thank you.
*Ms. Olson. May I make a comment? I think your question really goes to a major issue about these credits, which is the design of them, that some of the programs, the IRS could get documentation. But we would still, even with math error, we would still have to have the staff to look at them. And then they start turning into a traditional welfare program, which has very high costs, because everybody is looking at every single application that comes in.
So, some of these programs really shouldn’t be run through the Internal Revenue Code at all, because we can’t do a good job of them, if we do it efficiently. And if we do it with great scrutiny, such as the inspector general is suggesting, then we start running up our costs of personnel, and things like that.
So, I just wanted to make that point about maybe some of these programs shouldn’t come in.
*Ms. Jenkins. Okay. I appreciate that. Thank you. In addition, a 2009 Treasury Inspector General for Tax Administration report found $39 million in Federal tax refunds were issued to prison inmates. That was nearly tripling the $13.4 million found in 2004. At the time, the IRS said it could not immediately determine how much, if any, of the fraudulent returns in 2009 has been recovered, because the recapture process can take several years.
Following that report, Mr. George, you stated that if the IRS does not take action, the problem will only worsen, and more taxpayer dollars will be lost. So, Mr. George, since 2009, just please remind us what substantial action has the IRS taken to address this epidemic of inmates defrauding taxpayers? What further action might be required? And I think you have already hit on it, but what does the IRS need, in additional authority, from Congress?
*Mr. George. The interesting part, Ms. Jenkins, is that in this very hearing room almost seven years ago I testified on this very issue, of the fact that prisoners and a propensity ‑‑ an actual number of them were coming from Florida. And Congress did give the IRS a limited Federal authority to execute agreements with State prison officials in order to help educate both the IRS, as well as
State prison authorities, about this growing problem.
And our most recent report unveiled that the IRS has failed to complete many of these agreements. I think they now changed their attitude towards this, given ‑‑ in the wake of the Homebuyer Credit and a few of the other credits that you have cited. But the IRS failed once again in that instance to comply with the recommendation that we believe, had they done so, that problem may not have been eliminated, but it would have been stemmed greatly.
*Mr. Miller. So, Mr. Chairman ‑‑
*Ms. Jenkins. Thanks.
*Mr. Miller. ‑‑ I apologize for breaking in ‑‑ and I will be glad to do this in a response for the record ‑‑ but we have taken substantial steps, with respect to prisoners, substantial steps in the last six months, coming to agreements with seven states, with the Federal Bureau of Prisons, doubling the number of returns that we are stopping in our pre‑refund. And I would be glad to ‑‑
*Chairman Boustany. If you would, Mr. Miller, provide a more detailed reporting.
*Mr. Miller. I will do that, sir.
*Chairman Boustany. ‑‑ of the steps taken, we would appreciate it. Thank you.
The chair now recognizes Mr. Rangel for questioning.
*Mr. Rangel. Thank you, Mr. Chairman. I am happy that this hearing ‑‑ this is a very sensitive program, and we think when it is effective it really has pulled so many people out of poverty and given them the incentive to continue to work, rather than go on welfare.
Mr. George, did you say that soon, and very soon, you expect that the new computer system is going to correct most of these errors?
*Mr. George. Not correct, but will enable the IRS to more efficiently process forms that would help provide documentation as to whether or not someone is eligible for a tax credit, or whatever they may be seeking.
*Mr. Rangel. Is there any difference in the penalty if the taxes are made by a paid preparer, rather than the ‑‑ the penalties are different?
*Mr. George. No, I am just saying that that is an issue because, ultimately, it is the taxpayer’s responsibility to ensure that the tax forms submitted are accurate.
Now, some companies have a program which they would say they will seek ‑‑ they will represent you before the IRS if they prepare your tax return and there happens to be a mistake, or the IRS questions something. But ultimately, it is the taxpayer who is obligated ‑‑
*Ms. Olson. Actually, if I may clarify that, there is ‑‑ the taxpayer, if they are negligent in preparing their own return, or providing information to the IRS, has a negligence penalty. But that penalty can be waived if the taxpayer has reasonably relied on the return preparer.
*Mr. Rangel. But the standard is higher with a professional preparer?
*Ms. Olson. Actually, the taxpayer is ‑‑ if the taxpayer goes to a preparer and it is a good preparer, then the IRS is very ‑‑ is actually lenient to the taxpayer. What we have pointed out ‑‑
*Mr. Rangel. I don’t mean to the taxpayer. Is there a penalty for the professional preparer ‑‑
*Ms. Olson. Well, that is the question ‑‑
*Mr. Rangel. ‑‑ when you see fraud?
*Ms. Olson. The ‑‑ I think that we really need enhancement on the preparer side for some of the penalties ‑‑
*Mr. Rangel. So all of you believe this committee should look into the sanctions as relates to deliberate fraud by paid preparers?
*Mr. Miller. We certainly would support that. And, in fact, in the 2012 budget proposal that has been set forth, there is a due diligence penalty. If a paid preparer does not exercise due diligence, a level of due diligence in the EITC area, there is a specific penalty.
*Mr. Rangel. Okay.
*Mr. Miller. We have actually asked for that to be multiplied ‑‑
*Mr. Rangel. Okay, we will look into that.
*Mr. Miller. ‑‑ by five.
*Mr. Rangel. As it relates to the policy decision as to where you have the audits, I think Mr. Crowley and others were asking if you get less money for investing more time, why would you have that policy?
*Mr. Rangel. I think, Ms. Olson, didn’t you indicate that you thought that it was more attention being paid to these lower‑income people than the corporate structure?
Well, who would make a policy decision like that? I mean is that your ‑‑ everybody’s understanding, is that you do spend more time auditing in these type of things than you would where there are larger amounts of monies that could be collected?
*Mr. Miller. So if I could ‑‑ and I am sure the Taxpayer Advocate can chip in, but if I could ‑‑ again, the two percent coverage rate for the EITC versus the one percent for all individuals is ‑‑
*Mr. Rangel. Why is that?
*Mr. Miller. ‑‑ very high‑level. For those who are over $200,000, that individual rate goes up to something like 6 percent. For those who are over a million, it goes up to eight percent. So we try to maintain a balance. For very large corporations, it is in excess of 25 percent.
*Mr. Rangel. I know Ms. Olson said ‑‑ and no one challenged it, unless you are doing that now ‑‑ that, based on the amount of money that is collected, and the amount of time that is being put in for the audit, that, by far, there is less money to be collected from this group.
First, I want to make it abundantly clear. This program is so good that I would just want it to be as pure as the driven snow. And so, I do want everything done possibly so that people who are against the program for policy reasons won’t have an excuse that there is fraud, deliberate fraud that is going on. And the government should assist people not to make mistakes by educational programs.
Did someone say that there is 75 or 80 percent participation with eligible people for this?
*Mr. Miller. Yes, I did say that.
*Mr. Rangel. Wow. I don’t know whether other people on the committee find that high percentage, but we do a lot of educating on this subject.
But you know what I am trying to say, Mr. Miller. Is this targeted for political reasons, this group of people?
*Mr. Miller. No, sir, it is not.
*Mr. Rangel. And you think this is the most efficient way to use the auditors’ time, to concentrate on this group more than you concentrate on others?
*Mr. Miller. So you ask how is this set up. Frankly, it is set up in discussions with my boss, Mr. Shulman. But it is also our top‑level group, including especially me, quite frankly, that sets an annual work plan and determines where, generally, we are going to be spending our time.
*Mr. Rangel. Well ‑‑
*Mr. Miller. I believe that this is a balanced approach.
*Mr. Rangel. Send something to me.
*Mr. Miller. Surely.
*Mr. Rangel. Because there has been other questions asked similar to the ones that I have asked. And, for whatever reason ‑‑ I am not saying that they might not be a good reason to send a message out that if you find that there is more fraud in this particular tax benefit, that you may want to increase the penalty or increase the audits. But you are not saying that.
And so, if you could send to me, like ‑‑ the Google question is, “Are there more ‑‑ is there more oversight for EITC recipients than other taxpayers?”
*Mr. Miller. Surely.
*Mr. Rangel. And if I was to ask you that, what would you say right now?
*Mr. Miller. It is really going to depend. I can’t answer that, based at 10,000 feet. Is there more on the EITC than there are on wealthy Americans? No, I can say that. Than there are on large corporations? No. Small corporations? No.
*Mr. Rangel. Anybody else.
*Chairman Boustany. Mr. Miller ‑‑
*Mr. Rangel. This ‑‑
*Chairman Boustany. Yes, thank you.
*Mr. Rangel. Okay.
*Chairman Boustany. The gentleman’s time has expired, but I appreciate the line of questioning. And I think Mr. Miller will respond to you ‑‑
*Mr. Rangel. Please, Mr. Miller, just ‑‑
*Mr. Miller. I will do that. Absolutely.
*Mr. Rangel. Because I want to defend what you are doing. And the answers don’t just fit into a category that you can easily respond.
*Mr. Miller. Right.
*Mr. Rangel. Thank you, Mr. Chairman.
*Chairman Boustany. I thank the gentleman from New York. The other gentleman from New York now is allowed to ask questions.
*Mr. Crowley. Thank you, Mr. Chairman. Thank you, Doctor. I appreciate you for that.
And first I will say, Mr. Chairman and Mr. Lewis, I have some great concerns about the subject of the hearing today. The U.S. has a $14 trillion deficit, $14 trillion deficit. And I would argue that more than half of that was run up by the borrowing and spend policies of the previous Administration, from 2001 to 2009. And yet, we are starting today, this hearing, at the bottom, the very bottom of the scale.
An Administration that oversaw the enactment of tax cuts for the wealthiest in this country, the start of two wars ‑‑ some would argue three, now that we’re entered into what started with the first two ‑‑ and the biggest bail‑out in the history of the United States, TARP, for the wealthiest in this country. Yet we are still starting at the bottom today.
But has my ‑‑ but have my Republican colleagues in the Congress taken responsibility for the part that was started? Have they put forward a plan to remedy the situation to scale back spending? Well, kind of. They are not willing to admit that the policies of their party got us to this point in the first place, but they are willing to try to pay down the bills. Good news, right?
Well, maybe not exactly. First, their budget proposal to eliminate Medicare as we know it, and in turn, drastically increasing seniors’ cost for their health care, I think I was home sick during my high school days when we were taught about how seniors have been fleecing America. I could have sworn they were the ones who actually paid their dues and living out their retirement years now.
Now, my colleagues on the other side are making tweaks in the tax code to find savings. That is good news, isn’t it?
Well, maybe not so much. Are Republicans returning tax rates on millionaires to what they were during the economically prosperous years of the 1990s? No. Are they eliminating tax subsidies provided to the oil industry, an industry profiting from $4 a gas cost at the pumps, and the industry’s record profits? No.
Here is a list of what tax benefits they are cutting ‑‑ proposing to cut back on: the child tax credit, the adoption tax credit, the housing benefits for middle class credit. Republicans appear to believe the rich pay too much in taxes, and the middle class not enough. And that is the subject of this hearing today.
That brings me to my first question. Mr. Miller, you are from the IRS. From preliminary returns from the 2010 tax year, 41,000 tax returns claimed the refundable adoption tax credit. Is that correct?
*Mr. Miller. I think our numbers are maybe updated to 70,000 or so.
*Mr. Crowley. Seventy thousand? Who is eligible to claim this? Is it not for families who are adopting children? Or am I confused on what the adoption tax credit is for?
*Mr. Miller. It is for adopting families.
*Mr. Crowley. Thank you. Mr. Miller, 7.9 million Americans claimed ‑‑ have claims ‑‑ claimed the refundable higher education tax credit. Is that correct, or has that number changed?
*Mr. Miller. I think that number is correct, although I would have to check it again.
*Mr. Crowley. Isn’t that for families, again, who are sending their children to ‑‑ or child to college, to make it more affordable, and to give them an opportunity, a better way of life, and to help our country expand and to grow? Well, at least isn’t it ‑‑ don’t answer that. The end of the ‑‑ I have the end part. But isn’t it to help make affordable more ‑‑ college more affordable?
*Mr. Miller. I believe it is.
*Mr. Crowley. These are tax benefits that my colleagues on this side want to repeal in the name of budgetary soundness. But, like the Republican Medicare voucher plan, the Republican plan to eliminate tax benefits, may save the government money, but it bankrupts these families, families like those that want to take such activities as adopting a child, sending a child to college, or trying to purchase a home.
But what is even more ironic is, while the Republicans are ripping Medicare away from seniors and stealing tax benefits from the middle class, they uniformly oppose tax measures pushed by the Democrats to punish the wealthy Americans who hide their money in Swiss bank accounts.
Yes. Hundreds of billions of dollars of money are hidden overseas. And my colleagues on the other side, including every member of this committee but one ‑‑ I believe Ms. Black ‑‑ opposed ‑‑ she wasn’t here ‑‑ opposed legislation to track down and reclaim those hidden funds. They are protecting people who have money in Swiss bank accounts. How many of us have constituents with money in Swiss bank accounts? Anyone here? How many of us have constituents who use the child tax credit? Anyone here use that?
They also oppose efforts to crack down on federal contractors who owe back taxes.
And in a press release from the Republican committee majority, they have lambasted this Administration for raising taxes on people in prisons. And I appreciate Ms. Jenkins bringing up the point ‑‑
*Chairman Boustany. The gentleman’s time has expired.
*Mr. Crowley. Thank you, Mr. Chairman.
*Chairman Boustany. I appreciate the gentleman’s statements of a broad political nature, but I want to point out that the purpose of this hearing was focused on the integrity of these programs. We all recognize the value of the programs. But we also have a responsibility to provide oversight as to the integrity of these programs. And we are ‑‑
*Mr. Crowley. Will the gentleman yield? One question, one ‑‑
*Chairman Boustany. We are going to look at tax reform, as the gentleman well knows, and it is going to be a fundamental look at the entirety of the tax code. And this is but a small part of the oversight of these specific refundable tax credits, which all the witnesses have proposed that there are endemic problems with the administration of those programs.
And so, that is the purpose of this hearing. I want to get us back on track ‑‑
*Mr. Crowley. Mr. Chairman, can I ‑‑ for the purpose of a question?
*Chairman Boustany. Yes.
*Mr. Crowley. Will this committee consider a committee hearing on the concept of a shared sacrifice in this country? Is that something that we could look forward to?
*Chairman Boustany. This committee is going to fulfill the functions that are outlined in the rules of the committee, which is to look at the jurisdiction of the full committee, in concurrence with the other subcommittees. And since tax reform is a big part of what we are going to be doing over the course of this year, that will be the focus of the oversight function in this ‑‑
*Mr. Crowley. I will take it as a yes. Thank you, Mr. Chairman.
*Chairman Boustany. It is basically what the rules of the subcommittee and the committee are. And I will leave it at that.
And now the chair will recognize Mr. Marchant, who has waited patiently.
*Mr. Marchant. Thank you, Mr. Chairman, and thank you to the panelists.
Every time I stand before a group of taxpayers in my district, my constituents, the question comes up, “Congressman, what are you doing, and what is Congress doing, and what is the Federal Government doing, to cut waste, fraud, and abuse?” I don’t think there is a single congressman that does not get that question when they go home.
So, I deeply appreciate the fact that you are at the hearing today, that the hearing has been called for this purpose, and I appreciate your comments, because I think this is the purpose of this ‑‑ of Congress. This is oversight. And I have learned a great deal today. And to our constituents this Congress is going to do something with your help on this fraud and abuse, because I don’t think anybody here would deny that there is fraud and abuse going on.
For Mr. Miller, when a person accepts a refundable tax payment, and they receive the cash, and they have done so fraudulently, have they committed a crime?
*Mr. Miller. I suppose some have. There is civil fraud, as well as criminal fraud. So not necessarily in all cases, depending on various things that I am less familiar with than I should be.
*Mr. Marchant. But it is undoubtable that when they do receive that refundable tax credit, if they don’t deserve to receive it and they are audited, they have, in fact, created for themselves a tax liability, because they owe the money back.
*Mr. Miller. Correct.
*Mr. Marchant. When the tax liability is created, does that tax liability take any kind of precedence over any other tax liability that the person ‑‑ that any other taxpayer owes? Is the collection activity different from a collection activity from someone who owes $2,700 on last year’s taxes and have not paid?
*Mr. Miller. So if I could rephrase the question, if ‑‑ I think I understand it ‑‑ in our collection operations, is $2,700 $2,700, regardless of whether it is ‑‑
*Mr. Marchant. Yes. Is this a priority ‑‑
*Mr. Miller. It is not a priority. Whether it actually ends up being ‑‑ moved up in line will depend on what else is there, and what our determination of the collectability of that amount is.
*Mr. Marchant. So, the collection activity will fall under the same criteria as all collection activity, and you are going to look at each individual taxpayer and say, “Is this a” ‑‑ you know, “How likely are we going to be able to collect this money back?”
*Mr. Miller. Correct.
*Mr. Marchant. And do you take the next step and say, this person, or this taxpayer, whether it be corporate, energy, earned income credit, any of the tax refundable programs we have talked about today, does that person then earn a ‑‑ the same kind of treatment that any taxpayer would have if they owed a tax liability?
*Mr. Miller. Yes. I will note the EITC, as was mentioned earlier, there is a re‑certification rule that can occur. We have the ability to ban a person from EITC under ‑‑ all these things are statutory ‑‑ for either 2 or 10 years. There are things that we can do that are different, with respect to this tax liability, than others.
*Mr. Marchant. Well, to the taxpayers in my district that consider it a duty to pay their taxes and to pay what they owe, it is demoralizing to them to pick up the newspaper or see a report that is given that reports these kinds of obvious frauds. It is demoralizing for them to pick up the Wall Street Journal or any newspaper and read that people ‑‑ that prisoners, or people from ‑‑ that don’t deserve the homebuyer credit are getting it. I don’t give any more weight to the earned income credit as I do the energy credits or the homebuyer credit. Fraud is fraud.
I agree that the preparer ‑‑ we should begin to look more closely at the preparer. Because in my area most ‑‑ I believe most of the fraud is aided and abetted by the preparer. In fact, I pick up the newspaper and you can see in the classified ads or on late night cable ‑‑ I am a night owl, so I ‑‑ you can see the preparers are enticing people into the scheme, and showing them how to get the money, and they are charging them exorbitant amounts of money, and the benefit to the taxpayer ends up that they actually are accruing the tax liability that probably will brand them for years.
So, thank you for what you are doing. Thank you, Mr. Chairman.
*Chairman Boustany. I thank the gentleman. I want to thank all the witnesses for being here today, and providing testimony. This has been very helpful to us. Please be advised that Members may have written questions that they will submit to each of you, and those questions and answers will be made part of the record, the official hearing record.
So, thank you again. I thank the Members for their participation. This hearing is now adjourned.
[Whereupon, at 12:06 p.m., the subcommittee was adjourned.]
QUESTIONS FOR THE RECORD
Rep. Ron Kind
SUBMISSIONS FOR THE RECORD