Treasury Inspector General for Tax Administration 2023-40-032 (Fiscal Year 2022 Improper Payment Reporting Requirements Were Largely Met; However, Improper Payment Estimates Are Less )

Summary

Final Audit Report 2023-40-032 of the Treasury Inspector General for Tax Administration, issued May 12, 2023, reviews whether the IRS complied with annual improper payment reporting requirements for Fiscal Year 2022. The report finds the IRS largely compliant with the Payment Integrity Information Act of 2019 but states that the IRS still has not satisfied the goal to reduce improper payment rates to less than 10 percent. It states that the IRS reduced the National Research Program sample size due to limited resources, resulting in a less precise estimated improper payment rate. The report lists estimated improper payment rates of 36 percent for the American Opportunity Tax Credit, 32 percent for the Earned Income Tax Credit, 27 percent for the Net Premium Tax Credit and 16 percent for the Additional Child Tax Credit. TIGTA did not make any recommendations.

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TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Fiscal Year 2022 Improper Payment Reporting
Requirements Were Largely Met; However,
Improper Payment Estimates Are Less Precise

May 12, 2023

Report Number: 2023-40-032

1
TIGTACommunications@tigta.treas.gov | www.tigta.gov
HIGHLIGHTS: Fiscal Year 2022 Improper Payment Reporting Requirements
Were Largely Met; However, Improper Payment Estimates Are Less Precise
Final Audit Report issued on May 12, 2023 Report Number 2023-40-032

Why TIGTA Did This Audit What TIGTA Found
This audit was initiated because For FY 2022, the IRS was largely compliant with the reporting
TIGTA is required to annually requirements contained in the Payment Integrity Information Act
assess and report on the IRS’s of 2019. However, the IRS still has not satisfied the Payment Integrity
compliance with the reporting Act goal to reduce improper payment rates to less than 10 percent.
requirements contained in the
The IRS uses its National Research Program to measure reporting
Payment Integrity Information Act
compliance for different types of taxes, including calculating
of 2019. The objective of this
estimated improper payment rates. For FY 2022, the IRS reduced the
review was to determine whether
National Research Program sample size due to limited resources.
the IRS complied with the annual
The smaller sample size resulted in a wider confidence interval and a
improper payment reporting
less precise estimated improper payment rate. Furthermore, to
requirements for Fiscal
estimate the amount of improper payments, the IRS applied the
Year (FY) 2022.
estimated improper payment rate to returns on a tax year basis
Impact on Tax Administration rather than a fiscal year basis as it has done in the past, which is more
consistent with the filing and processing of tax returns.
The Office of Management and
Budget (OMB) defines an improper Estimates of improper payment rates have risen since Fiscal
payment as any payment that Year 2020. However, refundable credit improper payments are not
should not have been made, was primarily the result of internal control weaknesses that the IRS can
made in an incorrect amount, or address. Eligibility rules differ for each credit and are often complex
was made to an ineligible recipient. because they address complicated family relationships and residency
The IRS currently has identified arrangements to determine eligibility.
four programs that meet the
OMB’s definition of a high-priority
program susceptible to improper
payments. The OMB defines
high-priority programs as
programs with improper payments
resulting in monetary losses that
exceed $100 million annually.
The IRS estimated the following
improper payment rates: IRS management also advised TIGTA recently that there is a growing
expectation for the IRS to notify individuals who are potentially
• American Opportunity Tax
eligible for but are not claiming refundable credits to encourage
Credit (AOTC): 36 percent.
them to file a tax return and claim the credits. The same limitations
• Earned Income Tax Credit that prevent the IRS from verifying refundable credit claims may also
(EITC): 32 percent. limit its ability to proactively identify eligible individuals who are not
claiming these credits. This type of outreach could result in
• Net Premium Tax Credit:
additional improper payments and increased taxpayer burden.
27 percent.
• Additional Child Tax Credit
What TIGTA Recommended
(ACTC): 16 percent. TIGTA did not make any recommendations in this report.
This is the first year the IRS has
estimated an improper payment
rate for the Net Premium Tax
Credit.
U.S. DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20024

TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION

May 12, 2023

MEMORANDUM FOR: COMMISSIONER, INTERNAL REVENUE

FROM: Heather M. Hill
Deputy Inspector General for Audit

SUBJECT: Final Audit Report – Fiscal Year 2022 Improper Payment Reporting
Requirements Were Largely Met; However, Improper Payment Estimates
Are Less Precise (Audit # 202340001)

This report presents the results of our review of the Internal Revenue Service’s compliance with
annual improper payment reporting requirements for Fiscal Year 2022. This review is part of our
Fiscal Year 2023 Annual Audit Plan and addresses the major management and performance
challenge of Reducing Tax Fraud and Improper Payments.
Management’s complete response to the draft report is included as Appendix V. If you have any
questions, please contact me or Diana Tengesdal, Acting Assistant Inspector General for Audit
(Returns Processing and Account Services).
Fiscal Year 2022 Improper Payment Reporting Requirements Were
Largely Met; However, Improper Payment Estimates Are Less Precise

Table of Contents
Background .....................................................................................................................................Page 1

Results of Review .......................................................................................................................Page 3
Assessment of Fiscal Year 2022 Compliance With
Improper Payment Reporting Requirements ............................................................Page 4
Changes in the Estimation of Improper Payments Make
Year-to-Year Comparisons Difficult ..............................................................................Page 7
Despite Internal Revenue Service Efforts, Improper Payment
Rate Estimates Have Risen Since Fiscal Year 2020 ..................................................Page 9

Appendices
Appendix I – Detailed Objective, Scope, and Methodology ................................Page 12
Appendix II – Programs Identified for Improper Payment
Risk Assessments..................................................................................................................Page 14
Appendix III – Improper Payment Laws Repealed by the Payment
Integrity Information Act of 2019 ..................................................................................Page 15
Appendix IV – Prior Improper Payment Reports by the Treasury
Inspector General for Tax Administration ...................................................................Page 16
Appendix V – Management’s Response to the Draft Report ..............................Page 17
Appendix VI – Glossary of Terms ...................................................................................Page 18
Appendix VII – Abbreviations ..........................................................................................Page.20
Fiscal Year 2022 Improper Payment Reporting Requirements Were
Largely Met; However, Improper Payment Estimates Are Less Precise

Background
The Office of Management and Budget (OMB) defines an improper payment as any payment
that should not have been made, was made in an incorrect amount, or was made to an ineligible
recipient. 1 Agency Inspectors General are responsible for evaluating agency information related
to improper payments.
On March 2, 2020, the Payment Integrity Information Act of 2019 (PIIA) repealed several
improper payment laws but set forth similar improper payment reporting requirements. 2 For
example, agencies must conduct a program-specific risk assessment for each program or activity
identified by the agency as exceeding $10 million in annual outlays at least once every three
years, provide the methodology for identifying and measuring improper payments, and report
on actions the agency intends to take to prevent future improper payments. In addition, the
following remain in effect:
• Executive Order 13520, Reducing Improper Payments, signed by the President on
November 20, 2009, increased Federal agencies’ accountability for reducing improper
payments while continuing to ensure that Federal programs serve and provide access to
intended beneficiaries. It requires Federal agencies to provide agency Inspectors General
with detailed information on efforts to identify and reduce the number of improper
payments in Federal programs with the highest dollar value of improper payments.
• The Consolidated Appropriations Act of 2021, enacted on December 27, 2020. 3 This Act
directed the Internal Revenue Service (IRS) to make the elimination of improper
payments an utmost priority. In addition, the Act directed the IRS to implement, within
270 calendar days of enactment of the Act, all open and unimplemented
recommendations from the Treasury Inspector General for Tax Administration (TIGTA)
and the Government Accountability Office that address improper payments, or report on
impediments to implementation of each open recommendation. We previously assessed
the IRS’s compliance with this requirement and found the IRS reported all
unimplemented recommendations as required. 4
• OMB revised Circular A-123 Appendix C, Requirements for Payment Integrity
Improvement, issued March 5, 2021. Appendix C provides agencies and Inspectors
General with guidance on improper payment determinations and reporting. According
to the OMB, the goal of the revised Appendix C is to transform the payment integrity
compliance framework and create a more comprehensive and meaningful set of
requirements to allow agencies to spend less time complying with low-value activities
and more time researching the underlying causes of improper payments, balancing
payment integrity risks and controls, and building the capacity to help prevent future
improper payments. Every year, each agency Inspector General must review its agency’s

1
See Appendix VI for a glossary of terms.
2
Pub. L. No. 116-117, 134 Stat. 113. See Appendix III for a list of repealed improper payment laws.
3
Pub. L. No. 116-260, 134 Stat. 1182.
4
TIGTA, Report No. 2021-40-036, Improper Payment Rates for Refundable Tax Credits Remain High (May 2021) and
TIGTA, Report No. 2022-40-037, Programs Susceptible to Improper Payments Are Not Adequately Assessed and
Reported (May 2022).
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improper payment reporting in the Agency Financial Report (AFR) and any
accompanying material, such as that provided on www.paymentaccuracy.gov, to
determine if the agency complies with improper payment legislation and OMB guidance.

Process to identify IRS programs for improper payment risk assessment
Agencies must conduct an improper payment risk assessment at least once every three years for
each program with annual outlays over $10 million. The Department of the Treasury (Treasury
Department) identifies the programs that the IRS must assess for the risk of improper payments
each fiscal year. The IRS must complete a Treasury Certification for each program that was not
identified as needing a risk assessment this year stating there were no material changes to the
program since the last risk assessment was completed. For Fiscal Year (FY) 2022, the Treasury
Department selected eight program fund groups that required certification and 11 IRS programs
that required a risk assessment. 5
The IRS can use one of two types of risk assessments:
• Qualitative Risk Assessment – used to assess the risk that a program’s internal controls
could lead to susceptible improper payments. The OMB requires agencies to conduct
qualitative assessments after the first 12 months of the program and at least once every
three fiscal years thereafter. Once the IRS determines that a program is susceptible to
improper payments, it must produce a statistically valid estimate of the improper
payments the following fiscal year.
• Quantitative Risk Assessment – used to review a sample of disbursements to formulate
the overall estimated improper payment rate. In cases in which a quantitative risk
assessment is conducted, it could take one of several forms, such as a statistical
assessment similar to what is required for the regular improper payment estimate or a
nonstatistical assessment in which its ratio of improper payments and unknown
payments is projected to the annual outlays.
In addition, the IRS must provide the following information, as part of an improper payment
estimate for any program identified as susceptible to significant improper payments as a result
of a risk assessment for inclusion in the Treasury Department’s next fiscal year AFR:
• The rate and amount of improper payments.
• The root causes of the improper payments.
• The actions taken to address the root causes.
• The annual improper payment reduction targets.
• A discussion of any limitations to the IRS’s ability to reduce improper payments.

5
Appendix II provides the list of the 11 IRS programs identified for improper payment risk assessments for FY 2022
and the type of risk assessment or estimate completed for each program.
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The Treasury Department and the IRS continue to request relief from improper payment
reporting requirements for refundable tax credit claims
As we reported in May 2022, the Treasury Department and the IRS informed the OMB in
October 2020 that the tax system is primarily a collection system and not a payment program. 6
The Treasury Department and the IRS acknowledged that refundable tax credits currently fall
under the scope of the PIIA but do not believe that the refundable tax credits meet the
definition of payments in the traditional sense. Therefore, the Treasury Department believes the
credits should be reported only under the Tax Gap framework that comprehensively assesses
the tax collection system and no longer be reported under improper payment requirements.
In December 2020, officials at the Treasury Department and the IRS met with OMB officials to
discuss the request. The OMB requested additional information from the IRS, which was
provided to the OMB in February 2021. OMB officials advised that they would provide a
response on next steps once the full OMB leadership team was in place.
IRS management stated that IRS and Treasury officials met with the OMB on March 1, 2022, to
discuss their proposal for using only Tax Gap reporting to eliminate duplicative reporting on
refundable tax credits under the PIIA, including Appendix C and www.paymentaccuracy.gov.
Their proposal would:
• Eliminate a significant portion of Part 3, Section D of the Treasury Department’s AFR on
Payment Integrity, including the discussion of refundable tax credits and the reporting of
improper payment rates for these credits.
• Eliminate reporting information on refundable tax credits on www.paymentaccuracy.gov,
including improper payment rates, reduction targets, corrective action plans, etc.
• Continue reporting on refundable tax credits as part of the “Tax Gap framework,”
including the following specific information:
o Total credits.
o Amounts and rate of over and under claimed.
o Root cause analysis, i.e., sources of error, which enables corrective actions and
mitigation strategies.
o Compliance analysis.
On March 27, 2023, IRS officials confirmed that the OMB continues to review the business case.

Results of Review
The OMB defines high-priority programs as programs with improper payments resulting in
monetary losses that exceed $100 million annually. For FY 2022, as shown in Figure 1, the IRS
calculated and reported the dollar amount and percentage rate of improper payments
associated with four of its high-priority programs susceptible to improper payments.

6
TIGTA, Report No. 2022-40-037, Programs Susceptible to Improper Payments Are Not Adequately Assessed and
Reported (May 2022).
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Figure 1: IRS Estimated FY 2022 Improper Payments and Rates 7
Estimated
Total Estimated Improper
Program Improper Payment
Payments Payments
Rate
Earned Income Tax Credit (EITC) 32% $57.5 billion $18.2 billion
Additional Child Tax Credit (ACTC) 16% $32.8 billion $5.2 billion
American Opportunity Tax Credit 36% $5.6 billion $2.0 billion
(AOTC)
Net Premium Tax Credit (Net PTC) 8 27% $2.1 billion $0.6 billion
Source: FY 2022 Treasury Department’s AFR.

Assessment of Fiscal Year 2022 Compliance With Improper Payment
Reporting Requirements
The IRS was largely compliant with the reporting requirements contained in the PIIA for FY 2022.
Figure 2 provides a summary of our evaluation of the IRS’s compliance with the various
improper payment reporting requirements.

Figure 2: Compliance With Improper Payment Requirements for FY 2022
Source of IRS
Improper Payment Requirement
Requirement Compliance

Published Payment Integrity information with the annual
PIIA
financial statement.
Posted the annual financial statement and accompanying PIIA/
materials to agency website. Executive Order
Conducted improper payment risk assessments for each
program with annual outlays greater than $10 million at least PIIA
once in the last three years.
Adequately concluded whether programs are likely to make
Improper Payments and Unknown Payments above or below PIIA
statutory threshold. 9
Published improper payment and unknown payment
estimates for programs susceptible to improper payments and
PIIA
unknown in accompanying materials to the annual financial
statement.

7
For presentation purposes, the improper payment rates, total payments, and estimated improper payments as
presented may be impacted by rounding. Further detail is available within the datasets found on
www.paymentaccuracy.gov.
8
The Net PTC is the amount of the PTC minus the amount of the Advance PTC. This is the first year the IRS has
reported an improper payment rate for the Net PTC.
9
Unknown payments are payments made by a program in which it is still unknown whether the payment is proper or
improper. Payments are reported as unknown so that a program does not unintentionally over or under report the
payment type results.
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Fiscal Year 2022 Improper Payment Reporting Requirements Were
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Source of IRS
Improper Payment Requirement
Requirement Compliance

Published corrective action plans for each program for which
an estimate above the statutory threshold was published in PIIA
the accompanying materials to the annual financial statement.
Published an improper payment and unknown payment
reduction target for each program for which an estimate
PIIA
above the statutory threshold was published in the
accompany materials to the annual financial statement.
Demonstrated improvements to payment integrity or to reach
PIIA
a tolerable improper payment and unknown payment rate.
Developed a plan to meet the improper payment and PIIA/
unknown payment reduction target. Executive Order
Reported an improper payment and unknown payment
estimate of less than 10% for each program for which an
PIIA
estimate was published in the accompanying materials to the
annual financial statement.

Established targets to reduce and recover improper payments. Executive Order

Provided the methodology to identify and measure improper
Executive Order
payments.
Provided plans and supporting analysis to ensure that the
initiatives undertaken do not unduly burden program access Executive Order
and participation by eligible beneficiaries.
Source: TIGTA’s review of the IRS’s compliance with improper payment requirements for FY 2022 for the
programs listed in Appendix II.

While largely compliant, the IRS still has not satisfied the PIIA goal of reducing the overall
improper payment rate for the EITC, the ACTC, the AOTC, and the Net PTC to less than
10 percent. As we have reported previously, the OMB advised the IRS that as an alternative to
reducing the improper payment rate to less than 10 percent, a reduction target may remain
constant given the complexities of the programs, as long as the complexities are explained in
the AFR, which the IRS did. 10
In addition, the IRS properly reported all other required information to the Treasury Department
for posting to www.paymentaccuracy.gov. However, the OMB erroneously transcribed the
FYs 2019 and 2020 margins of error for the EITC, the ACTC, and the AOTC when posting the
information to www.paymentaccuracy.gov. IRS officials notified the Treasury Department and
the OMB and requested correction of the errors. As of March 2023, the information on
www.paymentaccuracy.gov was corrected.
The OMB also posts quarterly scorecards associated with high-priority programs to
www.paymentaccuracy.gov. It determines the scorecards to be posted based on the prior year’s
AFR. Because this is the first year that an improper payment rate and amount for the Net PTC
were included in the Treasury Department’s AFR, the OMB did not request quarterly scorecards

10
TIGTA, Report No. 2021-40-036, Improper Payment Rates for Refundable Tax Credits Remain High (May 2021).
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for the Net PTC program. Treasury Department officials expect quarterly scorecards to be
requested and reported for the Net PTC for FY 2023.

The IRS is not reporting improper payments for all Coronavirus Disease 2019
(COVID-19)-related programs
The IRS has a number of COVID-19 related programs created by the American Rescue Plan Act
of 2021; Coronavirus Aid, Relief, and Economic Security Act; and the Consolidated
Appropriations Act, 2021. 11 These include the advance Recovery Rebate Credit (RRC) payments
(also referred to as Economic Impact Payments) issued during Calendar Years (CY) 2020 and
2021 and the RRC claimed on Tax Years (TY) 2020 and 2021 tax returns.
Based on TIGTA’s concerns with the IRS’s initial evaluation of risk associated with these improper
payments, the IRS subsequently performed qualitative risk assessments. As a result, the IRS
rated the programs as susceptible to improper payments. However, it did not estimate the
amount of improper payments for these programs.
According to the IRS, due to the short time frame over which the majority of disbursements will
be made by these COVID-19-related programs, estimating the amount and rate of improper
payments, assessing the root cause, and developing corrective action plans to reduce payment
errors in the future would provide minimal value and be an ineffective use of resources. The IRS
stated that it planned to only assess risk according to the requirements outlined in Appendix C
of OMB Circular A – 123, rather than reporting an estimate of these programs in the AFR.
The Treasury Department notified the OMB of this decision on August 4, 2022. The OMB
acknowledged the IRS’s treatment of these payments, but it did not state whether this action
was appropriate. The IRS’s justification for not expending the resources to complete a
qualitative assessment is reasonable. However, the IRS could have summarized information
from external reviews and analysis, such as those completed by TIGTA, to provide perspective on
the potential volume and cause of improper payments in these programs. For example, our
reviews of the issuance of advance RRC payments and RRCs found that the IRS issued $8 billion
in advance RRC payments and RRCs to potentially ineligible individuals since the enactment of
the Coronavirus Aid, Relief, and Economic Security Act. Figure 3 shows the number of payments
the IRS issued to potentially ineligible individuals.

11
Pub. L. No. 117-2, 135 Stat. 4 (codified in scattered sections of 7, 12, 15, 19, 20, 26, 29, 42, and 45 U.S.C.); Pub. L.
No. 116-136, 134 Stat. 281 (codified as amended in scattered sections of 2, 5, 12, 15, 20, 21, 29, 42, and 45 U.S.C.); and
Pub. L. No 116-260, 134 Stat. 1182, respectively.
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Figure 3: Payments Issued to Potentially Ineligible Individuals

TIGTA Report Payments Dollars

TIGTA, Report No. 2021-46-034, Implementation of Economic 4.5 million $5.5 billion
Impact Payments (May 2021)
TIGTA, Report No. 2022-47-030, American Rescue Plan Act: 1.2 million $1.9 billion
Implementation of Advance Recovery Rebate Credit Payments
(Mar 2022)
TIGTA, Report No. 2022-46-032, Processing of Recovery Rebate
Credit Claims During the 2021 Filing Season (May 2022)
355,015 $603 million

Total 12 6.0 million $8.0 billion
Source: TIGTA analysis of payments issued as of July 16, 2020, May 27, 2021, and
September 16, 2021.

Changes in the Estimation of Improper Payments Make Year-to-Year
Comparisons Difficult
The IRS uses its National Research Program (NRP) to measure reporting compliance for different
types of taxes and various sets of taxpayers, including calculating an estimated improper
payment rate for programs rated as “High-Priority” or susceptible to significant improper
payments.
For FY 2022, the IRS relied on a smaller NRP sample size and changed the period for reporting
on claims and improper payments. These changes resulted in less precise and lower improper
payment estimates. The change in the reporting period resulted in lower estimates of the
number and amount of improper payments than the original estimation method. These
revisions make interpreting year-to-year changes in the IRS’s reported improper payment
estimates difficult.

The IRS relied on a smaller NRP sample size to estimate improper payment rates
NRP results are a statistically valid representation of the reporting compliance characteristics
based on a representative sample of audited taxpayers. FY 2022 improper payment estimates
are based on the TY 2018 NRP sample of returns filed predominately in CY 2019 because it takes
approximately three years to complete all of the audits associated with those tax returns.
The IRS designed the TY 2018 NRP sample to include an original sample of 11,041 tax returns,
which was a 20 percent decrease compared to prior years. However, the IRS reduced the overall
sample to 4,000 returns due to limited resources. 13 Figure 4 shows how the change in NRP
sample sizes affected the IRS’s estimated EITC improper payment rate. The width of a
confidence interval reflects the probability that the improper payment rate will fall between a set
of values. As shown in Figure 4, the smaller sample of 4,000 returns resulted in the estimated
EITC improper payment rate falling into a wider confidence interval (with less accuracy). As

12
Totals may not reconcile due to rounding.
13
The IRS reduced the original NRP sample size in TYs 2016, 2017, and 2018 due to resource constraints.
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Fiscal Year 2022 Improper Payment Reporting Requirements Were
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such, there is a larger range of values within which the improper payment rate falls, creating
more uncertainty in the estimate.

Figure 4: Example of the Impact on the Margins of
Error on the Estimated EITC Improper Payment Rate

Source: TIGTA analysis of the IRS’s sampling and estimation methodology.

The IRS changed the way it calculated total claims and estimated the amount of
improper payments
The IRS applied the estimated improper payment rate discussed previously to tax returns on a
tax year basis rather than a fiscal year basis as it has done in the past. Specifically, the IRS
applied the improper payment rate to TY 2020 returns filed in CY 2021 and CY 2022 instead of
all tax returns filed between October 1, 2021, and September 30, 2022 (FY 2022). 14 To evaluate
the potential impact of the change from a fiscal year to a tax year, we calculated the total EITC
claims and improper payment estimates using TY 2020 tax returns filed in CY 2021 and CY 2022
and all tax returns filed in FY 2022. Figure 5 shows an example of the potential impact of this
change on the estimated amount of EITC improper payments for FY 2022. However, this
evaluation applies specifically to FY 2022 reporting, changes in various factors (such as changes
in tax code or changes in taxpayer behavior) contribute to differences in volumes of claims each
year.

14
The improper payment rate was applied to TY 2020 tax returns, predominately filed in CY 2021, as that is the most
recent full year of returns available from the IRS’s Individual Returns Transaction File when the improper payment
estimates were calculated in CY 2022.
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Fiscal Year 2022 Improper Payment Reporting Requirements Were
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Figure 5: Estimate of the Impact in Calculating Improper Payments
for the EITC on a Tax/Calendar Year Basis Rather Than a Fiscal Year Basis
Program Claims Improper Payments Improper
(in billions) (in billions) Payment Rate

TIGTA Estimate of EITC Improper $65.4 $20.7 32%
Payments Using FY 2022
IRS EITC Estimate as Reported in
the FY 2022 AFR Using Claims $57.5 $18.2 32%
From TY 2020
Difference $7.9 $2.5
Source: TIGTA analysis of data from the IRS’s Individual Returns Transaction File for FY 2022 and the
FY 2022 Treasury AFR.

According to IRS officials, they changed the period of returns for estimation purposes to align
Net PTC reporting by tax year with the same calendar year of Advance PTC improper payments
being reported by the Department of Health and Human Services. IRS officials felt that also
changing the estimate for the EITC, the AOTC, and the ACTC had the added benefit of moving
the estimate of improper payments to a tax year basis, which is more consistent with the filing
and processing of tax returns.
While our estimate does not necessarily reflect the amount of EITC improper payments the IRS
would have reported had it continued to estimate using a fiscal year reporting period, it does
provide some perspective of the potential impact the change in reporting period had on
estimated improper payments.

Despite Internal Revenue Service Efforts, Improper Payment Rate Estimates
Have Risen Since Fiscal Year 2020
The IRS has implemented a number of initiatives to help reduce refundable tax credit improper
payment rates, yet rates remain persistently high. For example, the EITC improper payment rate
increased from 24 percent in FY 2020 to 32 percent in FY 2022. Figure 6 shows the improper
payment rates for the EITC, the ACTC, and the AOTC for the last three fiscal years.

Figure 6: FY 2020 Through FY 2022 Improper Payment Rates

Source: FY 2020 through FY 2022 AFRs.

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Fiscal Year 2022 Improper Payment Reporting Requirements Were
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Figure 7 lists the IRS initiatives implemented to reduce improper payments.

Figure 7: IRS Initiatives to Reduce Improper Payments
Initiative Description
Nationwide Tax The annual tax forum offers three full days of seminars with the latest
Forum news from IRS leadership and experts. More than 8,300 tax return
preparers attended the seminar entitled Looking to Tax Year 2022:
American Rescue Plan Tax Changes to the Earned Income Tax Credit
and Other Child-Related Credits at the 2022 virtual Nationwide Tax
Forums.
Interactive Tax Return The training module on IRS.gov covers the technical aspects of the tax
Preparer Due return preparer due diligence requirements. In FY 2022, more than
Diligence Training 10,400 preparers received a certificate of completion.
Module
Tax Preparer Toolkit The Tax Preparer Toolkit on IRS.gov has resources to assist tax return
preparers with the EITC, the ACTC, the AOTC as well as other credits
and tax benefits.
Software Developers The IRS meets with members of tax preparation companies and
Working Group software industry representatives to identify software enhancements
that can help reduce errors made by taxpayers and paid preparers
and to assist paid preparers in meeting their due diligence
requirements.
Tax Return Preparer The IRS hosts discussions and provides instructions and
Due Diligence demonstrations over the Internet. In FY 2022, nearly 900 preparers
Webinars attended the virtual webinar on due diligence requirements entitled
Keys to Mastering Due Diligence Requirements and What to Expect
During a Due Diligence Audit.
Tax Preparer Alerts Alerts on IRS.gov provide return preparers with updated news and
information on key refundable credit and return filing topics.
Refundable Credits In FY 2022, the IRS held its annual summit to provide a forum for
Summit interested internal and external stakeholders to discuss opportunities
to reduce improper payments, ease taxpayer burden, and mitigate
compliance risks. The IRS held an additional summit to discuss
administering the Advanced Child Tax Credit provisions in the
American Rescue Plan.
Source: FY 2022 AFR.

Refundable credit improper payments are not primarily the result of internal control weaknesses
that the IRS can address. In addition to the lack of reliable, relevant, and timely third-party data
for use in verifying refundable credit claims, the Treasury AFR reports that eligibility rules differ
for each credit and are often complex because they address complicated family relationships
and residency arrangements to determine eligibility. As we reported in September 2021, the
requirements to claim certain refundable credits have increased in complexity over time. For
example, when the EITC was created in 1975, the amount an individual was entitled to receive
was based solely on the individual’s earnings. Today, the EITC has four earnings limitations
dependent on the taxpayer’s filing status and the number of qualifying children. Since the
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credit’s enactment, it has been modified to increase amounts and to differentiate between
family size and structure. 15

Outreach efforts to expand participation in refundable tax credit programs can increase
improper payments
IRS management recently advised there is a growing expectation for the IRS to notify individuals
who are potentially eligible for but not claiming refundable credits to encourage them to file a
tax return and claim the credits. However, the same limitations that prevent the IRS from
verifying refundable credit claims may also limit its ability to proactively identify eligible
individuals who are not claiming these credits. This type of outreach could result in additional
improper payments and increased taxpayer burden. The following hypothetical example
illustrates how this might occur:
An individual has two children and earned income. The individual has a tax return filing
requirement but does not file. The IRS sends the individual a letter informing them of
their potential eligibility to claim the EITC and encouraging them to file and claim the
credit on their tax return, which the individual does.
The IRS processes the individual’s return and issues the claimed refund. The IRS
subsequently selects the individual’s return for review. The IRS learns that the two
children live with the individual’s parents (the children’s grandparents). As such, the
individual is not eligible to claim the children for the EITC. The IRS denies the individual’s
claim and must now attempt to recover the improperly paid refund.
Encouraging individuals to claim a refundable credit only to later deny the claim once filed may
create confusion and be detrimental to the IRS’s efforts to help taxpayers understand their tax
responsibilities and meet their tax obligations. It could also negatively impact the public’s
perception of the IRS’s ability to accurately administer the tax law with integrity and fairness.

15
TIGTA, Report No. 2021-40-070, Addressing Complex and Inconsistent Earned Income Tax Credit and Additional
Child Tax Credit Rules May Reduce Unintentional Errors and Increase Participation (Sept. 2021).
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Appendix I
Detailed Objective, Scope, and Methodology
Our overall objective of this audit was to determine whether the IRS complied with the annual
improper payment reporting requirements for FY 2022. To accomplish our objective, we:
• Determined whether the IRS complied with the improper payment reporting
requirements for FY 2022.
• Evaluated the adequacy of the IRS’s FY 2022 risk assessments for IRS revenue program
funds identified by the Treasury Department.
• Reviewed the IRS’s methodology to calculate EITC, ACTC, AOTC, and PTC improper
payment rates for FY 2022. 1
• Followed up on select prior audit findings to ensure that the IRS has taken the
agreed-upon action to resolve the issues.

Performance of This Review
This review was performed with information obtained from the Office of the Chief Financial
Officer and the Office of Research, Applied Analytics, and Statistics located at the IRS
Headquarters in Washington, D.C., during the period December 2022 through April 2023. We
conducted this performance audit in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on
our audit objective. We believe that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objective.
Major contributors to the report were Diana M. Tengesdal, Acting Assistant Inspector
General for Audit (Returns Processing and Account Services); Deann L. Baiza, Director;
Curtis J. Kirschner, Audit Manager; Linda M. Valentine, Lead Auditor; Jason J. Robertazzi, Auditor;
Michael F. Shugrue, Auditor, and Johnathan D. Elder, Supervisory Information Technology
Specialist (Data Analytics) – Applied Research and Technology Data.

Validity and Reliability of Data From Computer-Based Systems
During this review, we relied on data received from the IRS’s Returns Transaction File databases
for Processing Years 2021 and 2022 that were available on TIGTA’s Data Center Warehouse. We
determined the data were sufficiently reliable for purposes of this report.

Internal Controls Methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance. We determined that the

1
TIGTA’s contracted statistician assisted with reviewing the IRS’s FY 2022 sample design and estimation plan.
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following internal controls were relevant to our audit objective: the controls in place to ensure
that the IRS met the annual improper payment reporting requirements established in the PIIA
and Executive Order 13520. We tested these controls by reviewing and analyzing relevant
documents and holding discussions with IRS management and the Treasury Department’s Risk
and Control Group.

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Appendix II
Programs Identified for Improper Payment Risk Assessments
The following IRS programs were identified by the Treasury Department for improper payment
risk assessments for FY 2022.

Type of Total Non-Federal
IRS Program
Assessment Disbursements

Earned Income Credit IP Estimate $60.8 billion

Additional Child Tax Credit IP Estimate $79 billion

American Opportunity Tax Credit IP Estimate $4 billion

Premium Tax Credit IP Estimate $68.3 billion

Refund Collection, Interest Qualitative $3 billion

Health Coverage Tax Credit Qualitative $22.9 million

Build America Bond Payments Qualitative $3 billion

Qualified Zone Academy Bonds Qualitative $54 million

Qualified School Construction Bonds Qualitative $796.9 million

New Clean Renewable Energy Bonds Qualitative $56.9 million

Qualified Energy Conservation Bonds Qualitative $43.2 million
Source: IRS Office of the Chief Financial Officer. IP = Improper Payment

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Appendix III
Improper Payment Laws Repealed by the
Payment Integrity Information Act of 2019
• Improper Payments Information Act of 2002, Pub. L No. 107-300, 116 Stat. 2350.
• Improper Payments Elimination and Recovery Act of 2010, Pub. L. No. 111-204,
124 Stat. 2224.
• Improper Payments Elimination and Recovery Improvement Act of 2012, Pub. L.
No. 112-248, 126 Stat. 2390.
• Fraud Reduction and Data Analytics Act of 2015, Pub. L. No. 114-186, 130 Stat. 546.

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Appendix IV
Prior Improper Payment Reports by the
Treasury Inspector General for Tax Administration

Issuance Report
Report Title
Date Number

Programs Susceptible to Improper Payments Are Not Adequately
May 2022 2022-40-037
Assessed and Reported

May 2021 2021-40-036 Improper Payment Rates for Refundable Tax Credits Remain High

Improper Payment Reporting Has Improved; However, There
April 2020 2020-40-025 Have Been No Significant Reductions to the Billions of Dollars of
Improper Payments
Some Refundable Credits Are Still Not Classified and Reported
May 2019 2019-40-039 Correctly as a High Risk for Improper Payment by the Internal
Revenue Service

The Internal Revenue Service Is Not in Compliance With Improper
April 2018 2018-40-032
Payment Requirements

Revised Refundable Credit Risk Assessments Still Do Not Provide
April 2017 2017-40-030
an Accurate Measure of the Risk of Improper Payments

Without Expanded Error Correction Authority, Billions of Dollars in
April 2016 2016-40-036 Identified Potentially Erroneous Earned Income Credit Claims Will
Continue to Go Unaddressed Each Year

Assessment of Internal Revenue Service Compliance With the
April 2015 2015-40-044
Improper Payment Reporting Requirements in Fiscal Year 2014

The Internal Revenue Service Fiscal Year 2013 Improper Payment
March 2014 2014-40-027 Reporting Continues to Not Comply With the Improper Payments
Elimination and Recovery Act
The Internal Revenue Service Was Not in Compliance With All
February 2013 2013-40-024 Requirements of the Improper Payments Elimination and
Recovery Act for Fiscal Year 2012
Source: www.tigta.gov/reports/list.

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Appendix V
Management’s Response to the Draft Report

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Appendix VI
Glossary of Terms

Term Definition
A credit for individuals who receive less than the full amount of the
Additional Child Tax Credit nonrefundable Child Tax Credit. The ACTC may result in a refund even if no
tax is owed.

Advance Premium A tax credit that is paid in advance to a taxpayer’s insurance company to
Tax Credit help cover the cost of premiums.

Presents the Treasury Department’s financial and performance information
Agency Financial Report
for the fiscal year, with comparative prior year data where appropriate.

A credit for qualified education expenses paid for an eligible student for
American Opportunity
the first four years of higher education. A partially refundable Federal tax
Tax Credit
credit used to help parents and college students offset the costs of college.

Data Center Warehouse A TIGTA repository of IRS data.

Earned Income Tax Credit A refundable tax credit for low-income to moderate-income workers.

Any yearly accounting period, regardless of its relationship to a calendar
Fiscal Year year. The Federal Government’s fiscal year begins on October 1 and ends
on September 30.

High-Priority Program Program identified as susceptible to significant improper payments.

Any payment that should not have been made or that was made in an
incorrect amount under statutory, contractual, administrative, or other
Improper Payment
legally applicable requirements (including both overpayments and
underpayments).

Improper Payment Rate Amount in improper payments divided by the amount in program outlays.

When the PTC exceeds the Advance PTC (PTC minus Advance PTC = Net
Net Premium Tax Credit PTC). The Net PTC reduces a taxpayer’s tax liability and, if it is more than
the tax liability, results in a refundable tax credit.

A payment to liquidate an obligation generally equal to cash
Outlay
disbursements (the measure of Government spending).

A payment in excess of what is due. When an overpayment occurs, the
Overpayment improper amount is the difference between the amount due and the
amount that was actually paid. Overpayments are monetary loss IPs.

Any disbursement or transfer of Federal funds to any non-Federal person,
non-Federal entity, or Federal employee that is made by a Federal agency,
Payment
contractor, grantee, or a governmental or other organization administering
a Federal program or activity.

Refundable tax credit that helps eligible individuals and families cover the
Premium Tax Credit premiums for their health insurance purchased through the Health
Insurance Marketplace.

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Term Definition
The calendar year in which the tax return or document is processed by
Processing Year
the IRS.

Activities or sets of activities recognized as programs by the public, the
Program OMB, or Congress as well as those that entail program management or
policy direction.

A technique used to quantify risk associated with IPs and Unknown
Payments. For example, a qualitative IP risk assessment methodology
Qualitative Risk prioritizes the identified IP and Unknown Payment risks using a predefined
Assessment rating scale. Risks will be scored based on their probability or likelihood of
occurring and the impact on IPs and Unknown Payments in the program
should they occur.

A risk assessment technique that focuses on measurable data such as
Quantitative Risk improper or unknown payment amount. For example, a quantitative IP risk
Assessment assessment will provide numerical IP amounts and assess the probability of
their occurrence. The assessment may be similar to the regular IP estimate.

An IRS database containing transcribed tax returns for individuals that
Returns Transaction File
includes most forms and schedules.

Annual IPs and Unknown Payments, i.e., the sum of monetary loss IPs,
non-monetary loss IPs, and Unknown Payments, in the program exceeding
Significant Improper
1) both 1.5 percent of program outlays and $10,000,000 of all program or
Payment
activity payments made during the fiscal year reported or 2) $100,000,000
(regardless of the IP percentage of total program outlays).

The estimated difference between the amount of tax that taxpayers should
Tax Gap
pay and the amount that is paid voluntarily and on time.

A 12-month accounting period for keeping records on income and
Tax Year expenses used as the basis for calculating the annual taxes due. For most
individual taxpayers, the tax year is synonymous with the calendar year.

A payment that is less than what is due. When an underpayment occurs,
the improper amount is the difference between the amount due and the
Underpayment
amount that was actually paid. An underpayment is a non-monetary
loss IP.

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Appendix VII
Abbreviations

ACTC Additional Child Tax Credit
AFR Agency Financial Report
AOTC American Opportunity Tax Credit
COVID-19 Coronavirus Disease 2019
CY Calendar Year
EITC Earned Income Tax Credit
FY Fiscal Year
IP Improper Payment
IRS Internal Revenue Service
NRP National Research Program
OMB Office of Management and Budget
PIIA Payment Integrity Information Act of 2019
PTC Premium Tax Credit
RRC Recovery Rebate Credit
TIGTA Treasury Inspector General for Tax Administration
TY Tax Year

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To report fraud, waste, or abuse,
call our toll-free hotline at:
(800) 366-4484

By Web:
www.tigta.gov

Or Write:
Treasury Inspector General for Tax Administration
P.O. Box 23291
Washington, D.C. 20026

Information you provide is confidential, and you may remain anonymous.

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