Child tax credit expansion for filers without income raises fraud concerns

Congress' decision to expand the child tax credit to allow more individuals and couples to qualify, including those without income, has raised concerns of heightened fraud and improper payments made by the IRS. 

House Majority Leader Steny Hoyer (D-Md.) urged the Treasury Department and the IRS on Tuesday to "tighten up the system" as the agencies prepare to send out advance monthly child tax credit (CTC) payments.

As the IRS begins to roll out an automatic advance monthly payment system for the CTC with the first payments starting in July, there's a risk of double CTC claims in "split custody situations," according to Garrett Watson, an expert with the Tax Foundation.

The monthly payments were included as part of President Biden's $1.9 trillion American Rescue Plan. The payments would be based on information reported to the IRS on tax year 2020 or 2019 returns. The $1,400 stimulus payments in Biden's rescue plan were based on the same tax information. 

"One risk is in figuring out who gets monthly payments in split custody situations," Watson told Just the News. "Right now, there is often agreement to alternate claiming the credit annually, and it's unclear how that would translate to monthly payments. There is a risk of double claims, if there isn't a straightforward way to figure that out, resulting in clawbacks.

"The other risk is when advancing the credit, the filer needs to accurately account for expected income and marital status. Getting those wrong could result in needing to pay some of the advanced amount back next spring, though I'm not sure if this would be categorized as an improper payment strictly speaking." 

In FY 2020, the Treasury inspector general found that $4.5 billion of $39.1 billion total CTC payments were considered improper, approximately 12%. The Earned Income Tax Credit was also expanded as part of Biden's rescue plan. The IRS estimated in the report that 24% ($16 billion) of the total EITC payments of $68.2 billion were considered improper.

Hoyer, a supporter of expanding the CTC, was asked Tuesday if he is worried about heightened fraud and improper payments since more individuals than ever before are eligible to receive the CTC.

"I think that it's obviously a matter of concern ... I haven't read the IG's report in terms of what recommendations the IG has made, but we need to do everything we can to preclude fraud," Hoyer said. "But if there's 13% fraud, that means 80% of the people are justifiably getting, and that means 87% of the kids are justifiably getting support that they need to have some quality of life. 

"So we ought not to, you know, have to throw the baby, if you will, out with the bathwater. What we need to do is tighten up the system, and we ought to take such steps. We don't want fraud. We don't want people who are not justified in having assistance, either because of income or because of not having a child, whatever, that is of concern, but we need to keep our eye on the fact that means 87% are justifiably in need of the support that they're receiving. So we want to eliminate the bad and keep the good."