Treasury Inspector General for Tax Administration 2024-400-026 (Assessment of Fiscal Year 2023 Compliance With Improper Payment Reporting Requirements)

Summary

Final Audit Report 2024-400-026 of the Treasury Inspector General for Tax Administration, issued May 17, 2024, reviews whether the IRS complied with annual improper payment reporting requirements for Fiscal Year 2023. 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 describes IRS plans to reduce pre-refund audits focused on refundable tax credits while expanding outreach, and states that these initiatives may not make an immediate impact on improper payment rates. It also finds that the Department of the Treasury risk assessment template does not allow the IRS to provide an accurate assessment of improper payment risk. TIGTA did not make any recommendations.

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Full text

TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Assessment of Fiscal Year 2023 Compliance With
Improper Payment Reporting Requirements

May 17, 2024

Report Number: 2024-400-026

1
TIGTACommunications@tigta.treas.gov | www.tigta.gov
HIGHLIGHTS: Assessment of Fiscal Year 2023 Compliance
With Improper Payment Reporting Requirements
Final Audit Report issued on May 17, 2024 Report Number 2024-400-026

Why TIGTA Did This Audit What TIGTA Found
This audit was initiated because For FY 2023, 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 estimated the improper payment rates for the following
Payment Integrity Information Act
programs: Additional Child Tax Credit (ACTC), American Opportunity
of 2019. The objective of this
Tax Credit (AOTC), Earned Income Tax Credit (EITC) and Net Premium
review was to determine whether
Tax Credit (PTC).
the IRS complied with the annual
improper payment reporting
requirements for Fiscal
Year (FY) 2023.
Impact on Tax Administration
The Payment Integrity Information
Act of 2019 and the Office of
Management and Budget (OMB)
define an improper payment as
any payment that should not have
been made, was made in an In the FY 2023 Agency Financial Report, the IRS noted that part of its
incorrect amount, or was made to actions to mitigate the risk of improper payments included outreach
an ineligible recipient. The IRS to taxpayers and tax preparers in lieu of conducting additional
currently has identified four pre-refund audits. The IRS has implemented several different
programs that meet the OMB’s outreach initiatives intended to raise public awareness and
definition of a high-priority encourage eligible taxpayers to claim refundable tax credits.
program susceptible to improper Specifically, the IRS will reduce the number of pre-refund audits
payments. The OMB defines focused on refundable tax credits while also expanding outreach to
high-priority programs as help taxpayers claim the credits correctly at the time of filing.
programs with improper payments According to the IRS, focusing on helping taxpayers submit accurate
resulting in monetary losses that filings will increase payment accuracy while reducing administrative
exceed $100 million annually. burdens for both the IRS and the tax filer. In addition, the IRS also
intends to increase enforcement activities that focus on unscrupulous
preparers who contribute to the noncompliance in this area.
However, these initiatives may not make an immediate impact on the
improper payment rates.
Finally, this review also found that the Department of the Treasury
risk assessment template does not allow the IRS to provide an
accurate assessment of improper payment risk. While the results of
the qualitative risk assessments for the Advance Child Tax Credit and
Child and Dependent Care Tax Credit indicated that these credits
were not susceptible to improper payment risk, the IRS deemed them
“susceptible.” The IRS deemed these programs susceptible because
of the similarity of these programs with other programs that have
high error rates and deficiencies identified by external audit agencies,
such as TIGTA.
What TIGTA Recommended
TIGTA did not make any recommendations in this report.
U.S. DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20024

TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION

May 17, 2024

MEMORANDUM FOR: COMMISSIONER OF INTERNAL REVENUE

FROM: Matthew A. Weir
Acting Deputy Inspector General for Audit

SUBJECT: Final Audit Report – Assessment of Fiscal Year 2023 Compliance With
Improper Payment Reporting Requirements (Audit No.: 2024400001)

This report presents the results of our review to determine whether the Internal Revenue Service
complied with the annual improper payment reporting requirements for Fiscal Year 2023. This
review is part of our Fiscal Year 2024 Annual Audit Plan and addresses the major management
and performance challenge of Tax Fraud and Improper Payments.
Management’s complete response to the draft report is included as Appendix IV. If you have
any questions, please contact me or Diana Tengesdal, Assistant Inspector General for Audit
(Returns Processing and Account Services).
Assessment of Fiscal Year 2023 Compliance
With Improper Payment Reporting Requirements

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

Results of Review .......................................................................................................................Page 3
Assessment of Fiscal Year 2023 Compliance With
Improper Payment Reporting Requirements ............................................................Page 4
Despite Internal Revenue Service Efforts, Improper
Payment Rate Estimates Continue to Be High ..........................................................Page 5
The Treasury Department Risk Assessments Still Do Not
Accurately Reflect the Level of Risk for the IRS
Refundable Credit Programs ...........................................................................................Page 9

Appendices
Appendix I – Detailed Objective, Scope, and Methodology ................................Page 10
Appendix II – Programs Identified for Improper Payment Risk
Assessments ..........................................................................................................................Page 11
Appendix III – Improper Payment Laws Repealed by the Payment
Integrity Information Act of 2019 ..................................................................................Page 12
Appendix IV – Management’s Response to the Draft Report .............................Page.13
Appendix V – Glossary of Terms ....................................................................................Page.15
Appendix VI – Abbreviations ...........................................................................................Page.17
Assessment of Fiscal Year 2023 Compliance
With Improper Payment Reporting Requirements

Background
The Payment Integrity Information Act of 2019 (PIIA) and the Office of Management and Budget
(OMB) define 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 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, issued on
November 20, 2009, 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 Circular A-123 Appendix C, Requirements for Payment Integrity
Improvement , issued on March 5, 2021. Appendix C provides agencies and
Inspectors General with guidance on improper payment determinations and
reporting. Every year, each agency Inspector General must review its agency’s
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.

1
Pub. L. No. 116-117, 134 Stat. 113. Additionally, see Appendix V for a glossary of terms.
2
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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Assessment of Fiscal Year 2023 Compliance
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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 (hereafter
referred to as 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) 2023, the Treasury Department selected 15 program fund groups that required certification
and six 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 Treasury 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.

The Treasury Department and the IRS continue to request relief from improper payment
reporting requirements for refundable tax credit claims
In their Business Case to Eliminate Redundant Reporting of Refundable Tax Credits, dated
October 30, 2020, the Treasury Department and the IRS informed the OMB that the tax system is
primarily a collection system and not a payment program. Further, the business case states that
while the refundable portions of refundable tax credits are considered outlays and currently fall
under the scope of payments under the PIIA, the Treasury Department and the IRS do not

5
Appendix II provides the list of the six IRS programs identified by the Treasury Department for improper payment
risk assessments in FY 2023.
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believe that refundable tax credits should be considered improper payments under the PIIA
because they do not believe that the refundable tax credits meet the definition of payments in
the traditional sense. Instead, the Treasury Department believes the credits should be reported
only under the Tax Gap framework that comprehensively assesses the tax collection system. The
IRS noted in its business case that refundable tax credit overclaims are largely due to their
statutory design and the complexities taxpayers face when self-certifying eligibility and not due
to internal control weaknesses, financial management deficiencies, or reporting failures. In
addition, the IRS noted that Tax Gap estimates and other comprehensive compliance analyses
are more effective in helping the IRS identify noncompliance and allocate limited resources
effectively. In May 2023, we reported that the OMB continues to review the IRS’s business case,
provided to the OMB in October 2020. 6 As of March 26, 2024, IRS officials confirmed that there
have been no changes in the status of refundable credits reporting. The IRS continues to
support the business case and is working to find a better approach to reporting on these
programs.

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 2023, as shown in Figure 1, the IRS
reported the estimated dollar amount and percentage rate of improper payments associated
with four of its high-priority programs susceptible to improper payments: Additional Child Tax
Credit (ACTC); American Opportunity Tax Credit (AOTC), Earned Income Tax Credit (EITC) and
Net Premium Tax Credit (PTC).

Figure 1: FY 2023 Total Claims, Improper Payments, and
Improper Payment Rates 7

Improper Improper
Program Claims
Payments Payment Rate
(in billions)
(in billions)

ACTC $3.8 $0.5 14.5%

AOTC $5.2 $1.7 31.6%

Net PTC $3.7 $1.0 26.0%

EITC $65.4 $21.9 33.5%

Source: FY 2023 Treasury AFR.

6
TIGTA, Report No. 2023-40-032, Fiscal Year 2022 Improper Payment Reporting Requirements Were Largely Met;
However, Improper Payment Estimates Are Less Precise (May 2023).
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.
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Assessment of Fiscal Year 2023 Compliance
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Assessment of Fiscal Year 2023 Compliance With Improper Payment
Reporting Requirements
The IRS was largely compliant with the reporting requirements contained in the PIIA for FY 2023.
Although the IRS complied with 12 of 13 requirements, it still has not satisfied the PIIA goal of
reducing the overall improper payment rate for the ACTC, AOTC, EITC, 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 Treasury AFR, which the IRS did. 8
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 2023
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 payments in accompanying materials to the annual
financial statement.
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
accompanying materials to the annual financial statement.
Demonstrated improvements to payment integrity or to reach
PIIA
a tolerable improper payment and unknown payment rate.

8
TIGTA, Report No. 2021-40-036, Improper Payment Rates for Refundable Tax Credits Remain High (May 2021).
9
Unknown payments are payments made by a program where 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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Assessment of Fiscal Year 2023 Compliance
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Source of IRS
Improper Payment Requirement
Requirement Compliance

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 2023 for the
IRS’s four high-risk programs.

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. We previously reported that the Treasury Department expected to report on the Net PTC
in its quarterly scorecards for FY 2023. 10 We found that all required quarterly scorecards were
posted to www.paymentaccuracy.gov for FY 2023. 11

Despite Internal Revenue Service Efforts, Improper Payment Rate Estimates
Continue to Be High
The IRS has been unable to reduce improper payment rate estimates to less than 10 percent for
each of its high-risk programs, most notably the EITC. According to the Treasury AFR, the EITC
estimated error rates have ranged from 22.8 percent to 33.5 percent from FY 2006 through
FY 2023. This is despite the IRS’s efforts to reduce these rates. Figure 3 provides a comparison
of the improper payment rates from FY 2021 through FY 2023. 12

10
TIGTA, Report No. 2023-40-032, Fiscal Year 2022 Improper Payment Reporting Requirements Were Largely Met;
However, Improper Payment Estimates Are Less Precise (May 2023).
11
For FY 2023, the OMB waived the 1st quarter scorecards reporting for all agencies.
12
Beginning in FY 2022, the IRS changed its estimation of improper payments. Specifically, the IRS relied on a smaller
National Research Program sample size and changed the period for reporting on claims and improper payments. In
May 2023, we reported that this change to the sampling plan makes interpreting year-to-year changes in the IRS’s
reported improper payment estimates difficult.
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Assessment of Fiscal Year 2023 Compliance
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Figure 3: FY 2021 Through FY 2023 Improper Payment Rates 13

Source: Information obtained from www.paymentaccuracy.gov.

The IRS’s outreach initiatives may not have an immediate impact on reducing improper
payments
In the FY 2023 AFR, the IRS noted that part of its actions to mitigate the risk of improper
payments included outreach to taxpayers and tax preparers in lieu of conducting additional
pre-refund audits. The IRS has implemented several different outreach initiatives intended to
raise public awareness and encourage eligible taxpayers to claim refundable credits. Specifically,
the IRS will reduce the number of pre-refund audits focused on refundable credits while also
expanding outreach to help taxpayers claim the credits correctly at the time of filing. According
to the IRS, focusing on helping taxpayers submit accurate filings will increase payment accuracy
while reducing administrative burdens for both the IRS and the tax filer. In addition, the IRS also
intends to increase enforcement activities that focus on unscrupulous preparers who contribute
to the noncompliance in this area. However, these initiatives may not make an immediate
impact on the improper payment rates, if at all, due to the time it takes for taxpayers to file
returns and for the IRS to examine those returns. The following are details of the IRS’s
refundable credits strategies targeting both taxpayers and tax practitioners to help increase
payment accuracy.

The IRS implements strategies that educate taxpayers and preparers by proactively sharing
information about the eligibility requirements for refundable credits and identifying the most
common errors. Some of their outreach and education strategies include the following:

13
The IRS did not start calculating the improper payment estimates for Net PTC until FY 2022.
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 Nationwide Tax Forums and Refundable Credits Summit. These annual events are
instrumental in helping the IRS achieve its strategic goals of improving taxpayer service
and reducing improper payments. The Nationwide Tax Forums provide tax professionals
with the latest information they need to prepare accurate tax returns and reduce
improper payments. The IRS noted that historically 10,000 to 15,000 external
participants attend the Nationwide Tax Forums and 40 to 45 external participants from
approximately 29 organizations and agencies attend the annual Refundable Credit
Summit.
 Technical Training and Tax Preparer Toolkits. The IRS provides training modules and
free resources on IRS.gov to assist tax return preparers with due diligence requirements
and information on refundable credits.
 Webinars and Tax Preparer Alerts. The IRS hosts virtual discussions and issues alerts
on refundable credits and eligibility requirements.
 EITC Central and EITC Awareness Day. The IRS maintains a website
(https://www.eitc.irs.gov/) dedicated to providing resources to taxpayers and tax return
preparers on eligibility for the EITC. The IRS also participates in social media awareness
campaigns and provides images, sample messages, and targeted audience suggestions
for its partners to post on social media to help spread awareness. Additionally, in
January 2024, the IRS and partners highlighted the importance of the EITC during its
“EITC Awareness Day.”

The IRS has indicated that refundable credit noncompliance among tax return preparers has
been a growing concern for several years. The IRS has shifted its focus from examining
potentially noncompliant taxpayers to addressing noncompliant return preparers who file tax
returns claiming the ACTC, AOTC, and EITC. 14 Some of these efforts include:
 Focused treatment for return preparers. The IRS plans to focus their efforts on up to
23,865 potentially noncompliant tax return preparers during FY 2024, which represents
an increase of almost 20 percent from the FY 2023 plan. The IRS intends to conduct
focused correspondence examinations, outbound calls, and post-refund client audits of
preparers with patterns of noncompliance. Tax return preparers are assigned treatments
based on the level of risk, which is derived from a combination of return volume,
egregiousness, treatment history, and degree of improvement. In addition, the IRS can
issue letters to alert return preparers who prepared highly questionable refundable
credits or to alert them that some of their clients who claimed the EITC will be audited.
 “Knock and Talk” visits. “Knock and Talk” visits are optional educational visits,
conducted in-person by revenue agents or special agents with the IRS’s Criminal

14
TIGTA currently has a separate audit, Changes to the Earned Income Taxpayer Credit Audit Examination Strategy
(Audit No. 2024308026), to review the Wage and Investment Division’s portion of the IRS’s examination plan and the
changes to the EITC case selection processes to ensure a fair and equitable examination selection process and to
assess compliance with the Secretary of Treasury’s directive to the IRS.
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Investigation division. These visits are intended to educate tax return preparers on their
due diligence requirements and any changes to tax law. The IRS plans 426 “Knock and
Talk” visits for FY 2024.
 “Ghost preparers.” The IRS is using data analytics to identify “ghost preparers” and
reach out to taxpayers to help it identify who these preparers are that did not sign the
return. In February 2024, the IRS issued approximately 1,000 letters to taxpayers trying
to obtain information on these “ghost preparers.”

The IRS is issuing notices and letters to taxpayers to both encourage potentially eligible
taxpayers to take a credit and inform taxpayers who were not selected for audit of their
potential risk of noncompliance. Examples of the IRS issuing letters and notices to taxpayers are
as follows:
 Letter 6589, EITC Compliance Refresh-Letter 1 (Soft) , was issued to approximately
55,000 taxpayers in January 2024. This letter informs taxpayers, not selected for audit,
that they may not be entitled to some or all of the EITC claimed on their tax return. The
letter instructs taxpayers to review their return to confirm eligibility and if the credit was
claimed in error, file an amended return to remove or recalculate the credit.
 Letter 6591, Advance Child Tax Credit Outreach Letter for TY 21 filers yet to file
(English & Spanish) , was sent to 1,824,071 taxpayers who had not yet filed a Tax
Year 2021 return as of November 1, 2023, but to whom IRS records indicate Advance
Child Tax Credit payments were issued, to inform them of the need to file a Tax
Year 2021 return to claim any remaining amount of child tax credit to which they may be
entitled. This letter was issued in response to a prior TIGTA review that identified
4.1 million taxpayers who did not file a Tax Year 2021 return but may have been eligible
to claim the credit. 15
 Letter 6571, ARPA Section 9663 Notice, was issued to 10,069 taxpayers advising them
that they may be eligible to receive a refund of additional PTC or excess Advance PTC
that they repaid for Tax Year 2021. This letter was issued in response to a TIGTA
recommendation to send letters to 10,069 taxpayers. 16
 Notices. Based on information available at filing, taxpayers who appear to qualify for
the EITC or ACTC, but do not claim the credits will receive one of the following notices:
CP 08, You May Qualify for Child Tax Credit (CTC); CP 09, Earned Income Credit - You
May Be Entitled to EIC (issued to taxpayers with at least one qualifying child); or CP 27,
EIC Potential for T/P Without Qualifying Children. The IRS indicated that the historical
response rate to these notices is around 20 percent.

15
TIGTA, Report No. 2023-47-035, American Rescue Plan Act: Review of the Reconciliation of the Child Tax Credit
(June 2023).
16
TIGTA, Report No. 2023-47-036, American Rescue Plan Act: Continued Review of Premium Tax Credit Provisions
(June 2023).

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The Treasury Department Risk Assessments Still Do Not Accurately Reflect
the Level of Risk for the IRS Refundable Credit Programs
Our review of the risk assessment template found that it does not allow the IRS to provide an
accurate assessment of improper payment risk. The risk assessments are created and
distributed by the Treasury Department and were updated in FY 2023 based on trends the
Treasury Department noticed throughout all the bureaus. Thus, the questions on the risk
assessment are for general applicability and not intended to cover the unique nature of the IRS
refundable credits program.
Although the results of the completed qualitative risk assessments for the Advance Child Tax
Credit and Child and Dependent Care Tax Credit indicated that these credits were not
susceptible to improper payment risk, the IRS revised the risk assessment and deemed them
“susceptible.” The IRS deemed these programs susceptible because of the similarity of these
programs with other programs that have high error rates and deficiencies identified by external
audit agencies, such as TIGTA. Figure 4 outlines some of the reasons the IRS used to support its
decision to change the overall risk rating from “not-susceptible” to “susceptible” in FY 2023.

Figure 4: Results From the FY 2023 Qualitative Risk Assessment

Source: Excerpt from the FY 2023 Qualitative Risk Assessment.

We previously reported similar concerns with the accuracy of the assessment of improper
payment risk. 17 For example, the annual risk assessments underestimated the risk of improper
payments for both ACTC and AOTC despite the IRS’s own compliance data showing differently.
Because the risk assessment template does not allow for an accurate assessment of improper
payment risk, this could become problematic for those programs that are not regularly
evaluated by external audit agencies and may have a higher risk than the template identifies.
We met with the IRS and discussed the effectiveness of a risk assessment that must be changed
to accommodate IRS programs. Representatives from the IRS Office of the Chief Financial
Officer noted that they did not participate in updating the new risk assessment templates and
that it would be difficult to modify the template to reflect the unique nature of the refundable
tax credits and still have a generally applicable template. The Treasury Department is aware of
this unique nature and has been understanding of the justifications the IRS may have to make
when completing the template.

17
TIGTA, Report No. 2017-40-030, Revised Refundable Credit Risk Assessments Still Do Not Provide an Accurate
Measure of the Risk of Improper Payments (Apr. 2017) and TIGTA, Report No. 2016-40-036, Without Expanded Error
Correction Authority, Billions of Dollars in Identified Potentially Erroneous Earned Income Credit Claims Will Continue
to Go Unaddressed Each Year (Apr. 2016).
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Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this audit was to determine whether the IRS complied with the annual
improper payment reporting requirements for FY 2023. To accomplish this objective, we:
• Obtained and reviewed the information that the IRS provided to the Treasury
Department for inclusion in the AFR to determine if the information provided satisfied
the requirements.
• Evaluated the adequacy of the IRS’s FY 2023 risk assessments for the IRS revenue
program funds identified by the Treasury Department.
• Reviewed the IRS’s methodology to calculate the EITC, ACTC, AOTC, and Net PTC
improper payment rates for FY 2023.
• Followed up on select prior audit findings or recommendations to determine their status.

Performance of This Review
This review was performed with information obtained from the Office of the Chief Financial
Officer and the Office of Return Integrity located at the IRS Headquarters in Washington, D.C.,
during the period November 2023 through March 2024. 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, Assistant Inspector General for Audit
(Returns Processing and Account Services); Linna K. Hung, Director; Nina A. Hill, Audit Manager;
Erica Law, Lead Auditor; Carina Schusterman, Auditor; and Laura Christoffersen, Applied
Research and Technology Division.

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
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.

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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 2023.

Type of Total Non-Federal
IRS Program
Assessment Disbursements

Earned Income Tax Credit IP Estimate $64.3 billion

Additional Child Tax Credit IP Estimate $131.4 billion**

American Opportunity Tax Credit IP Estimate $3.8 billion

Premium Tax Credit IP Estimate $85.1 billion

Child and Dependent Care Tax Credit Qualitative $7.4 billion

Advance Child Tax Credit Qualitative **
** Additional Child Tax Credit and Advance Child Tax Credit are reported under the same fund symbol
and are part of the same disbursement.
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 Payment Law Description

Enacted on November 26, 2002, the law requires Federal agencies,
Improper Payments including the IRS, to estimate the dollar amount of improper payments
Information Act of 2002 1 and report to Congress annually on the causes of and the steps taken to
reduce improper payments.

Enacted July 22, 2010, the Act redefined what “significant improper
Improper Payments payments” are; strengthened agency reporting requirements and defined
Elimination and Recovery significant as exceeding either 1.5 percent of program outlays and
Act of 2010 2 $10 million of all program activities or $100 million.

Enacted on January 10, 2013, the Act codifies many parts of Executive
Improper Payments Order 13520 and requires the OMB Director to identify a list of
Elimination and Recovery high-priority Federal programs and agencies to develop additional or
Improvement Act of supplemental measures for tracking progress in reducing improper
2012 3 payments in these programs.

Enacted on June 30, 2016, the Act requires the OMB to establish guidelines
Fraud Reduction and Data to identify and assess fraud risks and design and implement control
Analytics Act of 2015 4 activities in order to prevent, detect, and respond to fraud, including
improper payments.

Source: TIGTA review of legislation related to improper payments.

1
Pub. L. No. 107-300, 116 Stat. 2350.
2
Pub. L. No. 111-204, 124 Stat. 2224.
3
Pub. L. No. 112-248, 126 Stat. 2390.
4
Pub. L. No. 114-186, 130 Stat. 546.
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Appendix IV
Management’s Response to the Draft Report

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Appendix V
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.

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
improper amount is the difference between the amount due and the
Overpayment
amount that was actually paid. Overpayments are monetary loss improper
payments.

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
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 improper payments and
unknown payments. For example, a qualitative improper payment risk
assessment methodology prioritizes the identified improper payment and
Qualitative Risk
unknown payment risks using a predefined rating scale. Risks will be
Assessment
scored based on their probability or likelihood of occurring and the impact
on improper payments and unknown payments in the program should they
occur.

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

Annual improper payments and unknown payments, i.e., the sum of
monetary loss improper payments, non-monetary loss improper payments,
Significant Improper and unknown payments, in the program exceeding 1) both 1.5 percent of
Payment program outlays and $10 million of all program or activity payments made
during the fiscal year reported or 2) $100 million (regardless of the
improper payment 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 improper payment.

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Appendix VI
Abbreviations

ACTC Additional Child Tax Credit
AFR Agency Financial Report
AOTC American Opportunity Tax Credit
EITC Earned Income Tax Credit
FY Fiscal Year
IRS Internal Revenue Service
OMB Office of Management and Budget
PIIA Payment Integrity Information Act of 2019
PTC Premium Tax Credit
TIGTA Treasury Inspector General for Tax Administration

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To report fraud, waste, or abuse,
contact our hotline on the web at www.tigta.gov or via e-mail at
oi.govreports@tigta.treas.gov.

To make suggestions to improve IRS policies, processes, or systems
affecting taxpayers, contact us at www.tigta.gov/form/suggestions.

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

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