IRS squanders nearly $1B in erroneous pandemic credits, won't try to recoup: Treasury watchdog

The Golden Horseshoe is a weekly designation from Just The News intended to highlight egregious examples of wasteful taxpayer spending by the government. The award is named for the horseshoe-shaped toilet seats for military airplanes that cost the Pentagon a whopping $640 each back in the 1980s.

This week's Golden Horseshoe is awarded to the IRS for issuing almost $1 billion in improper pandemic tax credits — and rebuffing an inspector general's recommendations to recover the erroneous payments.

The tax collectors issued potentially $898 million in improper Recovery Rebate Credits (RRCs) to ineligible individuals, including potential nonresident aliens, according to a final audit report by the Treasury Inspector General for Tax Administration (TIGTA).

The CARES Act authorized Economic Impact Payments in varying amounts depending on income and filing status. Any eligible individual who did not receive the stimulus payment could claim the missing amount on their tax return as an RRC on their taxes in 2020 and 2021.

"As of May 27, 2021, the IRS had processed 26.3 million tax returns with RRC claims totaling $39.2 billion," according to the TIGTA final audit report. "Of these, the IRS issued potentially improper RRC payments totaling $898 million. These include $79.8 million in the RRC that should have been paid to eligible individuals and $818.5 million in the RRC that was paid to ineligible individuals."   

The IRS declined to review or take steps to recover approximately two-thirds of the erroneously disbursed amounts, the inspector general revealed.

"The IRS did not agree to review erroneous payments totaling nearly $598 million that were paid to ineligible individuals as of May 27, 2021," the IG said. "The IRS also did not agree to conduct analysis to identify and recover additional erroneous RRC payments issued after May 27, 2021."

The watchdog found potentially 355,015 individuals were erroneously issued the payments, which included "ineligible dependents, nonresidents, and individuals associated with a credit from a U.S. Territory."

There were 75,594 tax returns with RRCs for more than $125 million that the IRS issued to potentially nonresident aliens, the TIG found.

IRS programming, errors by examiners in their Error Resolution Department, and timing issues all contributed to the improper payments, according to the watchdog, which found that while the IRS did have a 99.3% accuracy rate, the 0.7% errors totaled nearly $898 million.

The IRS agreed with just eight of 22 of the inspector general's recommendations.

Rejecting a recommendation to recover improper claims processed after May 27, 2021, Commissioner of the Wage and Investment Division Kenneth Corbin wrote to Deputy IG Michael McKenney that reviewing those claims "would require us to divert limited resources where there is only a 0.7 percent projected error rate."

The IRS disputed the premise underlying the IG's recommendation to review the 75,594 potentially nonresident alien tax returns. 

"We disagree with TIGTA's methodology to identify taxpayers who were potentially non-resident aliens," Corbin wrote. "The exemption from employer withholding of Federal Insurance Contributions Act (FICA) taxes is not a proxy for an individual's status as a resident alien or nonresident alien."

The IG also recommended the IRS review the 14,508 cases in which RRCs were  improperly issued when dependents were claimed on someone else's taxes and take steps to recover the erroneous payments. Rejecting the auditor's recommendation, Corbin defended the adequacy of existing IRS compliance checks and selective examination of ineligible claims within resource limitations.

Declining to review such ineligible claims processed after May 27, 2021, Corbin said the recovery effort "would require the IRS to divert limited resources to review these returns when such a small percentage, five one-hundredths of one percent, are projected to be affected by the issue."

Democrats increased the IRS budget by 6% in the recent omnibus spending legislation, and an additional 10,000 agents were expected to be hired.