IRS Overpaid on Tax Credit for the Poor by Up to $13.6 Billion


As Washington's battles over the budget and sequestration have played out over the past few months, pundits, politicians and analysts have flooded the airwaves and Internet with arguments about the government's spending priorities. However, amid all the bluster and bloviating, one fascinating piece of budgetary arcana has escaped much comment until now: One fairly major line item in the federal budget is, essentially, an accounting error.

On Tuesday, The Hill reported that the IRS overpaid the benefit for the Earned Income Tax Credit program by between 21 percent and 25 percent -- or $11.6 billion to $13.6 billion -- in 2012. Put in context, the FBI spent just over $8 billion on salaries that year. The Department of Education's budget for grants to primary and secondary education in 2013 is $14.5 billion. In terms of sequestration cuts, the EITC's overpayment exceeds the $9.9 billion that has been cut from Medicare, and is equal to a little less than half of the $28.7 billion that is getting stripped from all discretionary federal spending.

On the bright side, the IRS estimates that 2012 overpayment was lower than in most years; then again, over the last decade, the IRS has overpaid by up to $132.6 billion. For that matter, the program has broad bipartisan support, and most politicians agree that the overpayments have gone to a good cause: The EITC directly helps the country's poorest workers.

Under the program, a single taxpayer without children can claim up to $475 for the EITC if he or she makes less than $13,980 a year. The benefit level increases as a family's need goes up: Depending on their income and the number of children they have, claimants can receive up to $5,891. What's more, because the EITC is a refundable tax credit -- not just a deduction -- qualified taxpayers can claim it even if it totals more than their entire tax burden. In other words, it can mean a large tax refund for families facing hard financial times.

It isn't hard to see why the EITC's overpayments are so high: The limited time that the IRS has to process tax returns makes it hard for the agency to investigate all EITC claims, particularly given the hard-to-verify salary requirements. Then again, given that the EITC has been so helpful in directing money straight into the pockets of families who need it most, it is, perhaps, easy to understand why few politicians in either party are clamoring to place intense accounting restrictions on it.

Bruce Watson is DailyFinance's Savings editor. You can reach him by e-mail at, or follow him on Twitter at @bruce1971.