As part of the Biden $1.9 trillion stimulus plan, Democrats are proposing to expand several refundable tax credits that have a significant history of waste, fraud, and abuse including the Additional Child Tax Credit (ACTC), the Earned Income Tax Credit (EITC), and the Obamacare Premium Tax Credit (PTC).
The Treasury Inspector General for Tax Administration (TIGTA) has found that the rate of improper payments for these refundable credits was anywhere from 25 percent to 40 percent of total payments. Improper payments are defined as “any payment that should not have been made, was made in an incorrect amount, or was made to an ineligible recipient.” As the report explains:
“The IRS estimates that approximately 25 percent ($18.4 billion) of EITC payments were issued improperly in FY 2018…
“The IRS estimates that nearly 33 percent ($8.7 billion) of ACTC payments made during TYs 2009 through 2011 were likely improper and that over 31 percent ($5.3 billion) of AOTC payments made during TY 2012 were likely improper….
“The IRS’s own analysis of its compliance data indicates that the estimated error rate for Net PTC payments was 41 percent ($440 million).”
As TIGTA explains, these refundable credits carry a significant risk of fraud:
“The unintended consequence of these credits is that they can be the targets of unscrupulous individuals who file erroneous claims. Refundable credits can result in tax refunds when no income tax is paid or withheld because these credits are allowed even if they exceed the amount of the individual’s tax liability. Consequently, they pose a significant risk as an avenue for those seeking to defraud the Government.”
The stimulus proposal significantly expands each of these credits. The child tax credit is expanded for 2021 so that the credit is fully refundable. In addition, the credit is increased from $2,000 to $3,600 for children under 6 and to $3,000 for children between 6 and 18 years of age.
The proposal also expands the Earned Income Tax Credit for 2021 and expands the Obamacare advanced refundable premium tax credit for 2021 and 2022. All told, these provisions reduce revenues by $180 billion, according to the Joint Committee on Taxation.
While it is unclear what portion of this $180 billion accounts for refundable payments, the provisions will likely lead to billions of dollars in new improper payments based on existing problems administering the credits.