The following post first appeared on FactCheck.org.
Sen. Rand Paul falsely claimed that a tax credit program for low-income workers has a “fraud rate” of 25 percent and costs taxpayers “$20 billion to $30 billion.” Paul cited a report by the Government Accountability Office, but that’s not what the report said.
The earned income tax credit program had an “improper payment error rate” of 24 percent in fiscal year 2013, according to the latest GAO report. The error rate includes fraud, but also represents mistakes made by taxpayers when filing tax forms and the IRS when processing payments. The GAO blamed the mistakes on the “complexity of the tax law.” The errors cost taxpayers $14.5 billion — which is less than half of the high-end estimate provided by Paul.
Paul, a Kentucky Republican who is considering running for president, joined two other potential GOP presidential candidates at a Jan. 25 forum sponsored by the conservative Freedom Partners Chamber of Commerce. Sens. Marco Rubio of Florida and Ted Cruz of Texas also attended.
The moderator, Jon Karl of ABC News, asked the senators if they agreed with Rep. Paul Ryan’s proposal to expand the earned income tax credit and pay for the expansion by eliminating other tax breaks. The EITC is a refundable tax credit, which means that low-income taxpayers who have no tax liability can receive a refund. Otherwise, the tax credit is used to reduce a taxpayer’s liability.
Paul said he opposes Ryan’s plan and criticized the EITC program for being rife with fraud.
Paul, Jan. 25: When you look at the earned income tax credit, it has about a 25 percent fraud rate. We’re looking at $20 billion to $30 billion. And this is from estimates from the GAO [Government Accountability Office], from the government themselves.
That’s not what the GAO said.
The GAO issued a report Dec. 9, 2014, on improper payments made by various government agencies, including the IRS. The GAO said the EITC program had what it labeled an “improper payment error rate” of 24 percent at a cost of $14.5 billion in fiscal year 2013.
The GAO figures represent the midpoint between the estimates provided by the IRS itself, as required under a 2002 law, and contained in a report by the Treasury Inspector General for Tax Administration that was released March 31, 2014. The TIGTA report says the “improper payment rate” was between 22 percent and 26 percent in fiscal year 2013, costing taxpayers between $13.3 billion and $15.6 billion — roughly half of what Paul claimed when he placed the range between $20 billion and $30 billion.
The GAO and TIGTA do not mention fraud in their reports or use the term “fraud rate.” TIGTA defines an improper payment as “a payment that should not have been made or that was made in an incorrect amount or to an ineligible recipient.” GAO says that includes “duplicate or erroneous payments, payments to ineligible recipients, or payments for ineligible services.”
Improper payments include fraud, but the GAO and TIGTA reports do not say how much of the improper payments may be the result of fraud.
Why is there such a high error rate for the EITC program? GAO says that “the Department of the Treasury (Treasury) OIG reported that the complexity of the tax law was a barrier to reducing the improper payment error rate for the Internal Revenue Service’s Earned Income Tax Credit program.”
A second inspector general’s report, which was released in April, said the IRS is looking at ways to simplify the tax law. “Management noted that IRS is exploring new approaches such as the simplification of EITC eligibility criteria and the identification of more efficient means to distinguish valid claims from over claims,” the report said.
Improper payment rates have been a problem for years in many government programs. The GAO report listed the five federal programs that reported the largest improper payments in fiscal 2013: Medicare’s traditional fee-for-service program ($36 billion), EITC ($14.5 billion), Medicaid ($14.4 billion), Medicare Advantage ($11.8 billion), unemployment insurance ($6.2 billion). Those five programs accounted for 78 percent of the total improper payments made by the federal government in fiscal 2013, GAO says.
In an attempt to reduce improper payments, Congress passed the Improper Payments Information Act of 2002, which requires agencies to annually estimate the cost of improper payments and publish a corrective plan to reduce them.
Despite the law, the IRS continues to report high rates of improper payments in the tax credit program. In the first year of reporting improper payments, the IRS said the rate was between 25 percent and 30 percent in fiscal 2003. It dropped the next year to 22 percent to 27 percent. But it hasn’t changed much since then. (See Figure 2 in TIGTA’s latest annual report.)
We’re not minimizing the problem of improper payments in the earned income tax credit program. But Paul is wrong to claim that all recipients of EITC’s improper payments — whether overpayments or ineligible payments — obtained the money by committing fraud. He is also far off on how much the errors cost taxpayers.
This posted has been updated to show the “improper payment rate” in the fiscal year 2013 actually costs taxpayers $13.3 billion to $15.6 billion.