The nation’s largest cash-assistance program for the working poor has doubled in size since the 1990s and is plagued with an overpayment rate of up to 25 percent, one of the largest error rates of all federal programs, a Dayton Daily News analysis has found.
This tax season, the Earned Income Tax Credit program will give cash payouts of up to $5,891 for qualifying families.
In 2012, more than 950,000 filers in Ohio received an average of $2,225, which put the program’s price tag in the state at more than $2.1 billion. The total cost nationwide was more than $60 billion.
The cost of the program has more than doubled since 1997 with support from both Republican and Democrat administrations. The percentage of Ohioans claiming the credit has grown from 13 percent to 18 percent.
The Daily News compared data from the IRS and the nonpartisan Tax Policy Center to welfare and food stamp payout data obtained from the Ohio Department of Job and Family Services. The newspaper found that the growth of the EITC was outpaced by food stamps, which cost nearly $3 billion last year. But cash assistance from welfare was trimmed to $335.9 million last year in Ohio due to recent reforms.
With growth from the EITC comes increased concerns of misspending. Federal audits estimate up to $13.6 billion was overpaid in EITC refunds in 2012. That is an overpayment rate of up to 25 percent – far exceeding the food stamp overpayment rate estimated at 3 percent.
“That kind of growth is concerning, but more concerning than the growth of the program is the state … of the population that’s increasing its use of the program,” said Jason Seligman, assistant professor with The Ohio State University’s John Glenn School of Public Affairs.
More than 80 percent of the refunds in Ohio went to households making less than $25,000 a year. This is desperately needed money to pay for food, clothing and shelter, according to Barbara Sykes, president and CEO of Ohio United Way.
“Every individual that is applying for the EITC has or had a job sometime in that year in order to file,” Sykes said. “They’re not just sitting at home waiting, they’re trying to do the best they can and this says we understand that, we recognize that and we’re trying to assist you in taking care of your family and yourself.
“It’s not a handout, it’s a helping hand,” she said.
As for the amount of overpayments in the program, Seligman said, “It seems like a solvable problem.”
But with sequestration this year will come fewer audits, IRS officials have said, meaning many overpayments likely will go undetected.
Area preparers nabbed for fraud
Experts and audits say the majority of the overpayments likely are accidental due largely to the complexity of the tax system. But there have been several cases in southwest Ohio of tax preparers accused of inflating incomes for clients to fraudulently claim EITC refunds.
Three Cincinnati-area tax preparers were recently charged with costing the IRS more than $500,000 combined.
Last week, Latrina Williams was ordered to repay $152,124 and placed on five years probation, including 21 months of house arrest, for EITC fraud.
Williams prepared income tax returns during the 2006 through 2009 tax years, claiming her clients had income from child care businesses when in fact they had little or no income. This allowed Williams to fraudulently get large EITC refunds for her clients, which she split with them.
Robyn Jackson pleaded guilty last week to tax fraud charges that she – along with Hennaysha Candler, who pleaded guilty in January – filed at least 42 claims including faked income for tax years 2009 and 2010 and split the more than $400,000 in refunds.
Both face up to 10 years in prison and a $250,000 fine.
The Dayton-based tax preparation franchise company Instant Tax Service is going to trial in May to fight the federal government’s attempt to shut it down for myriad alleged misdeeds, including looking the other way as franchisees inflated clients’ incomes to secure fraudulent EITC refunds.
ITS claims to be the nation’s fourth largest tax preparation company with hundreds of locations in 34 states. The U.S. Attorney’s Office filed injunctions against the company in five states. The government claims company owner Fesum Ogbazion of Dayton “knew of illegal activity within its franchises but took no meaningful steps to stop it.”
“Franchisees of Instant Tax Service were not under the control of defendants, and defendants are not responsible for any wrongful conduct, if any, committed by such franchisees,” wrote Ogbazion’s attorneys in a legal filing responding to the government’s claims.
Complex tax code blamed
The complexity of the tax code is more of a driver of the EITC’s high error rate than intentional fraud, federal studies have found. Both halves of a divorced couple, for example, may think they’re entitled to the tax credit, perhaps because the non-custodial parent pays child support.
Another problem that drives overpayment is that nearly 70 percent of EITC returns are filed by commercial tax preparers, according to a recent report from the Center on Budget and Policy Priorities.
“The IRS believes most EITC errors occur on commercially prepared returns,” the CBPP report says. “Those who are unscrupulous may see an opportunity for larger fees if they can inflate the tax refund that the filer receives.”
The problem is magnified by statutory requirements that the IRS process tax returns and pay refunds within 45 days of receipt of the return or the tax return due date.
“Unlike social benefit programs, EITC is claimed voluntarily through the filing of a tax return, without upfront eligibility determinations through a caseworker,” said a prepared statement from the IRS in response to questions from this newspaper.
“One of the continuing challenges the IRS faces in administering the credit is the credit’s complexity,” the statement said. “The root causes for improper payments are a combination of intentional and inadvertent errors by both taxpayers and return preparers in income reporting, determination of a qualifying child and in identifying a correct filing status.”
IRS cracking down
When asked what could be done about the error rate, IRS officials pointed to increased training and tracking of paid preparers. This includes a checklist created in 2011 for tax preparers to make sure they were following “due diligence” in helping people apply for the EITC and imposing a $500 penalty for each time preparers didn’t comply.
Individuals who have applications for EITC rejected due to disregard for the rules can be barred from claiming the credit for two years. If the error was due to fraud, this is increased to 10 years.
The IRS also is comparing more EITC claims with databases for child support, food stamps and welfare.
Rep. Steve Chabot, R-Cincinnati, whose district now includes western Warren County, called for more exensive reforms.
“We need a simpler, fairer, flatter tax code that allows hardworking families to keep more of the money they earn,” he said. “It is also imperative that the IRS develop a comprehensive plan that reduces improper payments and complies with federal law.”
But in addition to facing resource limitations due to sequestration, the IRS has resisted shifting more resources into enforcing EITC rules because other areas of the tax code amount to more losses to the Treasury, the CBPP report notes.
The most recent study of unpaid taxes was released last year and found a total of $385 billion went unpaid in 2006. The error rate for collection of taxes from farm income, rents, royalties and other self-reported income is estimated at 56 percent — costing the Treasury roughly $120 billion in 2006. Under-reported corporate income tax cost $67 billion.
Growth fueled by GOP and Democrats
The EITC program has enjoyed praise from both sides of the political spectrum. It was created under Republican Gerald Ford and expanded under Ronald Reagan. Since 1997, the percentage of Ohioans claiming the tax credit grew by nearly 2 percent in the two years after the program was expanded under the Bush tax cuts in 2001, and went up another 2 percent after it was expanded by the Obama stimulus in 2009.
“People think it’s generally good at encouraging people to work because it gives you money for your earnings,” said Elaine Maag, senior research associate with the Tax Policy Center in Washington. “EITC has expanded many times over the period you’re looking at, and each time the credit expands more people are brought in.”
Democrats like the program because it raises more families above the poverty line than any other federal program. Republicans like it because it encourages work, as you must have an income to qualify.
“It is doing a lot to bring people into the labor force,” said Maag. “The government is also getting a lot of unproductive people turned into productive workers. That can save money on the welfare side of the budget.”
The effect of the recession on the cost of the program — and what the slow recovery will mean for its future — are unclear, experts say. People on unemployment don’t qualify for the credit, so the long-term jobless wouldn’t cost a dime. But people re-entering the workforce or who are underemployed may qualify.
But the EITC serves as a valuable safety net for people impacted by the recession, said Sykes of Ohio United Way.
“The growth (of the program) means it’s been successful, but it also means we have a lot of individuals that are working every day but are being underpaid and do not have adequate resources to pay for their families,” she said.
This newspaper reviewed federal audits and analyzed data from the Internal Revenue Service and the Tax Policy Center in order to gather information about the Earned Income Tax Credit. We also talked to experts and lawmakers about what can be done to improve the program. We will continue to examine important issues that affect all taxpayers.