TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION 

Existing Compliance Processes Will 

Not Reduce the Billions of Dollars in 

Improper Earned Income Tax Credit and 

Additional Child Tax Credit Payments 

September 29, 2014 

Reference Number: 2014-40-093 

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process 

and information determined to be restricted from public release has been redacted from this document. 

Redaction Legend: 

2 = Risk Circumvention of Agency Regulation or Statute 

Phone Number / 202-622-6500 

E-mail Address / TIGTACommunications@tigta.treas.gov

Website / http://www.treasury.gov/tigta
HIGHLIGHTS

EXISTING COMPLIANCE PROCESSES potential ACTC improper payment rate for 

WILL NOT REDUCE THE BILLIONS OF Fiscal Year 2013 is between 25.2 percent and 

DOLLARS IN IMPROPER EARNED 30.5 percent, with potential ACTC improper 

INCOME TAX CREDIT AND ADDITIONAL payments totaling between $5.9 billion and 

$7.1 billion. In addition, IRS enforcement data CHILD TAX CREDIT PAYMENTS show the root causes of improper ACTC 

Highlights payments are similar to those of the EITC. 

Significant changes in IRS compliance 

processes would be necessary to make any 

Final Report issued on significant reduction in improper payments. 

September 29, 2014 Expanded authority to make corrections to tax 

returns when data obtained from the Department 

Highlights of Reference Number: 2014-40-093 of Health and Human Services indicate the 

to the Internal Revenue Service Commissioner taxpayer’s refundable credit claims are not valid 

for the Wage and Investment Division. would help reduce improper payments. TIGTA 

estimates such authority could have potentially 

IMPACT ON TAXPAYERS allowed the IRS to prevent more than 

$1.7 billion in questionable EITC payments in The Earned Income Tax Credit (EITC) and Tax Year 2012. Additional Child Tax Credit (ACTC) are 

refundable credits designed to help low-income WHAT TIGTA RECOMMENDED 

individuals reduce their tax burden. The IRS 

estimated that it paid $63 billion in refundable TIGTA recommended that the IRS ensure that 

EITCs and $26.6 billion in refundable ACTCs for the results of the ACTC Improper Payment Risk 

Tax Year 2012. The IRS also estimated that Assessment accurately reflect the high risk 

24 percent of all EITC payments made in Fiscal associated with ACTC payments, identify the 

Year 2013, or $14.5 billion, were paid in error. root causes of the improper ACTC payments, 

and establish a plan to reduce erroneous 

WHY TIGTA DID THE AUDIT payments. Furthermore, if correctable error 

authority is granted, the IRS should contract with This audit was initiated because the IRS is the Department of Health and Human Services required to identify and take actions to address to obtain the complete National Directory of the root causes of improper payments in Federal New Hires database. programs identified as being at high risk for 

improper payments. The only IRS program In addition, the IRS should work with the 

identified as a high risk is the EITC. The overall Assistant Secretary of the Treasury for Tax 

objective of this review was to assess the IRS’s Policy to consider a legislative proposal to obtain 

efforts to identify and address the root causes of expanded National Directory of New Hires 

erroneous EITC and ACTC payments. database authority to systemically verify claims 

for other income-based refundable credits WHAT TIGTA FOUND (e.g., the ACTC). 

Processes have been developed to identify The IRS agreed with our recommendation to improper EITC payments and their root causes. pursue expanded National Directory of New Hire However, the IRS has not developed processes authority. The IRS did not agree with our other to quantify or identify the root causes of recommendations. TIGTA’s concerns with the improper ACTC payments. IRS’s response to the recommendations are 

The IRS has continually rated the risk of noted in the report. 

improper ACTC payments as low. However, 

TIGTA’s assessment of the potential for ACTC 

improper payments indicates the ACTC 

improper payment rate is similar to that of the 

EITC. Using IRS data, TIGTA estimates the 
DEPARTMENT OF THE TREASURY 

WASHINGTON, D.C. 20220

TREASURY INSPECTOR GENERAL 

FOR TAX ADMINISTRATION 

September 29, 2014 

MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION 

FROM: Michael E. McKenney 

Deputy Inspector General for Audit 

SUBJECT: Final Audit Report – Existing Compliance Processes Will Not Reduce 

the Billions of Dollars in Improper Earned Income Tax Credit and 

Additional Child Tax Credit Payments (Audit # 201340031) 

This report presents the results of our review to assess the Internal Revenue Service’s efforts to 

identify and address the root causes of erroneous Earned Income Tax Credit and Additional 

Child Tax Credit payments. This audit is included in our Fiscal Year 2014 Annual Audit Plan 

and addresses the major management challenge of Fraudulent Claims and Improper Payments. 

Management’s complete response to the draft report is included in Appendix IX. 

Copies of this report are also being sent to the Internal Revenue Service managers affected by the 

report recommendations. Please contact me if you have questions or Russell Martin, Acting 

Assistant Inspector General for Audit (Returns Processing and Account Services). 
Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

Table of Contents 

Background .......................................................................................................... Page 1 

Results of Review ............................................................................................... Page 6 

Processes Have Been Developed to Identify Root Causes 

of Improper Earned Income Tax Credit Payments ....................................... Page 6 

Annual Risk Assessments Do Not Accurately Reflect 

the Risk Associated With Additional Child Tax Credit 

Improper Payments ....................................................................................... Page 8 

Recommendation 1: ........................................................ Page 12 

Data Show Root Causes of Additional Child Tax Credit 

Improper Payments Are Similar to Those of the Earned 

Income Tax Credit ........................................................................................ Page 13

Recommendation 2: ........................................................ Page 14 

New Compliance Processes Are Needed to Make Any 

Significant Reduction in Improper Payments ............................................... Page 15 

National Directory of New Hires Wage and Employment 

Data Along With Correctable Error Authority Could 

Significantly Reduce Improper Payments .................................................... Page 17 

Recommendation 3: ........................................................ Page 21 

Recommendation 4: ........................................................ Page 22 

Appendices 

Appendix I – Detailed Objective, Scope, and Methodology ........................ Page 23 

Appendix II – Major Contributors to This Report ........................................ Page 27 

Appendix III – Report Distribution List ....................................................... Page 28 

Appendix IV – Outcome Measure ................................................................ Page 29 

Appendix V – Earned Income Tax Credit Eligibility Rules ......................... Page 31 
Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

Appendix VI – Qualifying Child Criteria for the Child Tax Credit 

or the Additional Child Tax Credit ............................................................... Page 33 

Appendix VII – Efforts to Address the Root Causes of Earned Income 

Tax Credit Improper Payments ..................................................................... Page 34 

Appendix VIII – Earned Income Tax Credit Tax Return Preparer 

Strategy ......................................................................................................... Page 36 

Appendix IX – Management’s Response to the Draft Report ...................... Page 37 

 
Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

Abbreviations 

ACTC Additional Child Tax Credit 

CTC Child Tax Credit 

DDV Due Diligence Visit 

EITC Earned Income Tax Credit 

HHS Department of Health and Human Services 

IPERA Improper Payments Elimination and Recovery Act 

IPERIA Improper Payments Elimination and Recovery Improvement Act 

IPIA Improper Payments Information Act 

IRS Internal Revenue Service 

NDNH National Directory of New Hires 

NRP National Research Program 

OMB Office of Management and Budget 

SSN Social Security Number 

TIGTA Treasury Inspector General for Tax Administration 
Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

Background 

Refundable credits are designed to help low-income individuals reduce their tax burden or to 

provide incentives for other activities. The number of these credits has varied over time because 

some credits are available for a limited period that is set by law. The Internal Revenue Service 

(IRS) reported that the amount of refundable tax credits claimed by taxpayers has grown from 

approximately $9.4 billion in Fiscal Year1 1993 to more than $104 billion in Fiscal Year 2013. 

The two largest refundable credits designed to help low-income individuals are the Earned 

Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC). The EITC is used to offset 

the impact of Social Security taxes on low-income families and to encourage them to seek 

employment. The ACTC is used to adjust the individual income tax structure to reflect a 

family’s reduced ability to pay taxes as family size increases. The EITC and the ACTC 

combined have increased almost 40 percent from Tax Year2

 2007 to Tax Year 2012. The IRS 

estimated that it paid $47.5 billion in refundable EITCs and $16.4 billion in refundable ACTCs 

for Tax Year 2007 compared to $63 billion and $26.6 billion, respectively, for Tax Year 2012. 

The EITC 

Congress created the EITC in 1975. Since then, the EITC has been modified a number of times 

to help improve the administration of the credit and to make the law less complex. For example, 

the initial eligibility requirements were revised to make taxpayers ineligible to receive the credit 

when the taxpayer has a Social Security Number (SSN) that is not valid for employment.3

 

Congress also implemented a uniform definition of a qualifying child that applied to most 

child-related tax provisions. Most recently, the EITC was expanded to provide for a temporary 

increase in the EITC and expansion of the credit for workers with three or more qualifying 

children. 

Taxpayers use Form 1040 (Schedule EIC), Earned Income Credit, to report the EITC qualifying 

child information. Taxpayers must meet specific criteria to qualify for the EITC that includes 

having a valid SSN. Additional criteria apply for those taxpayers who have qualifying children, 

including certain age, relationship, and residency tests. The resulting amount of the EITC a 

 

1

 Any yearly accounting period, regardless of its relationship to a calendar year. The Federal Government’s fiscal 

year begins on October 1 and ends on September 30. 

2

 A 12-month accounting period for keeping records on income and expenses used as the basis for calculating the 

annual taxes due. For most individual taxpayers, the tax year is synonymous with the calendar year. 

3

 Non-U.S. citizens who do not have an employment authorization must prove a valid nonwork reason for requesting 

an SSN in order to receive one, generally for obtaining Government benefits (Federal, State, or local) to which the 

individual is entitled. 

Page 1
Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

taxpayer can receive is based on the taxpayer’s earned income and the number of qualifying 

children. Appendix V lists the rules taxpayers must meet to qualify for the EITC. 

The ACTC 

The Child Tax Credit (CTC) and the ACTC (the refundable portion of the CTC) were enacted by 

the Taxpayer Relief Act of 1997.4 Congress believed that a tax credit for families with 

dependent children would reduce the individual income tax burden for families, better recognize 

the financial responsibilities of raising dependent children, and promote family values. To 

qualify for the CTC, a taxpayer must have a qualifying child.5

 Taxpayers use Schedule 8812, 

Child Tax Credit, to compute the ACTC and document whether the children claimed on the tax 

return who have an Individual Taxpayer Identification Number6

 meet the qualifying eligibility 

tests of substantial presence in the United States. The amount of the ACTC a taxpayer may 

receive, if any, is dependent on the total amount of the taxpayer’s CTC and the taxpayer’s earned 

income. 

The CTC can reduce an individual’s taxes owed by as much as $1,000 for each qualifying child.

7

 

Because the CTC is nonrefundable, the amount that can be claimed is limited to an individual’s 

reported tax liability. The ACTC is the refundable portion of the CTC and is provided to 

qualifying individuals even if no income tax is withheld or paid; that is, the credit can exceed the 

tax liability. Appendix VI lists the basic eligibility and qualifying child requirements for the 

CTC and the ACTC. 

Like the EITC, Congress has changed the CTC and the ACTC several times since they were 

enacted in Calendar Year 1997. These changes allowed more families to be eligible for the 

ACTC. For example, the American Recovery and Reinvestment Act of 20098 reduced the 

minimum earned income amount used to figure the ACTC to $3,000.9 Reducing the amount to 

$3,000 expanded the number of taxpayers who could then qualify for the ACTC as well as 

increased the amount of the ACTC they could receive. The $3,000 minimum earned income 

amount has been extended by law through Tax Year 2017. 

 

4

 Pub. L. No. 105-34, 111 Stat. 788. 

5

 A qualifying child for purposes of the CTC is a child who must be claimed as a dependent on your tax return and 

meets other specific eligibility tests, such as relationship, age, filing status, and support. See Appendix VI for 

qualifying criteria. 

6

 An Individual Taxpayer Identification Number is an IRS-issued identification number available to individuals who 

are required to have a Taxpayer Identification Number for tax purposes but who do not have and are not eligible to 

obtain an SSN because they are not authorized to work in the United States. 7

 The CTC amount has been $1,000 since Tax Year 2003. 

8

 Pub. L. No. 111-5, 123 Stat. 115. 

9

 Taxpayers must deduct the minimum earned income amount from their earned income before applying the 

percentage allowed to figure the refundable ACTC. 

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Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

Improper payments of refundable credits 

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. Various ways have been put forth to identify, measure, and reduce Federal improper 

payments, including laws specifically addressing improper payments, an Executive Order, and 

guidance by certain oversight agencies such as the OMB. In addition, agency Inspectors General 

serve a role by evaluating agency information related to improper payments. For example: 

 The Improper Payments Information Act (IPIA) of 200210 requires Federal agencies, 

including the IRS, to estimate the amount of improper payments and report to Congress 

annually on the causes of and the steps taken to reduce improper payments. 

 The Improper Payments Elimination and Recovery Act (IPERA) of 2010,

11 enacted on 

July 22, 2010, amended the IPIA by strengthening agency reporting requirements and 

redefining “significant improper payments.” Significant is defined as gross annual 

improper payments, i.e., the total amount of overpayments plus underpayments, made in 

the program during the fiscal year reported that exceeded a) both 2.5 percent of program 

outlays and $10 million of all program or activity payments or b) $100 million. 

 Executive Order 13520, Reducing Improper Payments and Eliminating Waste in Federal 

Programs, signed by the President on November 20, 2009, further increases Federal 

agencies’ accountability for reducing improper payments while continuing to ensure that 

Federal programs serve and provide access to their intended beneficiaries. 

 The Improper Payments Elimination and Recovery Improvement Act (IPERIA) of 2012,

12

enacted in January 2013, further expanded agency improper payment requirements to 

foster greater agency accountability. The IPERIA requires the OMB to designate the 

programs with the most egregious cases of improper payments as high-priority and 

requires agencies to develop additional or supplemental measures for tracking progress in 

reducing improper payments in these programs. 

The OMB’s improper payment reporting guidance13 requires agencies that identify programs 

with a high risk of improper payments to report root causes of these errors using the following 

three categories: 

 Documentation and Administrative Errors – Errors caused by the absence of supporting 

documentation necessary to verify the accuracy of a payment or errors caused by 

 

10 Pub. L. No. 107-300, 116 Stat. 2350. 

11 Pub. L. No. 111-204, 124 Stat. 2224. 

12 Pub. L. No. 112-248. 

13 OMB Circular A-123, Requirements for Effective Measurement and Remediation of Improper Payments, Part III 

to Appendix C (Mar. 22, 2010). 

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Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

incorrect inputting, classifying, or processing of applications or payments by a relevant 

Federal agency, State agency, or third party who is not the beneficiary. 

 Authentication and Medical Necessity Errors – Errors caused by an inability to 

authenticate eligibility criteria through third-party databases or other resources because 

no databases or other resources exist, or providing a service that was not medically 

necessary given the patient’s condition. 

 Verification Errors – Errors caused by the failure or inability to verify recipient 

information, including earnings, income, assets, or work status, even though verifying 

information does exist in third-party databases or other resources (in this situation, as 

contrasted with “authentication” errors, the “inability” to verify may arise due to legal or 

other restrictions that effectively deny access to an existing database or resource), or 

errors due to beneficiaries failing to report correct information to an agency. 

For Fiscal Year 2011 reporting and beyond, agencies with programs that are susceptible to 

significant improper payments under the IPIA are required to report information on the 

three categories of errors annually in their Performance and Accountability Report or Agency 

Financial Report. Furthermore, both the IPERA and Executive Order 13520 require the 

Treasury Inspector General for Tax Administration (TIGTA) to annually review the IRS’s 

compliance with improper payment assessment and reporting requirements. 

The process to identify IRS programs for improper payment risk assessment

The Department of the Treasury identifies the programs that the IRS must assess for the risk of 

improper payments. The IRS used the Improper Payments Elimination and Recovery Risk 

Assessment Questionnaire for Fiscal Year 2013 (the Questionnaire) and related guidance 

provided by the Department of the Treasury to assess the level of risk for each identified 

program. The Questionnaire computes a risk score for each program based on the IRS’s 

response to the questions contained in the Questionnaire. The risk score determines whether 

there is a low, medium, or high risk of improper payments in a program. The Department of the 

Treasury establishes the level of risk for improper payments in a program based on the risk score 

ranges and considers programs with a risk score of 0 to 11 as low risk, 12 to 28 as medium risk, 

and 29 and greater as high risk. 

The IRS is required to forward the results and documentation for all risk assessments to the 

Department of the Treasury. For any program identified as having a high risk for improper 

payments, the IRS must provide the following information to the Department of the Treasury for 

inclusion in the Department’s annual Agency Financial Report: 

 The rate and amount of improper payments. 

 The root causes of the improper payments. 

 Actions taken to address the root causes. 

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Existing Compliance Processes Will Not Reduce the 

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and Additional Child Tax Credit Payments 

 Annual improper payment reduction targets. 

 A discussion of any limitations to the IRS’s ability to reduce improper payments. 

The EITC has previously been declared a high-risk program by the OMB and as such the annual 

Improper Payments Elimination and Recovery Risk Assessment Questionnaire is not required to 

be prepared for this program. The EITC is currently the only IRS program identified as having a 

high risk for improper payments for the purposes of the IPERA and the only program with 

information included in the Agency Financial Report. The IRS estimates that 24 percent of all 

EITC payments made in Fiscal Year 2013, or $14.5 billion, were paid in error.14 In addition, the 

IRS estimates that it paid between $124 billion and $148 billion in improper EITC payments in 

Fiscal Years 2003 through 2013. 

This review was performed at IRS National Headquarters Office of Research, Analysis, and 

Statistics in Washington, D.C., and in the Office of Return Integrity and Correspondence 

Services in Atlanta, Georgia, during the period May 2013 through July 2014. 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. Detailed information on our audit objective, scope, and 

methodology is presented in Appendix I. Major contributors to the report are listed in 

Appendix II. 

 

 

14 The estimated EITC improper payment range for Fiscal Year 2013 was from 22 to 26 percent and from 

$13.3 billion to $15.6 billion. 

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Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

Results of Review 

Processes Have Been Developed to Identify Root Causes of Improper 

Earned Income Tax Credit Payments 

The IRS has determined that EITC improper payments primarily result from two root causes – 

authentication and verification. Authentication errors include errors associated with the IRS’s 

inability to authenticate qualifying child requirements, taxpayers’ filing status, and EITC claims 

associated with complex or nontraditional living situations. Verification errors relate to the 

IRS’s inability to identify individuals improperly reporting income to erroneously claim an EITC 

amount to which they are not entitled. Verification errors include underreporting and 

overreporting of income by wage earners as well as taxpayers who report they are self-employed. 

For Fiscal Year 2013, the IRS estimates that 70 percent, or $10.15 billion, in improper EITC 

payments resulted from authentication errors and the remaining 30 percent, or $4.35 billion, 

resulted from verification errors. 

The IRS uses the following methods to identify the root causes of EITC improper payments: 

 National Research Program (NRP) – The NRP Individual Income Tax Reporting 

Compliance Study, also known as the NRP 1040 Study, is performed annually and 

involves the IRS examining a statistically representative sample of tax returns. The NRP 

allows the IRS to estimate taxpayers’ compliance with the EITC and to estimate the 

improper payment rate each year. The NRP is designed to ensure consistency, 

uniformity, and thoroughness in the examination process in order to ensure a reasonable 

chance to uncover the noncompliance that is actually present on a return. Complete and 

accurate examination results are the foundation of good estimates. 

 Compliance Studies – The IRS conducted a series of studies in the 1990s to better 

understand compliance issues specific to the EITC and to aid EITC administration. 

These studies culminated in the IRS report Compliance Estimates for Earned Income Tax 

Credit Claimed on 1999 Returns (referred to as the 1999 Compliance Study).15 In 

addition to providing estimates of EITC overclaims, this report was used to develop 

strategies to improve the administration of the credit. Since its release, the 

1999 Compliance Study has been the authoritative source on the nature of EITC 

compliance. The IRS recently updated the 1999 Compliance Study using data from the 

NRP for Tax Years 2006 through 2008. The study results provide information about 

overall compliance of taxpayers claiming the EITC with specific emphasis on the nature 

 

15 Dated Feb. 28, 2002. 

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Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

of errors made. The IRS plans to use the updated study data to further explore and 

understand the nature of the errors and formulate future actions to address 

noncompliance. 

In response to the IRS’s identification of root causes of EITC improper payments, it has 

developed a strategy in an attempt to reduce EITC improper payments. This strategy focuses on 

early intervention to ensure that individuals claiming the credit are in compliance with the EITC 

rules. The IRS’s strategy includes:16

 Education and outreach – Programs designed to educate taxpayers and tax return 

preparers on the legal requirements for EITC eligibility so they can apply the law 

accurately. For example, the IRS hosts annual EITC Awareness Days to market the 

EITC to lower income taxpayers and the Nationwide Tax Forum EITC Training for tax 

return preparers on EITC due diligence requirements and qualifying child requirements. 

 Enforcement actions – Programs intended to contribute to the broader strategy of 

identifying errors as early in the process as possible, which include math error authority, 

an automated process to match reported income to third-party documents, and audits. 

 Paid tax return preparer compliance initiative – An EITC paid preparer strategy that 

focuses on tax return preparers who are not compliant with the EITC due diligence 

requirements. The EITC due diligence requirements are intended to assist tax return 

preparers in accurately determining their clients’ eligibility for the EITC and require that 

preparers maintain proof that they complied with the due diligence requirements. 

 Legislative proposals – The IRS has proposed legislative changes to enable it to put into 

place processes and programs that are needed to enable it to do its job more effectively 

and to address the root causes of EITC improper payments. 

According to the IRS, the above efforts reached more than 1.8 million taxpayers and 10,000 tax 

return preparers and identified and protected almost $4 billion in erroneous EITC claims during 

Fiscal Year 2013.17 However, despite the IRS’s efforts, the estimated EITC improper payment 

rate has remained relatively unchanged since Fiscal Year 2003 (the first year the IRS was 

required to report estimates of these payments to Congress), and the amount of EITC claims paid 

in error has grown. The IRS estimates that improper EITC payments totaled from $9.5 billion to 

$11.5 billion in Fiscal Year 200318 and from $13.3 billion to $15.6 billion in Fiscal Year 2013.19 

 

16 See Appendices VII and VIII for more details. 

17 See Appendices VII and VIII for detailed results of the various IRS programs to address EITC improper 

payments. 

18 EITC improper payment estimates obtained from the Department of the Treasury Performance and Accountability 

Report for Fiscal Year 2003. 19 EITC improper payments estimates obtained from the Department of the Treasury Fiscal Year 2013 Agency 

Financial Report . 

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Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

The IRS estimates the total EITC paid in error over these 11 years is between $124 billion and 

$148 billion. 

As previously discussed, the IRS has processes to identify the causes of improper EITC 

payments and to identify erroneous EITC payments. However, the IRS does not have the 

resources nor does it have alternative compliance tools needed to adequately address the 

erroneous EITC payments identified. As we have previously reported, the IRS will be unable to 

make any significant reduction in erroneous payments. In the IRS’s April 201420 report to 

TIGTA on its efforts to reduce erroneous EITC payments, IRS management acknowledged the 

limitations faced in significantly reducing noncompliance using the traditional process of 

auditing tax returns. The IRS noted that it cannot fully address EITC noncompliance by simply 

auditing returns and must pursue alternatives to traditional compliance efforts. 

Annual Risk Assessments Do Not Accurately Reflect the Risk 

Associated With Additional Child Tax Credit Improper Payments 

Each year since Fiscal Year 2011, the IRS has continually rated the risk of improper payments 

associated with the ACTC as low. However, our review of the IRS’s own enforcement data 

indicates that the ACTC improper payment rate is similar to that of the EITC. We estimate that 

the ACTC improper payment rate for Fiscal Year 2013 is between 25.2 percent and 30.5 percent, 

with potential ACTC improper payments totaling between $5.9 billion and $7.1 billion. 

The Department of the Treasury has selected the ACTC as one of the revenue program funds21

for which the IRS must perform a risk assessment to assess the level of improper payment risk. 

The Department of the Treasury selected the ACTC based on its materiality to the IRS’s 

financial statements. On March 20, 2014, the OMB issued supplemental improper payment 

guidance to the Department of the Treasury clarifying the requirement for annual risk 

assessments of all refundable tax credits. Although the IRS has conducted the annual risk 

assessment of the ACTC as required by the Department of the Treasury, the methodology that 

the IRS uses to conduct the risk assessment continues to provide an inaccurate assessment of the 

risk of ACTC improper payments. 

To determine the potential risk of ACTC improper payments, we used the same data sources and 

methodologies to the extent possible that the IRS uses to estimate the EITC improper payment 

rate to compute an estimate of the potential ACTC improper payment rate. For example, we 

used the results of the IRS’s NRP 1040 Study for Tax Year 2009, which is the same study the 

IRS used to estimate the Fiscal Year 2013 EITC improper payment rate. The IRS was unable to 

 

20 IRS, Report on Earned Income Tax Credit (EITC) Improper Payments Executive Order 13520: Reducing 

Improper Payments (April 15, 2014). 21 The IRS’s custodial activity includes revenues collected and refunds disbursed. However, in this report the 

general term “revenue” is used in place of “custodial.” The revenue program funds for which the IRS performed 

risk assessments generally represent specific individual tax credits or refund payments. 

Page 8
Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

provide an estimate of the amount of ACTC overclaims recovered through compliance programs 

for Tax Year 2009; therefore, we used the same ratio of overclaims recovered to improper 

payments that the IRS used to compute its Fiscal Year 2013 EITC improper payment rate.22 

Finally, we computed the estimated amount of potential ACTC improper payments by applying 

our estimate of the potential ACTC improper payment rate to the OMB budget estimates that are 

consistent with the budget estimates used by the IRS to compute Fiscal Year 2013 EITC 

improper payments. Figure 1 shows the methodology we used to estimate the potential ACTC 

improper payment rate for Fiscal Year 2013.

Figure 1: Methodology Used to Compute the Potential 

ACTC Improper Payment Rate for Fiscal Year 2013 

Potential ACTC Improper 

Payment Rate = 

ACTC Improper Payments – ACTC Overclaims Recovered 

Total ACTC Claims

ACTC Improper Payments – The amount of the difference between the amount of the 

ACTC claimed by the taxpayer on his or her tax return and the amount the taxpayer should 

have claimed based on NRP results for Tax Year 2009. This amount includes ACTC 

overclaims and ACTC underpayments. This amount totaled $8.07 billion. 

ACTC Overclaims Recovered – The amount of ACTC overclaims that the IRS prevents 

from being paid through activities such as math error processing and prerefund examinations 

or recovers after being paid through Automated Underreporter document matching and 

post-refund examinations. This amount was estimated by applying the ratio of EITC 

overclaims recovered to EITC improper payments from the IRS’s Fiscal Year 2013 EITC 

improper payment rate calculation. Using the EITC overclaims recovered ratio of 

13.5 percent, we estimated the ACTC overclaims recovered to total $1.09 billion. 

Total ACTC Claims – The amount of the ACTC claimed on all tax returns based on the 

NRP results for Tax Year 2009. This amount totaled $25.03 billion. 

Potential ACTC Improper 

Payment Dollars = 

Estimated ACTC Claims x 

Potential ACTC Improper Payment Rate 

Source: TIGTA analysis of Tax Year 2009 1040 NRP ACTC data and the IRS’s calculation of the Fiscal 

Year 2013 EITC improper payment rate. 

The IPERA defines a program as having significant improper payments when improper 

payments exceed both 2.5 percent of program outlays and $10 million of all program or activity 

payments made during the fiscal year reported or $100 million at any percent of program outlays. 

 

22 The IRS ratio of EITC overclaims recovered to EITC improper payments for Fiscal Year 2013 was 13.5 percent. 

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Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

Audit results indicate a high degree of noncompliance with ACTC eligibility 

requirements 

The IRS’s rating of the ACTC as low risk for significant improper payments is contrary to its 

own enforcement data, which show that in Fiscal Year 2013 the IRS adjusted23 over $347 million 

of ACTC claims on returns also claiming the EITC. Our review of EITC closed audit data found 

that there is a close relationship between taxpayers’ compliance with the EITC and the 

ACTC. According to the IRS, 283,806 (59 percent) of the 482,468 tax returns it audited in 

Fiscal Year 2013 with an EITC claim also included an adjustment record for the ACTC. Figure 

2 shows the results of the IRS’s EITC audits. 

Figure 2: Results of EITC Audits of Tax Returns 

That Also Include an ACTC Adjustment – Fiscal Year 2013 

Audit Disposition 

Number of 

Returns 

ACTC Dollars 

Adjusted 

Percentage 

of Returns 

Adjusted 

EITC/ACTC Tax Returns Audited 283,806 $347,844,351 100% 

ACTC Disallowed24 279,306 $350,324,178 98.41% 

Additional ACTC Allowed 2,916 ($2,479,827) 1.03% 

No Change 1,584 0 0.56% 

Source: IRS Examination Operational Automated Database.25 

When we provided our estimate of the potential ACTC improper payment rate to IRS 

management as well as our concern that the risk assessment process did not accurately reflect the 

risk associated with ACTC payments, the IRS raised the following concerns related to our 

estimate. We do not agree with the IRS’s conclusions. We respond to each concern below. 

 An assessment of the ACTC improper payment rate must also include an 

assessment of the validity of the CTC.

In March 2014, the OMB issued improper payment guidance to the IRS clarifying that all 

refundable credits are subject to IPERA requirements as they represent an additional 

outlay of funds by the Government. The CTC is a nonrefundable credit that reduces an 

individual’s tax liability and represents an offset of excess taxes that were already paid to 

the Government and therefore does not result in an additional budget outlay. The ACTC 

 

23 The ACTC can be adjusted if it was not claimed or if it was claimed incorrectly on the taxpayer’s tax return. 24 Includes full disallowance of 269,561 returns for a total of $342,622,748 and partial disallowance of 9,745 returns 

for a total of $7,701,430 

25 Provided by the IRS on February 27, 2014. 

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Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

is a refundable tax credit and therefore represents an additional expense or outlay to the 

Government because it is paid in excess of a taxpayer’s net tax liability. As a result, it is 

appropriate per OMB guidance to consider only the refundable ACTC for purposes of 

assessing the risk of improper payments and estimating the improper payment rate. 

 The NRP 1040 Study was not designed to meet IPERA precision requirements for 

computing an ACTC improper payment rate.

Our estimate of the potential ACTC improper payment rate was computed to show that 

the IRS’s improper payment risk assessment process should have ranked the ACTC 

Program as a high risk instead of low risk. We agree that the NRP 1040 Study was not 

designed to meet IPERA precision requirements. However, the 2,041 ACTC claims that 

the IRS audited as part of the NRP 1040 Study were selected by the IRS as part of a 

statistically valid sample of all Forms 1040, U.S. Individual Income Tax Return. 

As such, these tax returns are representative of the general tax return population for 

Tax Year 2009. 

 The potential ACTC improper payment rate does not account for recovered 

revenue.

Our ACTC improper payment rate does account for recovered revenue. As we 

previously mentioned, the IRS was unable to provide us the data for the ACTC for 

Tax Year 2009. As such, we estimated the ACTC overclaims recovered using the same 

ratio of overclaims recovered to improper payments that the IRS used to compute the 

Fiscal Year 2013 EITC improper payment rate. Therefore, our calculation of the 

potential ACTC improper payment rate is consistent with the IRS’s calculation of the 

EITC improper payment rate. 

Prior audits raise concerns with the reliability of the IRS’s improper payment risk 

assessment process 

In January 2013, TIGTA reported that the IPERA risk assessment process did not provide a 

reliable assessment of improper payment risk for IRS revenue program funds.26 Specifically, we 

concluded that the risk assessments were not performed in compliance with Department of the 

Treasury guidelines and that the Questionnaire did not effectively address risks associated with 

tax refund payments. 

In response to our audit recommendations, the IRS met with the Department of the Treasury to 

revise the risk assessment Questionnaire for revenue funds. In addition, the IRS Office of the 

Chief Financial Officer established guidelines for retaining risk assessment documentation and 

 

26 TIGTA, Ref. No. 2013-40-015, Improper Payments Elimination and Recovery Act Risk Assessments of Revenue 

Programs Are Unreliable (Jan. 2013). 

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Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

worked with the business unit executives to ensure that the appropriate subject matter experts 

were identified and participated in the review process. 

In March 2014, we reported27 that the IRS performed risk assessments for each of the 25 program 

fund groups identified by the Department of the Treasury for review for Fiscal Year 2013 – 

six administrative program funds and 19 revenue program funds.28 However, we again 

concluded that the process still may not provide a valid assessment of improper payments in tax 

administration because the EITC remains the only revenue program fund to be considered a 

high risk for improper payments despite numerous indicators that other refundable tax credits, 

e.g., the ACTC, also potentially result in significant improper payments. 

Recommendation 

Recommendation 1: The Commissioner, Wage and Investment Division, should ensure that 

the results of the ACTC Improper Payment Risk Assessment accurately reflect the high risk 

associated with ACTC payments and provide a reliable estimate of improper payments. 

Completion of the ACTC Improper Payment Risk Assessment should include an evaluation of 

available NRP and enforcement data when determining the overall risk of improper payments. 

Management’s Response: The IRS disagreed with this recommendation. IRS 

management stated that the Improper Payment Risk Assessment is completed for the 

ACTC following the guidance of the Department of Treasury and the OMB. The IRS 

stated that the assessment questionnaire and scoring methodology reflect operational risks 

associated with administration of the credit. The IRS already considers enforcement data 

and overall risks associated with administration of the ACTC by its inclusion in the Tax 

Gap estimate. 

Office of Audit Comment: As we have repeatedly reported, the risk assessment 

process performed by the IRS does not provide a reliable assessment of improper 

payments. The IRS has previously acknowledged this in its response to a prior review. 

Moreover, the IRS’s own enforcement data clearly contradicts the IRS conclusion that 

the risk of ACTC improper payments is low. 

 

27 TIGTA, Ref. No. 2014-40-027, The Internal Revenue Service Fiscal Year 2013 Improper Payment Reporting 

Continues to Not Comply With the Improper Payments Elimination and Recovery Act (Mar. 2014). 28 The EITC Program has been declared a high-risk program for improper payments by the OMB; therefore, no 

formal risk assessment is required for it. 

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Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

Data Show Root Causes of Additional Child Tax Credit Improper 

Payments Are Similar to Those of the Earned Income Tax Credit 

The IRS indicated that it does not have the same level of detail regarding the source of ACTC 

errors as it does for EITC claims. The IRS noted that for the NRP EITC audits, all aspects 

related to the credit are verified as part of the audit. As a result, the IRS has very detailed 

information about the condition that caused the EITC claim to be in error. Although the IRS has 

not developed a strategy to identify the root causes of ACTC improper payments, we believe it 

has information that indicates that the root causes are similar to those of the EITC. As discussed 

previously, 283,806 (59 percent) of the 482,468 EITC tax returns the IRS audited in 

Fiscal Year 2013 also included an adjustment record for the ACTC. The IRS adjusted the ACTC 

on 282,222 (99.4 percent) of these 283,806 EITC returns.

The correlation between causes of EITC and ACTC improper payments results from the 

commonality in many of the eligibility requirements. Figure 3 is a comparison of the eligibility 

requirements for the EITC and the ACTC.

Figure 3: Comparison of the Eligibility Requirements 

for the EITC and the ACTC for Tax Year 2013 

Page 13

Eligibility Test The EITC The ACTC 

Relationship Son, daughter, stepchild, foster child, or a descendant of 

any of them (for example, your grandchild). 

Brother, sister, half-brother, half-sister, stepbrother, 

stepsister, or a descendant of any of them (for example, 

your niece or nephew). 

Adopted child. An adopted child is always treated as 

your own child. The term “adopted child” includes a child 

who was lawfully placed with you for legal adoption. 

Same 

Joint Return The child does not file a joint return for the year (or files 

jointly to claim a refund). 

Same 

Age A qualifying child must be: 

 Under age 19 at the end of Tax Year 2013 and 

younger than you (or your spouse, if filing jointly); 

 Under age 24 at the end of Tax Year 2013, a 

student, and younger than you (or your spouse, if 

filing jointly); or 

 Permanently and totally disabled at any time 

during 2013, regardless of age. 

A qualifying child must be:

 Under age 17 at 

the end of the tax 

year. 
Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

Eligibility Test The EITC The ACTC 

29 Residency The child must have lived with the claimant in the 

United States for more than half of the year. 

The child must have lived 

with claimant for more 

than half of the year.30

Qualifying Child No Yes

Required? 

SSN Required? Yes No – The IRS allows 

Individuals issued an 

Individual Taxpayer 

Identification Number to 

receive the ACTC. 

Source: IRS Publication 972, Child Tax Credit, and IRS Publication 596, Earned Income Credit (EIC), for use in 

preparing Tax Year 2013 Returns. 

Recommendation 

Recommendation 2: The Commissioner, Wage and Investment Division, should, as required 

by the IPERA, identify the root causes of the improper ACTC payments, determine if tools 

and/or resources are available to address erroneous ACTC payments, and establish a plan to 

reduce the erroneous payments and then meet that plan. 

Management’s Response: The IRS disagreed with this recommendation and 

stated that the OMB acknowledges that it already conducts analysis of the Tax Gap that 

incorporates these credits. According to the IRS, refundable tax credit noncompliance is 

included in the Tax Gap estimate and in the assessment and regular updating of its 

compliance strategies. The IRS considers available tools, resources, and alternative 

treatment options when preparing and updating compliance strategies. The IRS stated 

that reduction of erroneous payments is a primary goal of those activities. 

Office of Audit Comment: Because of the substantial number and amount of ACTC 

improper payments, excluding this credit from the IRS’s assessment results in a 

substantial understatement of improper payments. We estimate this understatement to be 

in the range of $5.9 billion to $7.1 billion. If the IRS includes improper payments in its 

Tax Gap study, it should be clear on what portion of the Tax Gap is due to improper 

payments. Furthermore, the IRS advised us that the Tax Year 2006 Tax Gap estimation 

methodology did not estimate the number or amount of disallowed ACTC claims. 

Instead, it provides an aggregate estimate for the net misreported amount for all tax 

 

29 Exceptions apply. 

30 There are some exceptions to the residence test, which can be found in IRS Publication 972. 

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Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

credits. As such, it cannot ensure that its Tax Gap strategy accurately identifies and 

addresses the causes of ACTC improper payments as required by the IPERA. The 

IPERA requires agencies to identify the root causes for improper payments for all 

programs for which improper payments exceed both 2.5 percent of program outlays and 

$10 million of all program or activity payments made during the fiscal year reported or 

$100 million. 

New Compliance Processes Are Needed to Make Any Significant 

Reduction in Improper Payments 

As we have previously reported,31 the IRS continues to report significant improper EITC 

payments each year. For example, $13.3 billion to $15.6 billion in erroneous EITC payments 

were estimated to have been paid in Fiscal Year 2013. Compliance resources are limited, and 

additional alternatives to traditional compliance methods have not been developed. 

Consequently, the IRS does not address the majority of potentially erroneous EITC claims. This 

is despite the fact that the IRS has processes that successfully identify billions of dollars in 

potentially erroneous EITC payments. For example, the IRS identified more than 6.6 million 

potentially erroneous EITC claims totaling approximately $21.6 billion for Tax Year 2011. 

**************************************2***************************************

******************2**************. 

In addition to limited compliance resources and the reliance on traditional compliance methods, 

statutory requirements further limit the IRS’s ability to ensure that EITC claims are valid before 

they are paid. The Internal Revenue Code requires the IRS to process tax returns and pay any 

related tax refunds within 45 calendar days of receipt of the tax return or the tax return due date, 

whichever is later. Because of this requirement, the IRS cannot conduct extensive eligibility 

checks similar to those that occur with other Federal programs that typically certify eligibility 

prior to the issuance of payments or benefits. 

Some actions have been taken to address recommendations made in a prior 

TIGTA report 

In our Fiscal Year 2009 report,32 we recommended the IRS conduct a study to identify alternative 

processes that will expand its ability to effectively and efficiently address erroneous EITC claims 

for which data show that the taxpayer does not meet the EITC qualifying child relationship 

and/or residency tests. We also recommended that the IRS work with the Assistant Secretary of 

the Treasury for Tax Policy to obtain the authority necessary to implement alternative processes 

 

31 TIGTA, Ref. No. 2014-40-027, The Internal Revenue Service Fiscal Year 2013 Improper Payment Reporting 

Continues to Not Comply With the Improper Payments Elimination and Recovery Act (Mar. 2014). 32 TIGTA, Ref. No. 2009-40-024, The Earned Income Tax Credit Program Has Made Advances; However, 

Alternatives to Traditional Compliance Methods Are Needed to Stop Billions of Dollars in Erroneous Payments

(Dec. 2008). 

Page 15
Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

to adjust erroneous EITC claims for which data show that the taxpayer does not meet the EITC 

qualifying child relationship and/or residency tests.

In response to our recommendations, the IRS analyzed the information included in the Federal 

Case Registry33 and found that, although the information in the registry provides information as 

to a child’s custodial/noncustodial parent, the database cannot be solely relied upon to 

systemically adjust a potentially erroneous EITC claim.

Math error authority is not sufficient to effectively address erroneous EITC claims 

The IRS, in conjunction with the Assistant Secretary of the Treasury for Tax Policy, has 

requested additional authority (hereafter referred to as correctable error authority) to systemically 

disallow a tax claim, including the EITC, when information contained in reliable Government 

data sources does not support the claim. According to the IRS, reliable Government data sources 

include information obtained from the Social Security Administration, the Department of Health 

and Human Services (HHS), the Federal Bureau of Prisons, and the States’ Departments of 

Corrections. The IRS requested correctable error authority as part of its Fiscal Year 2015 budget 

submission. However, as of May 2014, the IRS has not been provided any additional authority 

or tools to expand its ability to prevent the issuance of improper EITC payments. 

Currently, under the Internal Revenue Code, the IRS can use its math error authority to address 

erroneous EITC claims by systemically correcting mathematical or clerical errors on EITC 

claims, such as correcting entries made on the wrong line on the tax return or mathematical 

errors in computing income or the EITC. In addition, the IRS can use math error authority to 

adjust an EITC claim if a qualifying child’s SSN is not valid. However, the majority of 

potentially erroneous EITC claims the IRS identifies do not contain the types of errors for which 

it has math error authority. For example, the IRS identified approximately 6.6 million 

potentially erroneous EITC claims totaling approximately $21.6 billion in Tax Year 2011 for 

which it does not have math error authority. In Tax Year 2011, the IRS used math error 

authority to identify and systemically correct only 270,492 (.009 or less than 1 percent)34 of more 

than 27.4 million EITC claims. The 270,492 returns claimed the EITC totaling $314 million. 

While the IRS has the authority to audit potentially erroneous EITC claims for which it does not 

have math error authority, doing so is more costly than the math error process. The IRS 

estimates that it costs $1.50 to resolve an erroneous EITC claim using math error authority 

compared to $278 to conduct a prerefund audit.35 In addition, the number of potentially 

erroneous EITC claims the IRS can audit is further reduced by its need to allocate its limited 

 

33 The Federal Case Registry is a national database that aids the administration and enforcement of child support 

laws. It consists of records that identify children, custodial parties, noncustodial parents, and putative (assumed) 

parents along with other relevant information. 

34 An additional 59,024 EITC claimants received approximately $21 million more in EITCs than claimed. 35 Cost to use math error authority as of June 25, 2014, as provided by the IRS. The IRS provided the cost of a 

prerefund audit based on Fiscal Year 2010 financial data, which are the most current estimate available. 

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Existing Compliance Processes Will Not Reduce the 

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and Additional Child Tax Credit Payments 

resources among the various segments of taxpayer noncompliance to provide a balanced tax 

enforcement program. As a result, billions of dollars in potentially erroneous EITC claims go 

unaddressed each year. 

National Directory of New Hires Wage and Employment Data Along 

With Correctable Error Authority Could Significantly Reduce Improper 

Payments 

Significant changes in IRS compliance processes would be necessary to reduce improper 

payments. Expanded authority to make corrections to tax returns when data obtained from the 

HHS indicate the taxpayer’s refundable credit claims are not valid would significantly reduce 

improper payments. For example, the information could be used at the time tax returns are filed 

to identify those individuals who claim the EITC based on wages that do not appear to be valid. 

For example, our review of Tax Year 2012 tax returns identified more than $1.7 billion in 

potentially erroneous EITC claimed on tax returns with no third-party Forms W-2, Wage and 

Tax Statement, received by the IRS supporting the wages reported. As we have noted 

previously, the IRS estimates that verification errors, i.e., underreporting and overreporting of 

income by wage earners, account for 30 percent, or $4.35 billion, of EITC improper payments. 

The IRS is granted the authority to use the National Directory of New Hires (NDNH) to verify 

EITC claims. However, the IRS does not have the authority to systemically disallow an EITC 

claim that is not supported by NDNH data (****************2********************). 

Therefore, the IRS must audit the EITC claims it identifies for which NDNH data indicate the 

income reported is potentially erroneous. The number of EITC claims the IRS can audit is 

limited to available resources and the need to provide a balanced enforcement program. As such, 

the IRS’s use of the NDNH to identify potentially erroneous EITC claims is limited to only those 

EITC claims it has the resources to address. The IRS does not have the authority to use the 

NDNH to verify any other refundable credit. 

The Social Security Act, 42 U.S.C. Section 653 (i) (3), grants authority to the Secretary of the 

Treasury to use the HHS NDNH to verify an individual’s claim of employment with regard to 

the EITC. The Act states: 

The Secretary of the Treasury shall have access to the information in the National 

Directory of New Hires for purposes of administering section 32 of the Internal Revenue 

Code of 1986, or the advance payment of the earned income tax credit under section 

3507 of such Code, and verifying a claim with respect to employment in a tax return. 

The NDNH is a national database of wage and employment information. The NDNH file 

contains the following information: 

 New Hire (W-4) File: The New Hire File contains information on all newly hired 

employees reported by employers to each State Directory of New Hires. Federal 

agencies report directly to the NDNH. 

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Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

 Quarterly Wage (QW) File: The Quarterly Wage File contains quarterly wage 

information on individual employees from the records of State workforce agencies and 

Federal agencies. 

 Unemployment Insurance (UI) File: The Unemployment Insurance File contains 

unemployment insurance information on individuals who have received or applied for 

unemployment benefits as reported by State workforce agencies. 

Analysis identified more than $1.7 billion in potentially erroneous EITC claimed 

on tax returns with no Forms W-2 to support wages 

Because of its current processes for using the NDNH, the IRS was only able to resolve 

approximately $20 million in potentially erroneous EITC claims on 3,728 tax returns between 

January and June 2013. However, the NDNH could be used to identify and resolve many more 

claims. Our analysis of the 26.7 million EITC claims received by the IRS for Tax Year 2012 

identified approximately 23.6 million (88 percent) tax returns with EITC claims totaling more 

than $53.8 billion for which the taxpayer claimed wages as the source income to support the 

EITC. Of the 23.6 million tax returns with wages reported, we identified 676,992 (3 percent) tax 

returns for which third-party Forms W-2 were not sent to the IRS by the employer for either the 

taxpayer and/or spouse listed on the tax return.36 These 676,992 tax returns claimed EITCs 

totaling more than $1.7 billion. We forecast the IRS could prevent the payment of more than 

$8.5 billion in questionable EITC claims over the next five years.37 

The IRS initially found the NDNH data to be valuable in identifying tax returns for which the 

income used to claim the EITC was potentially fraudulent. However, the IRS believes it is no 

longer cost beneficial to continue to use the NDNH to verify EITC claims. As such, it has 

decided not to renew the contract to use NDNH data with the HHS for Fiscal Year 2015. The 

IRS’s decision to discontinue the NDNH contract is based on two primary factors: 

 Improvements in the IRS’s fraud detection filters to incorporate the characteristics of 

EITC claims the NDNH helps identify have increased the IRS’s ability to more 

accurately detect EITC claims that appear to be based on potentially fraudulent income. 

 The use of the NDNH does not result in a significant resource savings because the IRS 

must continue to incur additional resource costs to verify the income and subsequently 

audit EITC claims even when NDNH data indicate the claim is erroneous. For example, 

the average cost to obtain NDNH data is more than $1.6 million per fiscal year. During 

 

36 Some of the tax returns we identified could also be the result of employer errors or employer nonreporting. 

37 See Appendix IV. The five-year forecast is based on multiplying the base year by five and assumes, among other 

considerations, that economic conditions and tax laws do not change. 

Page 18
Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

the period January 1, 2013, through June 30, 2013,38 the IRS submitted NDNH data 

requests for 136,175 EITC claims totaling more than $787 million. However, the IRS 

was only able to close 3,728 (2.7 percent) claims totaling more than $20 million based 

exclusively on NDNH data. The remaining 132,447 (97.3 percent) EITC claims required 

the IRS to use additional resources other than NDNH data to verify the claim and close 

the case because either the NDNH contained no data for the taxpayer or the data were not 

sufficient to verify the amount of income claimed. 

The NDNH data have the potential to significantly reduce EITC improper 

payments 

The IRS can use NDNH data during the processing of tax returns to significantly increase its 

ability to identify potentially erroneous EITC claims on tax returns with unsupported wages. 

However, to realize the full potential of NDNH data, the IRS needs to: 

 Obtain the authority to systemically disallow EITC claims for which NDNH data do not 

support the claim. Through legislative proposals, the IRS has requested correctable error 

authority to deny taxpayers’ claims without conducting an audit when reliable 

Government data sources do not support information on the tax return. However, the IRS 

has not yet been granted this authority. 

 Modify the processes it uses to obtain and use NDNH data. The IRS process to obtain 

NDNH data is a transactional manual process and is limited to the verification of only 

electronically filed tax returns with an EITC claim. If it obtained a copy of the complete 

NDNH database, the IRS could systemically verify all EITC claims to the NDNH. 

Figure 4 provides a comparison of the IRS’s current transactional-based processes to use the 

NDNH to identify a potentially erroneous EITC claim compared to the systemic processes that 

could be implemented if the IRS obtained a copy of the NDNH database. 

 

38 The IRS obtains NDNH data for EITC claims filed between January and June each year. After this period, the 

IRS has access to income information documents filed by third parties, including employers, for use in verifying 

income. 

Page 19
Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

Figure 4: Comparison of Existing NDNH Processes to Identify 

Potentially Erroneous EITC Claims to a Systemic NDNH Process 

Existing NDNH Processes to Identify 

Potentially Erroneous EITC Claims 

Potential Systemic NDNH Processes to 

Identify Potentially Erroneous EITC Claims 

The IRS evaluates EITC claims for potential fraud 

using established fraud filters. 

The IRS evaluates all EITC claims regardless of 

fraud potential. 

EITC claims with specified characteristics are The IRS systemically matches all EITC claims for 

suspended from processing and NDNH data are which income reported is wages to an NDNH file 

requested from the HHS for the taxpayer. the IRS obtains from the HHS to verify the 

taxpayer’s claim of employment. 

The IRS evaluates the NDNH data and 

determines the income claimed is potentially 

erroneous. 

The IRS identifies those EITC claims for which the 

NDNH indicates the taxpayer was not employed 

during the tax year. 

The IRS conducts additional analysis to verify the 

amount of income claimed. 

The IRS systemically disallows the EITC claim on 

the basis that the claim is unsubstantiated. 

The IRS audits the EITC claim on those tax Taxpayer is sent a notice detailing adjustment 

returns for which the income claimed is made to the tax return and is provided with a 

determined to be erroneous. telephone number and mailing address to contact 

the IRS if he or she questions the validity of the 

adjustment. 

Source: Existing processes provided by the IRS. Potential systemic processes are a hypothetical example of how 

the IRS could use the NDNH if correctable error authority was provided. 

Receiving a copy of NDNH data rather than using a transaction-based process may result in a 

lower cost to the IRS. The cost to obtain NDNH data under the current information sharing 

agreement with the HHS includes a set user fee and an additional transactional-based component. 

As such, the cost to obtain NDNH data increases as the number of data requests sent to the HHS 

increases. The cost to obtain NDNH data under this current information sharing agreement 

averaged more than $1.6 million a year for Fiscal Years 2010 through 2013. By receiving a 

complete copy of NDNH data, the IRS can eliminate the transactional cost associated with the 

existing agreement. Because the IRS has not pursued this option, the potential cost savings of 

doing so is unknown. 

It should be noted that the IRS has processes in place for taxpayers to dispute systemic 

adjustments. For example, our review of this process in July 201139 found that when the IRS 

makes math error adjustments to a taxpayer’s tax return, it sends a notice, generally a Computer 

 

39 TIGTA, Ref. No. 2011-40-059, Some Taxpayer Responses to Math Error Adjustments Were Not Worked Timely 

and Accurately (Jul. 2011). 

Page 20
Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

Paragraph 11 Notice (Balance Due (Over $5.00)) or a Computer Paragraph 12 Notice 

(Overpayment of $1.00 or More), to the taxpayer explaining the error(s) identified and the 

amount of any resulting adjustment(s). The math error notice includes an account statement 

showing how the changes affected the tax return and showing the corrected tax return 

information compared to what was reported on the original tax return. In addition, the math error 

notice provides both a telephone number and mailing address for the taxpayer to contact the IRS 

if he or she questions the validity of the adjustments. 

Taxpayers who question the validity of the adjustments are given 60 calendar days from the date 

of the notice to respond to the IRS disputing the validity of the adjustments made to their tax 

returns. During this 60-day period, the IRS will place a freeze on the taxpayer’s account to 

prevent the issuance of the portion of the refund associated with the error(s) identified or prevent 

the initiation of collection action resulting from any balance due. Once a math error adjustment 

is made, any subsequent action depends on the response from the taxpayer and can include: 

 Agreed Response: The taxpayer agrees with the math error adjustments made to his or 

her tax return. This includes taxpayers who do not respond to the IRS notice. The IRS 

removes the freeze from the taxpayer’s account, which will then release any refund or 

initiate collection of a balance due of taxes. 

 Substantiated Response: The taxpayer disagrees with the math error adjustments and 

either provides the IRS with written correspondence/documentation or information via 

telephone contact supporting his or her disagreement. The IRS agrees with the taxpayer 

based on the information provided and reverses the math error adjustments. The IRS 

removes the freeze from the taxpayer’s account, which will release any refund or initiate 

collection of a balance due of taxes. 

 Unsubstantiated Response: The taxpayer disagrees with the math error adjustments. 

However, the taxpayer does not provide adequate support for his or her disagreement. 

Generally, the IRS reverses the math error adjustments and places an examination freeze 

on the taxpayer’s account resulting in his or her tax return being referred to the 

Examination function for further review. 

Recommendations 

If the IRS is granted correctable error authority, the Commissioner, Wage and Investment 

Division, should: 

Recommendation 3: Contract with the HHS to obtain a complete copy of the NDNH 

database for use during tax return processing to systemically identify unsupported wages 

reported on tax returns to erroneously claim the EITC. 

Management’s Response: The IRS disagreed with this recommendation. The IRS 

stated that the cost of obtaining the limited NDNH is significant and, under current 

Page 21
Existing Compliance Processes Will Not Reduce the 

Billions of Dollars in Improper Earned Income Tax Credit 

and Additional Child Tax Credit Payments 

limitations on the IRS’s use of the data, the IRS does not consider it to be a 

cost-beneficial tool. The IRS also disagreed with our outcome measure of $1.7 billion 

in potential cost savings, stating that the outcome is contingent on the IRS receiving 

expanded legislative authority and that its review of data from the recent EITC 

Compliance Study covering Tax Years 2006 through 2008 found that a significant 

portion of EITC claims on returns with reported wages and no Form W-2 were accurate 

or disallowed for reasons other than misreported income. 

Office of Audit Comment: The IRS’s disagreement is not consistent with its response 

to Recommendation 4 of this report in which the IRS states that it is pursuing expanded 

NDNH authority for use of the entire NDNH database as well as correctable error 

authority. Moreover, the EITC Compliance Study to which the IRS refers above 

excludes many EITC claims, such as fraudulent claims. Our analysis includes all EITC 

claims for which wages were reported and a Form W-2 was not filed by an employer for 

either the taxpayer or the taxpayer’s spouse. 

Legislative Recommendation 

Recommendation 4: Work with the Assistant Secretary of the Treasury for Tax Policy to 

consider a legislative proposal to obtain expanded NDNH authority to systemically verify claims 

for other income-based refundable credits (e.g., the ACTC) based on NDNH employment data. 

Management’s Response: The IRS agreed with this recommendation. The IRS 

stated that the General Explanations of the Administration’s Fiscal Year 2015 Revenue 

Proposals presents a legislative request for expanded use of the NDNH database. The 

IRS’s proposal would amend the Social Security Act to expand IRS access to NDNH data 

for general tax administration purposes, including data matching and verification of 

taxpayer claims during return processing. The IRS believes this proposal addresses the 

recommendation.

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Appendix I

Detailed Objective, Scope, and Methodology 

Our overall objective was to assess the IRS’s efforts to identify and address the root causes of 

erroneous EITC and ACTC payments. To accomplish our objective, we: 

I. Determined what actions the IRS has taken to identify the root causes of improper 

payments for the EITC and the ACTC and the results of its efforts. 

A. Contacted the Office of Research, Analysis, and Statistics and the Office of Return 

Integrity and Correspondence Services to obtain copies of refundable credit studies 

conducted from Tax Year1

 2008 to the present, including any NRP Compliance 

Studies for the past five years. 

B. Reviewed reports provided by the IRS to determine if root causes for EITC and 

ACTC improper payments were identified. We evaluated the root causes identified 

by the IRS to determine if causes identified were actually root causes or just 

symptoms of root causes. 

C. Reviewed the Department of the Treasury’s Agency Financial Reports for Fiscal 

Years2 2012 and 2013 to identify changes made between the two reports, and 

determined if the causes the IRS identified for EITC improper payments are the same 

as reported in the Executive Order and other studies. 

D. Reviewed data available on the IRS Office of Research, Analysis, and Statistics NRP 

and Compliance Data Warehouse websites to obtain guidance on conducting the 

annual NRP review, information available on the NRP methodology, format of the 

NRP electronic audit case files, and instructions to obtain direct access to NRP review 

data or how to obtain a data extract of the NRP review data. 

E. Determined information, if any, the Office of Return Integrity and Correspondence 

Services uses and actions taken based on the data obtained in Steps I.B, I.C, and I.D 

above to identify the causes of taxpayer noncompliance with the EITC and the 

ACTC. Specifically, we: 

1. Discussed what efforts have been taken to identify root causes of improper 

payments for the EITC and the ACTC or refundable credits in general and any 

 

1

 A 12-month accounting period for keeping records on income and expenses used as the basis for calculating the 

annual taxes due. For most individual taxpayers, the tax year is synonymous with the calendar year. 

2

 Any yearly accounting period, regardless of its relationship to a calendar year. The Federal Government’s fiscal 

year begins on October 1 and ends on September 30. 

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reasons why efforts have not been made to identify root causes. 

2. Obtained and reviewed copies of relevant documentation to include methodology, 

procedures, and reports unavailable on the websites. 

F. Obtained access to NRP data through a TIGTA Strategic Data Services Division 

extract request and performed analysis of the types of information available to 

identify the reasons the EITC and the ACTC were denied and to verify the IRS’s 

assessment of the root causes for improper payments. 

II. Determined what actions the IRS has taken to address the identified root causes for EITC 

and ACTC improper claims. 

A. Reviewed the results of TIGTA and Government Accountability Office reports 

related to the EITC and the ACTC issued over the past five years to determine any 

IRS efforts to identify root causes or if any root causes were identified by TIGTA or 

the Government Accountability Office. 

B. Reviewed the IRS’s study results of the feasibility of using the Federal Case Registry 

dated October 2011 to identify potentially erroneous EITC claims. 

C. Reviewed IRS guidance to determine what policies and procedures the IRS has in 

place to address the identified root causes. 

D. Interviewed IRS personnel for current and planned efforts to address the identified 

root causes. Based on the IRS’s input, we researched current initiatives, determined 

if EITC claims are analyzed for income misreporting to include overreported and 

underreported income, and determined if the IRS’s initiatives present new alternatives 

or rely on traditional compliance efforts. 

1. Identified math error authorizations and determined if the IRS has presented any 

additional requests for tax policy changes.

2. To determine how the IRS is using the NDNH, we met with the HHS and the IRS 

to determine if the IRS has restricted NDNH access and the amount the IRS pays 

for access to the NDNH. We obtained and reviewed a copy of the Memo of 

Understanding that the IRS has with the HHS for use of the NDNH. We also 

reviewed the IRS’s current periodic report submitted to the HHS on the 

effectiveness of the NDNH in identifying potentially false EITC claims. 

E. Analyzed what action the IRS has taken to measure the impact of any actions taken, 

assessed the challenges the IRS faces in addressing the root causes identified, and 

determined if the IRS’s efforts to address noncompliance are appropriate to address 

the identified root causes. 

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III. Determined if there are root causes for EITC or ACTC improper payments that the IRS 

has not identified. 

A. Reviewed legislation and IRS guidance to determine the EITC and ACTC eligibility 

requirements. 

B. Conducted tests to identify additional root causes for improper refundable credits. 

1. Analyzed applicable Taxpayer Notice Code volumes for Tax Year 2011 returns. 

2. Requested the Dependent Database3

 rule break volumes for Tax Year 2011. 

C. Evaluated potential fraud. 

1. Identified Tax Year 2012 returns claiming the EITC and wages on the Individual 

Return Transaction File and matched to the Individual Master File4

 to identify 

those individuals who actually received the credit. 

2. Matched the tax returns identified in Step III.C.1 to the Tax Year 2012 

Form W-2 File to identify returns for which the wages claimed on the tax return 

are not supported by a third-party Form W-2. We quantified the number of 

returns and amount of the EITC claimed on tax returns for which the wages are 

not supported. 

IV. Determined an ACTC improper payment rate. Using data from the IRS NRP 1040 Study 

for Tax Year 2009 and the OMB budget reports used by the IRS to estimate EITC 

improper payments, we computed the potential ACTC improper payment rate and dollars 

for Fiscal Year 2013. To the extent possible, we used the same methodology the IRS 

uses to estimate the EITC improper payment rate and dollars to compute the potential 

ACTC improper payment rate. The potential ACTC improper payment rate was 

computed with the assistance of the TIGTA contract statistician. 

Data validation methodology 

During this review, we relied on data extracted from the IRS’s Individual Master File for Tax 

Year 2012, Individual Returns Transaction File for Processing Year5

 2013, and the Form W-2 

File for Tax Year 2012 located on the TIGTA Data Center Warehouse. We also relied on a data 

extract of Tax Year 2012 Forms 1099-R, Distributions From Pensions, Annuities, Retirement or 

Profit-Sharing Plans, IRAs, Insurance Contracts, etc.,

6

 from the IRS’s Information Returns 

 

3

 The Dependent Database is a risk-based audit selection tool used by the IRS to identify tax returns for audit. The 

Dependent Database scoring system uses business rules to identify EITC noncompliance at the point of filing 

through use of internal and external data elements. 4

 The IRS database that maintains transactions or records of individual tax accounts. 5

 The calendar year in which the tax return or document is processed by the IRS. 6

 We specifically requested information on Form 1099-R with a Distribution Code 3 for disability income. 

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Processing database and a data extract of Tax Year 2008 EITC NRP data from the IRS’s 

Compliance Data Warehouse that was provided by the TIGTA Office of Investigations’ Strategic 

Data Services Division. Additionally, we used Tax Year 2009 1040 NRP data that were 

provided by the IRS’s NRP staff. We were able to verify a random sample of each data set to the 

IRS’s Integrated Data Retrieval System. As a result of our testing, we determined the data used 

in our review were sufficiently reliable. 

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: controls in place to identify and 

address the root causes of erroneous EITC and ACTC payments. We evaluated these controls by 

interviewing management, reviewing policies and procedures, and reviewing the process used to 

identify root causes and any initiatives taken to address root causes identified. 

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Appendix II 

Major Contributors to This Report 

Russell P. Martin, Acting Assistant Inspector General for Audit (Returns Processing and 

Account Services) 

Deann L. Baiza, Director 

Sharla J. Robinson, Audit Manager 

Roy E. Thompson, Audit Manager 

Sandra L. Hinton, Lead Auditor 

Linda L. Bryant, Senior Auditor 

W. George Burleigh, Senior Auditor 

Jennie G. Choo, Senior Auditor 

Johnathan D. Elder, Auditor 

Nathan J. Smith, Auditor 

James M. Allen, Information Technology Specialist 

Kevin O’Gallagher, Information Technology Specialist 

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Appendix III 

Report Distribution List 

Assistant Secretary of the Treasury for Tax Policy 

Commissioner C 

Office of the Commissioner – Attn: Chief of Staff C 

Deputy Commissioner for Operations Support OS 

Deputy Commissioner for Services and Enforcement SE 

Chief Counsel CC 

Director, Office of Research, Analysis and Statistics RAS 

Deputy Commissioner, Wage and Investment Division SE:W 

Director, Customer Account Services, Wage and Investment Division SE:W:CAS 

Director, Return Integrity and Correspondence Services, Wage and Investment Division 

SE:W:RICS 

Director, Submission Processing, Wage and Investment Division SE:W:CAS:SP 

Director, Office of Legislative Affairs CL:LA 

Director, Office of Program Evaluation and Risk Analysis RAS:O 

National Taxpayer Advocate TA 

Office of Internal Control OS:CFO:CPIC:IC 

Audit Liaisons: 

Chief, Program Evaluation and Improvement, Wage and Investment Division 

SE:W:S:PEI 

Director, Communications and Liaison, National Taxpayer Advocate TA:CL 

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Appendix IV 

Outcome Measure 

This appendix presents detailed information on the measurable impact that our recommended 

corrective actions will have on tax administration. This benefit will be incorporated into our 

Semiannual Report to Congress. 

Type and Value of Outcome Measure: 

 Funds Put to Better Use – Potential; $1,712,725,533 in questionable EITC claims paid on 

676,992 Tax Year1

 2012 tax returns; $8,563,627,6652 in questionable EITC claims issued 

over five years (see page 17). This outcome is potential because it depends on whether the 

IRS is granted correctable error authority and obtains the complete NDNH database to verify 

these claims.3 

Methodology Used to Measure the Reported Benefit: 

We conducted computer analysis of the Tax Year 2012 Individual Master File to identify 

26,715,006 tax returns that received EITC totaling $61,989,202,110.4  Of the 26,715,006 tax 

returns, approximately 23,571,365 (88 percent) included EITCs totaling $53,773,385,436 for 

which the taxpayers claimed wages on Line 7 of their Form 1040 as the source of EITC 

supporting income. 

We matched the 23,571,365 tax returns to the IRS’s Form W-2 File on the TIGTA Data Center 

Warehouse for Tax Year 2012 using both the primary and secondary SSNs to determine if a 

Form W-2 was on file that would support the wages being claimed on Line 7 of the Form 1040.5

 

Of the 23,571,365 tax returns with wages reported, we identified 676,992 (3 percent) tax returns 

for which third-party Forms W-2 were not sent to the IRS by the employer for either the taxpayer 

and/or spouse listed on the tax return.6

 These 676,992 tax returns received EITC totaling 

 

1

 A 12-month accounting period for keeping records on income and expenses used as the basis for calculating the 

annual taxes due. For most individual taxpayers, the tax year is synonymous with the calendar year. 

2

 The five-year forecast for potential funds put to better use is based on multiplying the base year by five and 

assumes, among other considerations, that economic conditions and tax laws do not change. 

3

 The amount may also be affected by employer reporting errors or employer nonreporting. 

4

 Our analysis did not include taxpayers who had an EITC reversed on their account. 5

 We removed tax returns on which disability payments were reported on the Form 1040, Line 7 – Wages which 

were supported by Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, 

IRAs, Insurance Contracts, etc., with a Distribution Code 3 for disability income. 6

 Some of the tax returns we identified could also be the result of nonreporting of income and withholding by the 

employer. 

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$1,712,725,533. We forecast that the IRS could prevent the issuance of $8,563,627,665 in 

questionable EITC claims over the next five years ($1,712,725,533 x 5). 

This outcome is achievable if: 1) the IRS is granted expanded legislative authority to 

systemically disallow EITC claims based on NDNH employment results and 2) the IRS obtains 

an entire copy of the NDNH database for use during tax return processing to systemically 

identify unsupported wages reported on tax returns to erroneously claim the EITC. 

The actual amount of questionable EITC claims the IRS will identify and prevent is dependent 

on the actions the IRS takes to obtain needed authority and access to NDNH data and will not be 

known until such authority and data use are implemented.

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Appendix V 

Earned Income Tax Credit Eligibility Rules 

Taxpayers claiming the EITC must meet specific criteria to qualify for the credit. Additional 

criteria apply for those taxpayers who have qualifying children. Figure 1 lists the basic EITC 

eligibility requirements. Figure 2 shows the additional eligibility tests of age, relationship, 

residency, and joint return requirements that must be met by taxpayers claiming the EITC with a 

qualifying child. The maximum EITC available for Tax Year 2013 ranges from $487 for 

taxpayers with no qualifying children to $6,044 with three or more qualifying children. 

Figure 1: Basic EITC Eligibility Requirements 

First, you must meet all 

the rules in this column

Second, you must meet all the rules in 

one of these columns, whichever applies Third, you must 

meet the rule in 

this column

Rules if you have a 

qualifying child

Rules if you do not 

have a qualifying child

1. Your adjusted gross income 8. Your child must 11. You must be at 15. Your earned 

must be less than: meet the least age 25 but income must be 

 $46,227 ($51,567 for married 

filing jointly) if you have three 

or more qualifying children, 

relationship, age, 

residency, and joint 

return tests. 

12. 

under age 65. 

You cannot be the 

dependent of 

less than: 

 $46,227($51,567 

for married filing 







$43,038 ($48,378 for married 

filing jointly) if you have two 

qualifying children, 

$37,870 ($43,210 for married 

filing jointly) if you have one 

qualifying child, or 

$14,340 ($19,680 for married 

filing jointly) if you do not 

have a qualifying child. 

9. 

10. 

Your qualifying 

child cannot be 

used by more than 

one person to 

claim the EITC. 

You cannot be a 

qualifying child of 

another person. 

13. 

14. 

another person. 

You cannot be a 

qualifying child of 

another person. 

You must have 

lived in the United 

States more than 

half of the year. 

jointly) if you have 

three or more 

qualifying children, 

 $43,038 ($48,378 

for married filing 

jointly) if you have 

two qualifying 

children, 

 $37,870 ($43,210 

for married filing 

2. You must have a valid SSN. jointly) if you have 

3. Your filing status cannot be one qualifying 

married filing separately. child, or 

4. You must be a U.S. citizen or  $14,340 ($19,680 

resident alien all year. for married filing 

5. You cannot file Form 2555, 

Foreign Earned Income, or 

Form 2555-EZ, Foreign Earned 

jointly) if you do 

not have a 

qualifying child. 

Income Inclusion (relating to 

foreign earned income). 

6. You must have earned income. 

7. Your investment income must 

be $3,300 or less. 

Source: IRS Publication 596, Earned Income Credit (EIC), for use in preparing 2013 Returns. 

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Figure 2: Additional EITC Eligibility Tests of Age, 

Relationship, Residency, and Joint Return Requirements

Eligibility Test Qualifying Child Criteria

Relationship Must meet one of the following relationship tests: 

 Son, daughter, stepchild, foster child, or a descendant of any of them 

(for example, your grandchild), or 

 Brother, sister, half-brother, half-sister, stepbrother, stepsister, or a 

descendant of any of them (for example, your niece or nephew). 

Adopted child. An adopted child is always treated as your own child. The 

term “adopted child” includes a child who was lawfully placed with you for 

legal adoption. 

Age Must meet one of the following age tests: 

 Under age 19 at the end of Tax Year 2013 and younger than you 

(or your spouse, if filing jointly), 

 Under age 24 at the end of Tax Year 2013, a student, and younger 

than you (or your spouse, if filing jointly), or

 Permanently and totally disabled at any time during Tax Year 2013, 

regardless of age. 

Residency Your child must have lived with you in the United States for more than 

half of Tax Year 2013. 

Joint Return The child cannot file a joint return for the year. Exception: An exception to 

the joint return test applies if your child and his or her spouse file a joint 

return only to claim a refund of income tax withheld or estimated tax paid. 

Source: IRS Publication 596. 

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Appendix VI 

Qualifying Child Criteria for the Child Tax Credit 

or the Additional Child Tax Credit 

The CTC can reduce an individual’s taxes owed by as much as $1,000 for each qualifying child. 

For Tax Year 2013, the ACTC is equal to the lesser of the CTC that was not allowed or 

15 percent of earned income that is more than $3,000.1 Figure 1 shows the seven eligibility tests 

a child must meet to qualify for the CTC or the ACTC. 

Eligibility Test Qualifying Criteria

Age A qualifying child must be under age 17 at the end of the tax year. 

Relationship The child must be the taxpayer’s son, daughter, stepchild, foster child, brother, 

sister, stepbrother, stepsister, or a descendant of any of them (for example, a 

grandchild, niece, or nephew) and an adopted child (includes a child lawfully 

placed for legal adoption). 

Support The child must not have provided more than one-half of their own support for the 

tax year. 

Dependent The taxpayer must claim the child as a dependent on the Federal tax return. 

Citizenship The child must be a U.S. citizen, U.S. national,2

 or U.S. resident alien.3

Joint Return The child does not file a joint return for the year (or files joint to claim a refund). 

Residence The child must have lived with claimant for more than one-half of the year.4

 

Source: IRS Publication 972, Child Tax Credit, for use in preparing 2013 returns. 

Limitations: The CTC is limited if modified adjusted gross income is above a certain amount 

(which varies depending on the taxpayer’s filing status).5

 In addition, the CTC is generally 

limited by the amount of the income tax owed as well as any alternative minimum tax owed. 

 

1

 Tax-exempt combat pay is included as earned income when calculating the ACTC. 2

 A U.S. national is an individual who, although not a U.S. citizen, owes his or her allegiance to the United States. 

U.S. nationals include American Samoans and Northern Mariana Islanders who chose to become U.S. nationals 

instead of U.S. citizens. 

3

 Publication 519, U.S. Tax Guide for Aliens, states that an individual will be considered a U.S. resident for tax 

purposes if they meet the substantial presence test for the calendar year. To meet this test, the individual must be 

physically present in the United States on at least 31 calendar days during the current year and 183 calendar days 

during the three-year period that includes the current year and the two years immediately before. 4

 There are some exceptions to the residence test, which can be found in IRS Publication 972. 5

 For married taxpayers filing a joint return, the phase-out begins at $110,000. For married taxpayers filing a 

separate return, it begins at $55,000. For all other taxpayers, the phase-out begins at $75,000. 

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Appendix VII 

Efforts to Address the Root Causes of 

Earned Income Tax Credit Improper Payments 

The IRS has several programs to address the root causes of EITC improper payments. The IRS 

considers these programs as part of its overall strategy to ensure compliance with the rules. 

Many of these programs are aimed at identifying and preventing erroneous payments once a tax 

return is filed rather than correcting the underlying reason that the error is occurring. 

Outreach and Education – Programs designed to educate taxpayers and tax return preparers on 

the legal requirements for EITC eligibility so they can apply the law accurately. 

 Annual EITC Marketing Campaign – This campaign, which includes the EITC 

Awareness Day, targets underserved populations and includes print and media tours. 

 EITC Due Diligence Training Modules – A web-based initiative in which tax return 

preparers can earn a certificate of completion. 

 Nationwide Tax Forum EITC Training – Annual seminars that educate tax return 

preparers on EITC due diligence requirements and qualifying child requirements. 

 External Stakeholders – The IRS works with external stakeholders including the tax 

return preparer community to share information regarding the EITC in an effort to 

identify trends and improve compliance. 

Enforcement – Programs intended to contribute to the broader strategy of identifying errors as 

early in the process as possible. The IRS’s prevention activity focuses on three main areas: 

 Audits – The IRS identifies returns for examination usually before the refund is released. 

Because of the refundable nature of the credit, the high error rate, and the high dollar 

amount associated with the credit, returns with EITC claims are twice as likely to be 

audited as other individual taxpayer returns. According to the IRS, 70 percent of the 

examinations the IRS conducts each year are prerefund examinations in which the IRS 

determines the validity of the EITC claim before the EITC refund is issued. The 

remaining 30 percent of the examinations are conducted post refund. 

 Math Error – An automated process performed while tax returns are being processed and 

before refunds are sent to taxpayers in which the IRS identifies math or other 

irregularities and automatically prepares an adjusted return for a taxpayer filing on paper 

and generally rejects electronic returns. The IRS currently has limited legislative 

authority to use this process. 

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 Document Matching – The IRS matches income claimed on tax returns to income 

reported by employers and other third parties to identify discrepancies that involve 

instances in which EITC claimants underreport income. 

Figure 1 shows the main EITC compliance activities and the resulting total revenue protected for 

Fiscal Years1

 2008 through 2014. 

Figure 1: EITC Compliance Activities and Total Revenue Protected 

(Dollars in Billions) for Fiscal Years 2008 Through 2014 

Fiscal 

Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Years 

Compliance Year Year Year Year Year Year Year 2008–2014 

Activity 2008 2009 2010 2011 20122 20133 20144 Total 

Examination 

Closures 503,755 508,180 473,999 483,574 487,408 483,139 483,000 3,423,055 

Math Error 

Notices5 432,797 355,416 341,824 293,450 270,492 240,000 210,000 2,143,979 

Document 

Matching 727,916 688,087 904,920 1,178,129 985,172 906,994 907,000 6,298,218 

Amended 

Returns6 32,473 25,395 19,347 14,317 13,284 8,129 8,000 120,945 

Total 

Revenue 

Protected $ 3.74 $ 3.79 $ 3.87 $ 3.75 $ 3.95 $ 3.84 $ 3.69 $ 26.63 

(in Billions) 

Source: The Department of the Treasury’s Agency Financial Report for Fiscal Year 2013. 

 

1

 Any yearly accounting period, regardless of its relationship to a calendar year. The Federal Government’s fiscal 

year begins on October 1 and ends on September 30. 

2

 Restated actual. 

3

 Preliminary estimates. 

4

 Estimated based on Fiscal Year 2013 preliminary data. 

5

 The EITC withheld from the claimant; includes decreases in the amount of the EITC claimed as well as 

disallowance of the full EITC claim. 

6

 Amended returns are a subset of Examination Closures. 

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Appendix VIII 

Earned Income Tax Credit 

Tax Return Preparer Strategy 

As part of its efforts to address EITC improper payments, the IRS developed an EITC paid 

preparer strategy that focuses on tax return preparers who are not compliant with the EITC due 

diligence requirements. Figure 1 provides results of this strategy for Fiscal Year 2013.

Figure 1: Results of the EITC Tax Return Preparer Strategy for Fiscal Year 2013 

Penalties EITC Revenue 

Treatment Description Program Results 

Proposed 

(in millions)

Protected 

(in millions) 

Due Diligence 

Visit (DDV)1 Prefiling season DDVs 540 visits 

86 percent penalty rate $14.9 $43.8 

Filing season DDVs 300 visits 

81 percent penalty rate Almost $2.9 $7.5 

Filing season follow-up DDVs2 27 visits 

67 percent penalty rate

More Than 

$200,000 Not Measured3

Knock and Visits made by auditors and 

Talk Visit Criminal Investigation agents 

to educate EITC preparers on 105 visits 4 None $10.0 

EITC laws and due diligence 

requirements. 

EITC Due 

Diligence 

Injunction 

Court action to prevent 

egregious preparers from 

filing future returns. 

4 injunctions $0 $15.4 

DDV Warning 

Letter 

Prefiling season letters to 

advise preparers of EITC 

due diligence problems. 

9,453 letters $0 $275.1 

Filing season letters to advise 

preparers of continuing EITC 1,781 letters $0 $16.9 

due diligence problems. 

Source: The Internal Revenue Service Filing Season 2013 EITC Real Time Return Preparer Initial Finding and 

Fiscal Year 2013 Executive Order Report. 

 

1

 Field examiners audit EITC preparers to verify that they are meeting their due diligence requirements and assert 

penalties as warranted. 

2

 A filing season follow-up DDV is for continuing noncompliant preparers who received an educational visit. 3

 Insufficient sample size. 

4

 Integrated approach for educational purposes. 

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 Appendix IX

Management’s Response to the Draft Report 

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and Additional Child Tax Credit Payments 

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