$106 billion dollars in wrongful refundable tax credit payments by the IRS is a lot of money even on Capitol Hill. Accordingly, based on a Government Account Office (GAO) report, Congress will be holding hearings in the House Ways and Means Oversight Subcommittee to get to the bottom of what can only be described as a huge problem for the IRS.

IRS lawyers say Earn Income Tax Credits, Child Tax Credits, and The First Time Home Buyers’ Credit are all refundable tax credits. A refundable tax credit means a taxpayer can receive payments from the government that exceed his/her actual tax liabilities.

According to the GAO, in 2010 the IRS improperly gave refunds totaling $16.9 billion dollars attributable to the Earned Income Tax Credit (EITC). Whoops! In 2009, there were more than $11 billion dollars in improper EITCs issued by the Agency. IRS attorneys say that means nearly a quarter (1/4) of all taxpayers receiving the EITC in 2009 were ineligible.

IRS tax lawyers explain the EITC is complicated and tax return preparers do their best with clients who bring in partial documentation and don’t really understand how the IRS tax law for these credits is intended to work. The GAO claims there is still a 30% error rate with these types of refundable tax credits.

IRS lawyers say the EITC was intended to reward the poor for working by off-setting a significant amount of their payroll taxes. IRS attorneys claim that the theory was that if the poor were encouraged to work they would be less depended on government benefits thereby ultimately saving the government in the long run.

And let’s not forget the IRS also issued $513 million dollars of refunds, based on fraudulent claims, as part of the beleaguered first-time home buyers’ credit. In fact, recent news reports that 128 IRS employees fraudulently made such claims sure won’t help the IRS as it attempts to explain to Congress how it’s managing this refundable tax credit. The GAO estimates that $513 million dollars will really end-up costing the government 4.2 billion dollars over the next five years.

Another problem IRS tax lawyers suggest is hurting the Agency with Congress is that the IRS supposedly neglected to follow years of recommendations by the Treasury’s Inspector General. In fact, during a hearing on the Hill, Representative Charles Boustany (Republican from Louisiana) said “the agency has also failed to implement years of inspector general recommendations that, if accepted, could save taxpayers billions of dollars.”

In the end, however, the IRS’s mistakes could come back to bite those who benefited from wrongful refundable tax credit payments. In addition to owing back taxes, these folks may be subjected to substantial penalties and even, in some cases possible jail. If you received a refundable tax credit and have questions, you should consider contacting a competent IRS tax attorney or other tax professional to get the answers you need.


Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

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