TIGTA Report Makes (Incomplete) Case For Expanded Math Error Authority

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An earlier version of this post appeared on the Forbes PT site on May 20, 2016

TIGTA just released a report called Without Expanded Error Correction Authority, Billions of Dollars in Identified Potentially Erroneous Earned Income Credit Claims Will Continue to Go Unaddressed Each Year. The report is sure to generate headlines, as it details some eye popping numbers about EITC improper payment rate and the IRS’s failure to take action on EITC-claiming returns it knows are likely to contain errors. On the surface TIGTA makes a compelling case but I do not understand why the default solution TIGTA proposes is one that effectively treats EITC claiming individuals as a suspect class that is not entitled to the same due process protections as other individuals who file income tax returns. Our tax system is built on individuals having procedural protections in the form of pre-assessment Tax Court review rights through deficiency procedures. TIGTA’s proposals amount to a possible rejection of protections for millions of individuals least likely to be in a position to protect themselves against IRS overreaching.

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A snapshot of the numbers from the TIGTA report shows that the improper payment rate hovering between 23 and 27% for the past six years, with 2015 estimates looking at about IRS improperly paying out $15.6 billion out of a total $62.3 billion claimed for a 24% improper payment rate. TIGTA also notes that the IRS has identified millions of EITC returns which it believes are likely erroneous but due to resource constraints (and perhaps other reasons) IRS fails to take action and prevent the outflow of improper credits. For example, for 2014 TIGTA estimates that IRS identified over 5.7 million EITC returns with over $20 billion claimed that were likely containing improper claims but due to resource issues IRS only “systematically corrected” about 166,000 of the returns:

We continue to report that IRS compliance resources are limited. Consequently, the IRS does not address the majority of potentially erroneous EITC claims despite having established processes that identify billions of dollars in potentially erroneous EITC payments. For example, the IRS identified approximately 5.7 million potentially erroneous EITC claims totaling approximately $20.7 billion in Tax Year 2014 for which it does not have error correction authority to address.

The TIGTA solution is one that the President has proposed in recent budget proposals, an expanded ability to use summary math error assessment procedures to disallow the credits without allowing people the same pre-assessment right to notice and Tax Court review that everyone else enjoys.

It has been a couple of years since I have discussed TIGTA math error proposals, but the TIGTA discussion brings to mind a post from December 2014 Annual TIGTA Review of IRS Erroneous Payments and The Possible Expansion of Math Error Powers. In that post I go into some more detail regarding the efficiency issues that the government points to in making the case for expanded math error procedures (it is on the surface way cheaper to use math error powers than to give taxpayers a stat notice and full blown deficiency rights). Back in 2014 I referred to TIGTA’s dollars and cents discussion:

While the IRS has the authority to audit potentially erroneous EITC claims for which it does not have math error authority, doing so is more costly than the math error process. The IRS estimates that it costs $1.50 to resolve an erroneous EITC claim using math error authority compared to $278 to conduct a prerefund audit. In addition, the number of potentially erroneous EITC claims the IRS can audit is further reduced by its need to allocate its limited resources among the various segments of taxpayer noncompliance to provide a balanced tax enforcement program. As a result, billions of dollars in potentially erroneous EITC claims go unaddressed each year.

The TIGTA report both now and in 2014 fails however to address some of the criticism of the proposals for expanded powers. In my 2014 post I argued for caution in this area:

If the administration is successful in getting its expanded summary assessment procedures, I hope that IRS carefully studies its impact (as it seems to have done with child support data), establishes clear guidelines for employees, and drafts simple understandable correspondence to allow taxpayers to unwind the assessment and get back in line for deficiency procedures. Some lower-income taxpayers may be less equipped to contest erroneous assessments; telephone wait times are long, and taxpayers who are lower-income are often more transient and less likely to receive correspondence. Add to the mix language and literacy obstacles and you have a potential recipe for real harm.

Congress’ continued use of the Internal Revenue Code to deliver social benefits combined with pressure on IRS to reduce error rates may lead to the IRS taking additional compliance steps without an ability to serve taxpayers who may be inadvertently caught in the compliance crosshairs. Even an agency intent on balancing competing interests must reflect the budget realities that are likely going to jeopardize those taxpayers least likely to be able to withstand erroneous IRS determinations.

In the 2015 NTA Report to Congress a section called Authorize the IRS to Summarily Assess Math and “Correctable” Errors Only in Appropriate Circumstances makes a systematic case for at least some more caution in this area before giving IRS expanded math error powers. That report suggests that before giving IRS expanded powers the following must take place:

  1. There is a mismatch between the return and unquestionably reliable data (rather than the IRS’s estimate about the mere probability of an error).
  2. The IRS’s math error notice clearly describes the discrepancy and how taxpayers may contest the proposed change.
  3. The IRS has researched all of the information in its possession (e.g., information provided on prior- year returns) that could reconcile the apparent discrepancy.
  4. The IRS does not have to analyze facts and circumstances or weigh the adequacy of information submitted by the taxpayer (e.g., whether sufficient documentation is attached) to determine if the return contains an error.
  5. The abatement rate for a particular issue or type of inconsistency is below a specified threshold for those taxpayers who respond.
  1. For any new data or criteria, the Department of Treasury, in conjunction with the National Taxpayer Advocate, has evaluated and publicly reported to Congress on the reliability of the data or criteria for purposes of assessing tax using math error procedures The report should analyze the burdens and benefits of the proposed use of math error authority, considering downstream costs
    to taxpayers (e.g., time, paperwork, representation) and the IRS (e.g., processing taxpayer calls and letters, requests for audit reconsideration, amended returns, appeals, and TAS intervention).

Parting Thoughts

I recognize that there is a compelling interest in reducing error rates for programs such as the EITC. Underlying the NTA suggestion for caution is that with expanded math error powers comes the distinct likelihood that millions of Americans who may claim the credit are the same Americans who need the procedural protections that come with the regular right to Tax Court pre-assessment review. Due process at its core reflects a balancing of interests between the government and its legitimate right to ensuring program integrity and the general right to protect against erroneous government determinations that deprive people of protected property rights. The NTA proposal to carefully study and consider the effect of expanded math error powers reflects a respect for the individual.  Congress has increasingly given IRS special powers when it comes to trying to nudge down the improper payment rate for the EITC. Congress would be well-served from stepping back and rather than continuing to add piecemeal provisions study individual noncompliance more generally and consider what is likely to work and what are the full consequences of additional IRS powers.

 

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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