Last month TIGTA released its annual review of the IRS’s improper payment reporting requirements under the Payment Integrity Information Act (PIIA). The focus in this TIGTA report is the IRS’s administration of refundable credits. In the pre-COVID time frame (FY 20), OMB determined that the Earned Income Tax Credit (EITC), Additional Child Tax Credit (ACTC), and American Opportunity Tax Credit (AOTC) are high-priority programs that are susceptible to significant improper payments.
Under applicable executive orders, for any program identified as “susceptible to significant improper payments” the IRS is required to provide the following information for the Treasury Department’s financial report:
Rather than focus on the data that the report reveals (as I have done in the few times I have reviewed these reports), in this brief post I will focus on two somewhat surprising developments discussed in the TIGTA report: 1) that the IRS has formally requested that OMB excuse it from reporting erroneous refundable tax credit claims under the PIIA and 2) that the IRS is systemically imposing a two-year ban for ACTC claimants. The first of these developments is encouraging and the second is alarming. I will briefly discuss each below.
Possible IRS Carve Out From IPAA
On pages 2 and 3 of the report TIGTA discusses how last fall Treasury and the IRS formally requested that the OMB allow IRS to be excused from meeting the requirements under the PIAA. As TIGTA discusses, Treasury and IRS stated that the tax system is “primarily” a collection system and not a payment program. More substantively the request centered on how IRS directly addresses similar concerns as part of its comprehensive tax gap strategy. As part of its pitch, and as TIGTA summarized, the argument centered on the following points:
- The refundable portion of tax credits, or outlays, should not be considered separately from the rest of the credit because the IRS and Treasury Department need to view any errors to address them effectively.
- Tax credits are embedded into and affected by other provisions of the Federal tax system. Tax Gap estimates and other comprehensive compliance analyses are more effective in helping the IRS identify noncompliance and allocate limited resources effectively.
- Tax Gap estimates already effectively monitor changes in refundable tax credit errors over time.
- Improper payment estimates under the PIIA provide no additional information to the IRS as it administers tax credits and addresses noncompliance.
- Refundable tax credit overclaims are largely due to the credits’ statutory design and the complexity taxpayers face when self-certifying eligibility for the refundable tax credits, not internal control weaknesses, financial management deficiencies, or reporting failures.
- Tax credits are part of an interrelated tax administration portfolio that the IRS addresses through a comprehensive enterprise risk management program.
Given that refundable credits comprise a relatively small amount of the overall tax gap, and that special focus on this one small aspect of the gap seems to contribute to additional pressure on IRS to single out relatively low income and low payoff audits, the Treasury and IRS request seems sound. Does this mean that if the request is granted the number of EITC audits will decrease? I am not certain, though I suspect that with additional pressure on IRS to step up audits of higher income taxpayers and lighten the touch on others it would likely give the IRS more flexibility to shift resources and contribute to a relative rebalancing of individual audit coverage.
The other side of the coin is that Congress seems intent on using the tax system to deliver all sorts of benefits, and as the IRS itself more directly acknowledges its role as a benefit administrator, the reasons for exceptional treatment may not be as compelling. According to TIGTA, earlier this year OMB advised Treasury and IRS that it is considering IRS’s request and will respond after the new management team at OMB is in place. It is unclear if the last year’s expanded use of IRS to deliver benefits that seem less tethered to tax collection will have an impact on the OMB decision. Perhaps OMB might press IRS to focus more on certain payments, like the advanced component of the CTC if that is made permanent.
Systemic Ban and Child Tax Credit
One aspect of the TIGTA report is to evaluate whether IRS is using its existing powers to adequately address refundable credit errors (this is a common refrain; see my post Is IRS Too Soft on People Claiming EITC? Treasury Says Yes and Also Suggests No). One part of the IRS tool kit is the extraordinary power IRS has to impose a two or ten-year ban following a determination that an individual has disregarded credit eligibility rules. TIGTA observes that in its view IRS has failed to effectively use bans, looking at 1.9 million taxpayers from FY 17 and over 3900 of them who were allowed to claim credits despite having some or all of the credits disallowed in the two prior years. Given audit costs (even correspondence audits) TIGTA’s “solution” is for IRS to systemically impose a ban when individuals have had two successive years of disallowed credits.
The report is a little foggy on the details but it appears that IRS pushed back on the TIGTA recommendation. On page 8 the IRS stated that it did not agree to “modify systemic processes to apply the two-year ban after two audits result in the disallowance of a refundable tax credit “ On the other hand, earlier on the same page the report states that starting in “Processing Year 2021, systemic processes will assess the two-year ban for the ACTC.”
I read this to mean that IRS is for some refundable credits (ACTC and I suspect EITC) will be using a systemic ban following prior disallowances. There are a number of problems with this solution, as the NTA’s 2019 special report on refundable credits highlighted. With Congress at least temporarily buttressing the CTC, and the influx of claims to hit IRS from nontraditional taxpayers, any IRS decision to systemically impose a ban is fraught with risks to taxpayer rights. It seems hard to square bootstrapping a failure to respond with the mental state needed to justify a ban determination. While I would like to know more about the systemic banning IRS will be imposing I suspect that this means IRS can make a determination that an individual has acted recklessly or intentionally in the absence of any hearing or even direct taxpayer communication. Given that there is no published guidance on the meaning of reckless or intentional disregard for these purposes, and no outward facing guidance on exactly how IRS makes its determinations, this is a relatively obscure but potentially significant part of the IRS’s job in administering benefits.
As I and others have written before (see for example Bob Probasco’s The EITC Ban-Further Thoughts Part 1, Part 2 and Part 3) the absence of clear notice and a defined path to administrative and judicial review of a ban determination is inconsistent with taxpayer rights, including the right to be informed, the right to a fair and just tax system, and the right to appeal. As Congress leans on IRS to deliver more benefits, the absence of clarity around these potentially catastrophic ban determinations is likely to generate close judicial scrutiny and highlight how IRS practice is inconsistent with due process protections that surround other nontax based programs. Given the temporary and likely permanent expansion and advanced payment of the ACTC, the stakes are even higher than in past years.