The Internal Revenue Service’s overall improper payment rate on tax breaks like the Earned Income Tax Credit increased from 21.9% in fiscal year 2024 to 26.5% in 2025. The total estimated improper payments amounted to approximately $28.1B, according to a new report.
The report, released last week by the Treasury Inspector General for Tax Administration (TIGTA), is mandated by the Payment Integrity Information Act of 2019. This act requires agencies such as the IRS to annually report on all programs and identify those susceptible to significant improper payments.
The IRS has four programs considered to be susceptible to improper payments that include the…
1 – Additional Child Tax Credit,
2 – American Opportunity Tax Credit
3 – Earned Income Tax Credit
4 – And The Net Premium Tax Credit.
All of these are refundable credits, which can produce a refund even if the taxpayer has no tax liability.
For fiscal 2025, the IRS did not comply with all the requirements of the 2019 law, which aims to reduce the improper payment rate to less than 10% for the four high-risk refundable tax credits. In addition, the IRS failed to demonstrate improvements to payment integrity, the report found.
For the IRS to effectively reduce improper payment rates and prevent financial loss to the federal government, it would need to prevent refunds from being issued during return processing, TIGTA noted. The IRS runs different kinds of automated checks on a tax return before paying a refund, but has limited ability and information to verify taxpayer eligibility on a timely basis.
The IRS reported that from fiscal years 2023 – 2025, it used math error authority to reduce total claims by approximately 2% ($7.6B), and adjusted claims from $330.5B to approximately $322.8B. Outside of its existing math error authority, though, the IRS doesn’t have sufficient or reliable data to systemically prevent ineligible individuals from receiving refundable credits.
Once a refund is issued, the IRS should audit these questionable returns. In the report, the Service stated that it examined less than 1% of returns claiming these credits.
The report acknowledged that one reason why examinations are decreasing is due to reductions in staffing. In FY 2025, the IRS’s Refundable Credits Examination Operations Unit lost about 20% (86 examiners) of its 439 examiners.
This was primarily due to budget reductions.
Let me leave you with this…
Every year an amazing phenomenon occurs before our very eyes. On the normally deserted street corners of the most devastated portions of Chicago’s South and West Sides, Quickie Income Tax Refund Shops sprout into full bloom during tax season.
By April 16th, they vanish like a thief in the night. The reason behind this strange occurrence is refundable credits.
Thirty-seven years ago, back when dinosaurs still roamed the earth, we used to prepare off-the-street 1040s. I remember one of the last returns I tried to complete was for a family of six with a $5,000 W-2.
I asked if this was all of the family’s income for the year, and they responded in the affirmative. They probably had other cash income they weren’t reporting because no one can feed a family of six in Chicago on 5 G’s, but they swore several times that this was all of their income.
The W-2 had $400 in withholding, and after the Earned Income Tax Credit and the Child Tax Credits for the four children, they were set to receive a $6,000 refund. Take a moment and think about this situation.
They report $5K in income, have $400 withheld, and receive a $6K check in return. There’s no way they’re reporting all of their income but based on the tax code they’re supposed to receive this money.
I didn’t complete the return in question and politely asked the family to get out of my office. Okay. Maybe I wasn’t so polite.
I’m trying to explain that these refundable tax credits are nothing more than a license to steal. And who is paying for this thievery?
We all are and it’s wrong. It couldn’t possibly be more detestable.
According to the report, it only cost you and me $28.1B last year.
This thievery has become such an art form that Quickie Income Tax Refund shops all over Chicago live off of it. If they only did tax returns for honest taxpayers like the rest of us do, they’d starve.
And until the IRS can hire enough auditors to stop this abuse, it will only multiply.
As always, if you’re having problems with your accounting and tax work, we’d love to help. Please click on the button below for a complimentary tax planning session to get on my calendar.
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Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
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