A Bipartisan Bid to Reduce Improper Tax Credit Payments and Improve Claimant Outcomes

Improper EITC and CTC payments are those received by people who are either ineligible for one or both of the tax credits or who receive more than they should by law. According to the IRS, an estimated 24% of EITC payments and 12% of refundable CTC payments each year are improper. While some improper claims are fraudulent, many are honest mistakes by individuals confused by the credits’ complicated rules. Further, illegitimate payments are often the result of errors—unintentional or otherwise—by unenrolled tax preparers. The proliferation of improper payments misuses taxpayer dollars and endangers the broad support that has sustained the EITC and CTC for decades.

• Authorize the IRS to regulate unenrolled tax preparers.
• Adequately fund the IRS and improve the audit process.
• Expand support for the Volunteer Income Tax Assistance (VITA) program.

Authorize the IRS to regulate unenrolled tax preparers

A majority of CTC and EITC recipients pay a preparer to claim tax benefits on their behalf, and more than three-quarters of paid preparers are “unenrolled preparers,” who are often not subject to any certification, training requirements, formal ethical standards, or competency tests. Erroneous filings by unenrolled preparers particularly impact lower- and moderate-income households: One in four EITC recipients files with an unenrolled preparer, and the IRS estimates that between 33% and 40% of EITC dollars claimed by filers using unenrolled preparers are overclaims made in error. Given that unenrolled preparers have the highest rates of EITC overclaims, it is troubling that they cannot—by law—be regulated by the IRS.

We recommend providing the IRS authority to regulate these preparers, allowing the agency to, for example, require unenrolled preparers to pass competency tests, be subject to the same ethical standards as other preparers, and complete continuing education. The budgetary impacts could be significant: In 2018, when the IRS intervened with unenrolled preparers with the highest rates of erroneous EITC claims, it reduced improper payments by an estimated $347 million. This intervention consisted of enforcement and education initiatives, not systematic regulation of the kind that the IRS is legally prevented from issuing. Allowing the IRS to properly regulate unenrolled preparers could drive even larger savings.

Adequately fund the IRS and improve the audit process

Underfunding of the IRS has weakened the agency’s ability to detect and stop EITC and CTC overclaims. From 2010 through 2018, the agency’s real funding for enforcement fell by 29%, leading to a drop of 31% in enforcement staff. Over the same time period, the examination rate of EITC returns fell by 51%. In tax year 2018, the IRS identified but could not further review more than 3.5 million returns with discrepancies of at least $1,000 between the income reported on tax returns and the income reported on W-2s. These returns contained more than $8.3 billion in EITC payments.

Funding and staffing challenges have also led to significant delays in the audit process, harming honest taxpayers. The IRS regularly takes more than a year to release an audited EITC claimant’s refund, which is an eternity for a family trying to make ends meet. BPC recommends increasing funding for the IRS to provide additional support for claimants during the filing process and help achieve its audit goal—rooting out overpayment—without imposing an overly severe burden on those audited.

Additionally, subpar IRS customer service disadvantages taxpayers. In fiscal year 2020, the agency answered only 24% of the more than 100 million calls it received, with an average hold time of 18 minutes. In response to service concerns, Congress enacted the Taxpayer First Act in 2019, which directed the IRS to develop plans to improve customer service and modernize its IT systems within existing resources. Without increased funding, however, the IRS will be unable to make significant progress toward these objectives.

Expand support for VITA sites

IRS VITA sites help low-income Americans file tax returns for free. These volunteers have some of the lowest EITC overclaim rates of any return preparers, yet only a relatively small number of eligible filers are served by the program.

We propose increasing funding for the VITA program to help claimants avoid errors, to prevent preparer fees from eroding refunds meant to support low-income families, and to reduce improper payments that waste taxpayer dollars.