«Testimony of The Honorable J. Russell George Treasury Inspector General for Tax Administration February 25, 2015 Washington, D.C. TESTIMONY OF THE ...»
TIGTA, Audit No. 201430027, Additional Improvements Are Needed to Measure the Success and Productivity of the Partnership Audit Process, report planned for March 2015.
Each year, the IRS receives information returns filed by third parties such as employers and educational institutions. These returns provide the IRS the information needed to verify taxpayers’ claims for benefits such as the Earned Income Tax Credit (EITC) and the American Opportunity Tax Credit (AOTC). However, information returns are generally not filed with the IRS until after most taxpayers file their annual tax returns. As a result, the IRS cannot use the information contained on these information returns to verify tax returns until after those tax returns are processed and refunds are issued.
For example, the IRS estimates that in FY 2013, 30 percent or $4.35 billion in improper EITC payments resulted from verification errors associated with the IRS’s inability to identify taxpayers who misreport their income to erroneously claim the EITC.
TIGTA’s review of Tax Year 2012 tax returns identified more than $1.7 billion in potentially erroneous EITC claims on tax returns with no third-party Forms W-2, Wage and Tax Statement, received by the IRS supporting the wages reported. However, the IRS does not have the Forms W-2 information at the time most of these tax returns are processed. Employers who file paper Forms W-2 are not required to file these forms until February of each year. Employers who e-file Forms W-2 have until the end of March each year to file.
TIGTA also estimates that the IRS issued more than $3.2 billion in potentially erroneous education credits in Tax Year 2012 for students for whom the IRS did not receive a Form 1098-T, Tuition Statement, from a postsecondary educational institution.34 Educational institutions are required to provide a Form 1098-T to students who attend their institution and file a copy of Form 1098-T with the IRS. The Form 1098-T provides the name and Employer Identification Number of the institution, the name and Taxpayer Identification Number of the student who attended, and information on whether the student attended half-time or was a graduate student.
However, these forms are not available at the time the tax returns are filed. As such, the IRS is not able to use this information to identify potentially erroneous claims when tax returns are processed. As with the Form W-2, Forms 1098-T generally do not have to be filed with the IRS until the end of March each year.
Requiring third parties such as employers and educational institutions to file information returns earlier will provide the IRS the opportunity to use the information contained on these forms to verify tax returns at the time they are processed rather TIGTA, Audit Number 201440015, Billions of Dollars in Potentially Erroneous Education Credits Continue to be Claimed for Ineligible Students and Institutions, report planned for March 2015.
than after refunds are issued. This could significantly improve the IRS’s ability to prevent the issuance of billions of dollars in erroneous tax benefits, including the EITC and education credits.
However, even if the third-party information returns are received more timely, the IRS still needs certain authorities to more efficiently and effectively use these data to address taxpayer noncompliance. Generally, the IRS must audit any tax return it identifies with a questionable claim before the claim can be adjusted or denied, even if the IRS has reliable data that indicate the claim is erroneous. However, the number of tax returns the IRS can audit is limited to available resources and the need to provide a balanced enforcement program among all taxpayer segments.
The IRS does have math error authority35 to systemically address erroneous claims that contain mathematical or clerical errors or EITC claims with an invalid qualifying child’s Social Security Number. The IRS estimates that it costs $1.50 to resolve an EITC claim using math error authority, compared to $278 to conduct a pre-refund audit.
However, the majority of erroneous claims the IRS identifies do not contain the types of errors for which it has math error authority. For example, in Tax Year 2011, the IRS identified approximately 6.6 million potentially erroneous EITC claims totaling approximately $21.6 billion that it could not address using existing math error authority.
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 areas 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 Department of the Treasury has included a legislative proposal as part of the IRS’s budget requests since FY 2013 to obtain correctable error authority, which would permit the IRS to disallow tax benefit claims when Government data sources do not support information on the tax return, or when taxpayers have failed to include required documentation with their tax return or exceeded the lifetime limit for claiming a deduction or credit. This authority would enable the IRS to systemically deny all tax claims for which the IRS has reliable data showing the claim is erroneous. The data available for IRS use in verifying tax returns go beyond that provided to the IRS on information returns such as the Form W-2.
Under current law, the IRS can adjust tax returns on which the taxpayer has made a math error utilizing summary assessment procedures.
For example, the Affordable Care Act requires Health Care Exchanges to provide data to the IRS on a monthly basis for each individual enrolled in the Exchange who purchased a qualified health insurance plan, including the amount of advance Premium Tax Credits (PTC) received. The Department of Health and Human Services estimates more than six million individuals purchased insurance through an Exchange in Calendar Year 2014. The Exchange data are available at the time tax returns are processed and can be used to ensure taxpayers have purchased insurance through an Exchange as required and properly reconciled advance PTC payments on their tax return before refunds are paid. However, the IRS was not given the authority to use the Exchange data to systemically disallow a PTC claim for which the data show the claim is erroneous. As a result, the IRS must audit these tax returns.
The IRS has authority to use the Department of Health and Human Services National Directory of New Hires (NDNH) which contains wage information to verify EITC claims. However, the IRS does not have the authority to systemically disallow an EITC claim that is not supported by NDNH data. Therefore, the IRS must audit the EITC claims it identifies for which NDNH data indicate the income reported is potentially erroneous. TIGTA estimates the use of correctable error authority along with expanded use of the NDNH could have potentially prevented the issuance of the more than $1.7 billion in questionable EITC claims in Tax Year 2012 for which the IRS had no Form W-2 from an employer. TIGTA forecasted that these processes could prevent the issuance of more than $8.5 billion in potentially erroneous EITC claims over the next five years.
A similar issue also exists with education credits. To qualify for an education credit, students must attend a postsecondary educational institution that is certified by the Department of Education to receive Federal student aid funding. The Department of Education Postsecondary Education Participants System (PEPS) database includes all educational institutions certified to receive Federal student aid funding. TIGTA’s comparison of Tax Year 2012 tax returns with the Department of Education PEPS database identified more than 1.6 million taxpayers who received education credits totaling approximately $2.5 billion for students who attended institutions that are not certified to receive Federal student aid funding. As with the EITC, the IRS must audit these tax returns before the erroneous claim can be denied. 36 Despite the IRS’s numerous efforts, it is unlikely they will achieve any significant reduction in erroneous payments without more timely access to third-party information TIGTA, Audit Number 201440015, Billions of Dollars in Potentially Erroneous Education Credits Continue to be Claimed for Ineligible Students and Institutions, report planned for March 2015.
and the ability to systemically deny erroneous claims at the time a tax return is processed. Given the scope of the improper payments that the IRS reports each year, in addition to the improper payments that remain unreported, changes in existing compliance methods could have a significant financial impact by enabling the IRS to more efficiently and effectively address this problem.
We at TIGTA are committed to delivering our mission of ensuring an effective and efficient tax administration system and preventing, detecting, and deterring waste, fraud, and abuse. As such, we plan to provide continuing audit coverage of the IRS’s efforts to operate efficiently and effectively and investigate any instances of IRS employee misconduct or fraud in IRS operations.
Chairman Crenshaw, Ranking Member Serrano, and Members of the Subcommittee, thank you for the opportunity to share my views.
A native of New York City, where he attended public schools, including Brooklyn Technical High School, Mr. George received his Bachelor of Arts degree from Howard University in Washington, DC, and his Doctorate of Jurisprudence from Harvard University's School of Law in Cambridge, MA. After receiving his law degree, he returned to New York and served as a prosecutor in the Queens County District Attorney's Office.
Following his work as a prosecutor, Mr. George joined the Counsel's Office in the White House Office of Management and Budget where he was Assistant General Counsel. In that capacity, he provided legal guidance on issues concerning presidential and executive branch authority. He was next invited to join the White House Staff as the Associate Director for Policy in the Office of National Service. It was there that he implemented the legislation establishing the Commission for National and Community Service, the precursor to the Corporation for National and Community Service. He then returned to New York and practiced law at Kramer, Levin, Naftalis, Nessen, Kamin & Frankel.
In 1995, Mr. George returned to Washington and joined the staff of the Committee on Government Reform and Oversight and served as the Staff Director and Chief Counsel of the Government Management, Information and Technology subcommittee (later renamed the Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations), chaired by Representative Stephen Horn. There he directed a staff that conducted over 200 hearings on legislative and oversight issues pertaining to Federal Government management practices, including procurement policies, the disposition of government-controlled information, the performance of chief financial officers and inspectors general, and the Government's use of technology. He continued in that position until his appointment by President Bush in 2002.
In addition to his duties as the Inspector General for Tax Administration, Mr. George serves as a member of the Recovery Accountability and Transparency Board, a non-partisan, non-political agency created by the American Recovery and Reinvestment Act of 2009 to provide unprecedented transparency and to detect and prevent fraud, waste, and mismanagement of Recovery funds. There, he serves as chairman of the Recovery.gov committee, which oversees the dissemination of accurate and timely data about Recovery funds.
Mr. George also serves as a member of the Integrity Committee of the Council of Inspectors General for Integrity and Efficiency (CIGIE). CIGIE is an independent entity within the executive branch statutorily established by the Inspector General Act, as amended, to address integrity, economy, and effectiveness issues that transcend individual Government agencies; and increase the professionalism and effectiveness of personnel by developing policies, standards, and approaches to aid in the establishment of a well-trained and highly skilled workforce in the offices of the Inspectors General. The CIGIE Integrity Committee serves as an independent review and investigative mechanism for allegations of wrongdoing brought against Inspectors General.