Using the tax agency's own numbers, the investigator said about quarter of all earned income tax credits go to families that don't meet the requirements.
The IRS has known about the improper payments for years but has not done enough to stop them, said J. Russell George, the Treasury inspector for tax administration. From 2003 to 2009, improper payments have totaled at least $70 billion, according to a report issued by George. In 2009, between $11.2 billion and $13.3 billion was improperly paid out.
"While the earned income tax credit helps many deserving Americans, it is well past time for the IRS to reduce the amount of improper payments in the program," George said. "The loss of billions of dollars in improper EITC payments annually calls for aggressive and immediate action."
IRS spokeswoman Michelle Eldridge says the agency has worked hard to enforce a complicated section of the tax code. She says taxpayers who receive the credits are twice as likely as others to be audited.
"The IRS is strongly committed to ensuring the accuracy of EITC claims and protecting against improper payments," Eldridge said. "Every year, the IRS conducts 500,000 EITC audits as part of a broader enforcement strategy, and EITC claims are twice as likely to be audited as other tax returns. The IRS protects nearly $4 billion in improper claims each year."
The earned income tax credit is a favorite among advocates for the poor, who hail it as one of the nation's most successful anti-poverty programs. In 2009, 24 million low-and moderate-income working families claimed $55 billion in credits, according to the IRS. Families earn the credits by working and earning wages, but there are income limits, depending on how many children are in each family.
For 2010, a married couple with three children could make as much as $48,362 and qualify for the tax credit. A married couple with two children could make as much as $45,373. The top credit is $5,666 for a family with three or more qualifying children; $5,036 for a family with two qualifying children.
For many families, the credits are worth more than the federal income taxes they owe. Those families receive the excess credits in the form of a payment from the government after they file their federal tax returns.
Several Republican lawmakers said the report released Wednesday shows there are serious problems with the program.
Sen. Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, called the report "an absolute indictment on how badly the IRS has handled this."
"It's been nine years, and the IRS' own estimate found that one-fourth of all of payments are issued improperly," Hatch said. "That's unacceptable and I have already contacted the IRS to make clear to them that this situation needs to be fixed as soon as possible."
Rep. Charles Boustany, R-La., chairman of the House Ways and Means oversight subcommittee, said, "The IRS has failed in its duty to enforce existing law, and the billions of dollars erroneously paid out in recent years is disgraceful, especially when our economy continues to suffer."
The IRS said in a written response to the report that the tax credit is extremely complicated to administer. It noted that eligible taxpayers often have changing incomes that make them eligible one year and not the next. The agency said it hopes to improve enforcement through a new program that requires paid tax preparers to register with the IRS and get training. The agency said that 66 percent of those who apply for the credit use paid tax preparers.
"Although we agree that the risk associated with improper EITC payments remains significant, we believe the actions we have taken and our evolving strategies reflect our substantial and ongoing commitment to addressing this complex issue," the IRS said in its response.
The agency, however, said that any efforts to reduce improper payments "must be considered in light of adverse impact on the participation rate and on the need for the IRS to maintain a balanced enforcement and compliance program."
Sen. Charles Grassley, R-Iowa, noted that the rate of improper payments barely budged from 2003 to 2009. In 2009, the IRS estimated the rate of improper payments at 23 percent to 28 percent.
"For more than eight years, the IRS hasn't made a dent in this problem," Grassley said. "It's more than enough time to figure out a way to fix it."