General government: Refundable Tax Credits (2017-24)
The Internal Revenue Service could potentially realize hundreds of millions in cost savings by improving the administration of three large refundable tax credits.
Year Identified: 2017
Area Number: 24
Area Type: Cost Savings & Revenue Enhancement
4 Total Action(s)
Building on current efforts, the Commissioner of Internal Revenue should develop a comprehensive operational strategy that includes all the refundable tax credits for which the Refundable Credits Policy and Program Management is responsible. The strategy could include use of error rates and amounts, evaluation and guidance on the proper use of indicators like no-change and default rates, and guidance on how to weigh trade-offs between equity and return on investment in resource allocations.
Building on current efforts, the Commissioner of Internal Revenue should develop a comprehensive operational strategy that includes all the refundable tax credits for which the Refundable Credits Policy and Program Management is responsible. The strategy could include use of error rates and amounts, evaluation and guidance on the proper use of indicators like no-change and default rates, and guidance on how to weigh trade-offs between equity and return on investment in resource allocations.
In April 2018, the Internal Revenue Service (IRS) completed a comprehensive refundable tax credit compliance strategy, as GAO recommended in May 2016. The strategy primarily focuses on three large refundable tax credits for individual taxpayers—the Earned Income Tax Credit, the Additional Child Tax Credit, and the American Opportunity Tax Credit. According to IRS, in 2016, these three credits had a combined outlay of almost $85 billion, and about 95% of all refundable tax credits. The new strategy evaluates the effect that various compliance treatments—such as taxpayer education and outreach campaigns, interventions focusing on paid preparers, and exams—have on different outcomes—such as taxpayer burden, return on investment, and taxpayer behavior, among others. With that data, IRS developed a tool, the Exam Planning Scenario Tool, to help with exam planning. According to IRS, although exams are only a piece of the puzzle, the exam planning tool has made its planning process more efficient, although no savings estimate is currently available. For example, IRS reported that its previous process was manually intensive and the exam planning tool provides greater automation. It also allows officials to make adjustments and review proposed outcomes prior to settling on a final work plan each year. This new comprehensive approach has the potential to help IRS determine whether its current allocation of resources is optimal, and if not, what adjustments are needed.
As the Refundable Credits Policy and Program Management begins efforts to track the number of erroneous returns claiming the Additional Child Tax Credit or the American Opportunity Tax Credit identified through pre-refund enforcement activities, such as screening filters and use of math error authority, the Commissioner of Internal Revenue should develop and implement a plan to collect and analyze these data that includes such characteristics as identifying timing goals, resource requirements, and the appropriate methodologies for analyzing and applying the data to compliance issues.
As the Refundable Credits Policy and Program Management begins efforts to track the number of erroneous returns claiming the Additional Child Tax Credit or the American Opportunity Tax Credit identified through pre-refund enforcement activities, such as screening filters and use of math error authority, the Commissioner of Internal Revenue should develop and implement a plan to collect and analyze these data that includes such characteristics as identifying timing goals, resource requirements, and the appropriate methodologies for analyzing and applying the data to compliance issues.
In April 2018, the Internal Revenue Service (IRS) completed a comprehensive refundable tax credit compliance strategy, as GAO recommended in May 2016. The strategy primarily focuses on three large refundable tax credits for individual taxpayers—the Earned Income Tax Credit, the Additional Child Tax Credit, the American Opportunity Tax Credit. According to IRS, in 2016, these three credits had a combined outlay of almost $85 billion and about 95% of all refundable tax credits. The new strategy evaluates the effect that various compliance treatments—such as taxpayer education and outreach campaigns, interventions focusing on paid preparers, and exams—have on different outcomes—such as taxpayer burden, return on investment, and taxpayer behavior, among others. With that data, IRS developed a tool, the Exam Planning Scenario Tool, to help with exam planning. According to IRS, although exams are only a piece of the puzzle, the exam planning tool has made its planning process more efficient, although no savings estimate is currently available. For example, IRS reported that their previous process was manually intensive and the exam planning tool provides greater automation. It also allows officials to make adjustments and review proposed outcomes prior to settling on a final work plan each year. This information should help IRS deepen its understanding of common errors made by taxpayers claiming these credits; IRS can use these insights to develop strategies to educate taxpayers.
The Commissioner of Internal Revenue should assess whether the data received from the Department of Education's Postsecondary Education Participants System (PEPS) database(1) are sufficiently complete and accurate to reliably correct tax returns at filing and (2) provide additional information that could be used to identify returns for examination; if warranted by this research, IRS should use this information to seek legislative authority to correct tax returns at filing based on PEPS data.
The Commissioner of Internal Revenue should assess whether the data received from the Department of Education's Postsecondary Education Participants System (PEPS) database(1) are sufficiently complete and accurate to reliably correct tax returns at filing and (2) provide additional information that could be used to identify returns for examination; if warranted by this research, IRS should use this information to seek legislative authority to correct tax returns at filing based on PEPS data.
As of September 2017, the Internal Revenue Service (IRS) completed its assessment of the usefulness of data received from the PEPS database, as GAO recommended in May 2016.IRS determined that it is not a sufficiently complete database to confirm American Opportunity Tax Credit (AOTC) eligibility during return processing or post-processing. While this assessment of the PEPS database addressed our recommendation, IRS took additional steps to assist future compliance efforts by developing a table of schools and related employment identification numbers (EIN). IRS tested this table to determine if it could be used to validate EINs on tax year 2016 Forms 8863, Education Credits (AOTC and Lifetime Learning Credits). IRS reported that the test results, while promising, showed that 1.4 million or 17 percent of the returns with AOTC did not contain an EIN. As tax year 2016 was the first year an EIN was required on Form 8863, IRS expects a higher percentage of AOTC claims containing an EIN when it tests the EIN table again for tax year 2017. Depending on the results from the second year of the test, IRS said it will consider seeking math error authority to use the 3-year EIN table to reconcile EINs reported on Form 8863 during return processing.
The Commissioner of Internal Revenue should take necessary steps to ensure the reliability of collections data and periodically review those data to (1) compute a collections rate for post- refund enforcement activities and (2) determine what additional analyses would provide useful information about compliance results and costs of post-refund audits and document-matching reviews.
The Commissioner of Internal Revenue should take necessary steps to ensure the reliability of collections data and periodically review those data to (1) compute a collections rate for post- refund enforcement activities and (2) determine what additional analyses would provide useful information about compliance results and costs of post-refund audits and document-matching reviews.
No executive action taken as of December 2021. IRS disagreed with GAO's May 2016 recommendation. IRS raised concerns about the cost of studying collections data for post-refund enforcement activities. GAO recognizes that gathering collections data has costs and the data have limitations, notably that not all recommended taxes are collected. However, use of these data--once IRS is able to verify their reliability--could better inform resource allocation decisions and improve the overall efficiency of enforcement efforts.
By not taking necessary steps to ensure the reliability of these data and linking them to tax assessments to calculate a collections rate, IRS lacks critical information. Periodic reviews of collections data and analyses could help IRS officials more efficiently allocate limited enforcement resources by providing a more complete picture about compliance results and costs.
Related Reports & Links
