The WasteWatcher: The Staff Blog of Citizens Against Government Waste

Rethinking Refundable Tax Credits

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


Over the course of the past 40 years, members of Congress have created refundable tax credits (RTCs), which have become ubiquitous in the tax code.  RTCs are available for everything from employment to education to having children.  However, mismanagement and a lack of oversight by the Internal Revenue Service (IRS) and Congress have enabled RTCs to become a multibillion dollar source of wasteful spending.

One such RTC, the Earned Income Tax Credit (EITC), made permanent by the Revenue Act of 1978, was designed to encourage individuals to get jobs while easing the tax burden on those with lower paying jobs.  A June 27, 2016 Government Accountability Office (GAO) report noted that improper payments from the EITC averaged $18.1 billion annually between 2009 and 2011, mostly because individuals underreported income or claimed dependents that did not qualify under IRS regulations. 

While the EITC is the largest RTC, the Child Tax Credit/Additional Child Tax Credit (CTC/ACTC) and the American Opportunity Tax Credit (AOTC) are significant RTCs that are regulated even less effectively than the EITC.  The CTC and ACTC were created in the Taxpayer Relief Act of 1997 to ease the burden of taxation on parents, while the AOTC was created by the 2009 American Recovery and Reinvestment Act (stimulus) by expanding the original Hope Scholarship Credit to aid individuals in pursuing higher education.  The June 27, 2016 GAO study reported that improper payments from CTC/ACTC averaged $6.4 billion annually between 2009 and 2011, while improper payments for AOTC averaged $5 billion over that same timeframe.

Part of the reason the ACTC and AOTC are so vulnerable is because they can be awarded without the use of a Social Security number (SSN).  Foreign nationals, resident aliens, nonresident aliens, and others who report taxes but do not qualify for a SSN are given an Individual Taxpayer Identification Number (ITIN).  During a May 25, 2011 House Ways and Means Subcommittee on Oversight hearing, Treasury Inspector General for Tax Administration (TIGTA) J. Russell George stated that “billions of dollars in ACTC are being provided to ITIN filers without verification of eligibility, and IRS employees have raised concerns about the lack of an adequate process for identifying and addressing improper claims.” 

When awarded correctly, the RTCs can be helpful to beneficiaries.  However, loose standards and unclear regulations leave a large opening for fraud and abuse.  When money is improperly paid to individuals who do not qualify for these RTCs, less money is available to assist people who do qualify.

Solutions for curbing the billions in waste should include the establishment and enforcement of higher standards for verifying income and dependents for the EITC.  TIGTA recommended that the IRS reevaluate whether individuals should qualify for the CTC/ACTC and AOTC with an ITIN.  Equalizing this standard with the EITC is a commonsense solution that could save taxpayers billions of dollars. 

More must be done to address these improper payments.  Congress must establish and enforce higher standards and reevaluate qualifications for RTCs.  A significant portion of a combined $30 billion in annual improper payments could then be avoided.   

  -- Leah Lagoudis

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