ModernTax Insights: Addressing Improper Tax Credits and the Evolution of Data Use in Financial Services

May 28, 2024

Welcome back to the ModernTax series, where today's post takes you behind the scenes of the tax industry. We'll be shining a spotlight on the IRS's compliance journey with improper payment rules for FY2023, and discussing the ripple effects this has across our sector. So sit back, grab a coffee, and dive into the world of taxation with us.

The IRS met most improper payment rules in FY2023. However, high-risk program rates exceeded the 10% target due to insufficient taxpayer outreach and lax enforcement. The Treasury's risk assessment template did not sufficiently capture IRS refundable credit risks. This issue impacts us at ModernTax as it influences the data we provide to our customers and the efficiency of our services.

The Treasury Inspector General for Tax Administration (TIGTA) released a report focusing on improper tax credit payments. The Payment Integrity Information Act of 2019 mandates the IRS to report on their accuracy in tracking improper payments. While the agency showed improvement, it also recorded a higher rate of high-risk payments than the less than 10% goal.

Several tax credits recorded high improper payment rates. The American Opportunity Tax Credit showed a 31.6% rate, translating to $1.7 billion in improper payments out of $5.2 billion total claims. The Earned Income Tax Credit exhibited a 33.5% rate, amounting to $21.9 billion in improper payments out of $65.4 billion total claims. Lastly, the Net Premium Tax Credit recorded a 26.0% rate, meaning $1.0 billion in improper payments out of $3.7 billion total claims.

Taken together, the improper payments for these three credits in FY2023 totalled $24.6 billion. These high rates suggest significant inaccuracies in the tax return data used to claim these credits. This issue could potentially affect the accuracy of tax return data used by individuals to qualify for other services and benefits that rely on income information from tax returns.

The IRS is planning to mitigate these improper payments through education and enforcement. They aim to educate taxpayers and tax preparers to claim credits accurately upfront, rather than conducting additional pre-refund audits. However, these outreach initiatives may not have an immediate impact on reducing the improper payment rates.

In addition to education, the IRS aims to increase enforcement activities focused on potentially noncompliant tax return preparers who contribute to improper payments. However, don't expect overly harsh enforcement on tax preparers - that's how over 65% of Americans still file their taxes and how the IRS generates most of its revenue.

There is significant room for improvement in helping taxpayers claim credits like the EITC, AOTC, and PTC correctly. More accurate tax records can only benefit the evolving use cases of how data can assist taxpayers in acquiring better financial services.

Stay tuned for more updates on our work at ModernTax as we continue to strive to provide you with the best insights into the world of tax data and its potential to revolutionize financial services.

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