Senate Again Takes Aim at Improper Payments in Federal Programs

0 Flares Filament.io 0 Flares ×

Last week the Senate Finance Committee held a hearing on reducing improper payments in federal programs. The hearing considered not just tax. It covered 124 programs across the federal government in FY 2014 that have resulted in about $124.7 billion misspent, though the IRS got special attention as the EITC, along with Medicare and Medicaid, account for about 75% of the government-wide improper payments. The only witness at the hearing was GAO Comptroller Gene Dodaro, a graduate of Lycoming College, the alma mater of the great Stephen Olsen.

The hearing highlights the continued IRS emphasis on EITC, with Dodaro testifying that EITC claimants are twice as likely to get audited as non-claimants and that about 45% of all IRS correspondence audits focus on EITC. Moreover, Dodaro believes that the two most important legislative fixes Congress could do to help IRS administer EITC would be to give it authority to regulate unenrolled preparers and to accelerate the time to file information returns.

read more...

The hearing itself is good theater and also informative. Senator Hatch kicks it off at the 35 minute mark, noting the importance of the issue and framing the severity of the problem with what could be done with the money if it were not misspent (e.g., the improper payments would be enough to buy every American an Ipad or a year’s worth of meals at Chipotle, or on a more serious level health insurance for every person in Florida). Senator Wyden’s opening remarks starts off at the 42 minute mark, framing the discussion by noting that there are two key defining issues: one, that improper payments include payments that are too big, too small or documented in some wrong way. The second issue is out and out fraud. Senator Wyden notes that conflating fraud and improper payments generally is wrong.

GAO Comptroller Dodaro’s testimony starts at the 51 minute mark. His written testimony has lots of data and graphs and charts. He goes into EITC in great detail on page 13, and it looks at IRS compliance trends and that how in FY 14 IRS reported EITC program payments of $65.2 billion and estimated that about 27.2% or $17.7 billion in those EITC payments were improper.

Despite that attention-grabbing number, the GAO written testimony (page 33) describes the most significant source of the tax gap for individuals not as errors with credits such as EITC, but small business individual income underreporting:

Individual income tax underreporting accounted for most—about $235 billion—of the underreporting tax gap estimate for tax year 2006. Of that amount, IRS reported that over half—$122 billion—comes from individuals’ business income, including income from (1) sole proprietorships (persons who own unincorporated businesses by themselves), (2) partnerships (a group of two or more individuals or entities, such as corporations or other partnerships, that carry on a business), and (3) S-corporations (corporations meeting certain requirements that elect to be taxed under subchapter S of the Internal Revenue Code).

In his written testimony he summarized GAO’s view on the tax gap as follows and how IRS and Congress can reduce it as follows:

Addressing the estimated $385 billion net tax gap will require strategies on multiple fronts. Key factors that contribute to the tax gap include limited third- party reporting, resource trade-offs, and tax code complexity. For example, the extent to which individual taxpayers accurately report their income is correlated to the extent to which the income is reported to them and the Internal Revenue Service (IRS) by third parties. Where there is little or no information reporting, such as with business income, taxpayers tend to significantly misreport their income. GAO has many open recommendations to reduce the tax gap. For example, GAO recommended in 2012 that IRS use return on investment data to reallocate its enforcement resources and potentially increase revenues. Since 2011, GAO also recommended improvements to telephone and online services to help IRS deliver high-quality services to taxpayers who wish to comply with tax laws but do not understand their obligations. Other strategies GAO has suggested would require legislative actions, such as accelerating W-2 filing deadlines. Additionally, requiring partnerships and corporations to electronically file tax returns could help IRS reduce return processing costs and focus its examinations more on noncompliant taxpayers. Further, a broader opportunity to address the tax gap involves simplifying the Internal Revenue Code, as complexity can cause taxpayer confusion and provide opportunities to hide willful noncompliance.

At about the 58 minute mark, a good snapshot of the GAO position on EITC was in Dodaro’s response to questioning from Senator Hatch when the Senator described the EITC as “one of the most poorly administered federal programs” and asked if Dodaro agrees with that characterization. There Dodaro deflects from IRS bashing and notes that the EITC is difficult and complex to administer based on the challenges it faces in determining family arrangements and often its lack of information about income. Dodaro again emphasizes that IRS needs legislation to help it administer the program successfully. In particular, as I mention above, Dodaro believes that the two most important legislative proposals would be giving IRS authority to regulate paid preparers and accelerate the filing of information returns.

For those interested in the issue of regulating preparers, at about 1:01 is where GAO’s Dodaro gives his endorsement of legislation regulating preparers, including references to Oregon, one of the handful of states that has its own mandatory education and testing regime.

Parting Thoughts

There are many other specific proposals in the GAO testimony, including expansion of math error authority that I have many reservations about (and discussed previously), and a general call for simplifying the laws. For many reasons, Congress will always focus on errors in transfer programs such as the EITC. Given that the administration has proposed extending the prior expanded levels of EITC and has with some bipartisan support also called for expanding the EITC for childless workers it seems likely that the issues surrounding EITC compliance will receive an even greater amount of Congressional attention in the months ahead.

About Leslie Book

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

Comments

  1. Bob Kamman says

    Good theater, but good math? An iPad costs about $1,000. I divided $124.7 billion by 320 million Americans and got $390. Are they giving a special deal to Senators and staff?

    And how many meals in a year? My office assistant likes Chipotle’s takeout, and sometimes when I haven’t brought a lunch she picks one up for me too and says it cost $8. Should I ask her to stick with the dollar menu?

    When unethical preparers are regulated, only ethical preparers will be signing returns.

  2. Senator Hatch no doubt meant real Americans, i.e., citizens. Back to the abacus, Bob, and deduct the 35 million illegal aliens.

  3. Isn’t 40 years of the Earned Income Tax Credit quite enough? Repealing the EITC would solve the fraudulent and mistaken payout problems.

    The idea that millions of workers should be subsidized from the public Treasury or from borrowed funds is an idea whose time has long expired. The constitutional clause that the EITC implicates is called “the general welfare,” not “welfare.”

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind

*