Arrival of Obamacare puts focus on IRS tax-credit scandal

There’s no doubt congressional investigators have their hands full probing allegations the Internal Revenue Service targeted conservative non-profit groups. But now a different IRS scandal — involving the chronic, ongoing, mind-bogglingly wasteful mismanagement of a popular tax credit program — demands Congress’s attention because it has taken on new importance with the arrival of Obamacare.

The program is the Earned Income Tax Credit, through which the federal government gives out between $60 billion and $70 billion to low-income working Americans each year. It’s known as a “refundable” tax credit, but it is basically a transfer payment, in which the IRS sends a check — perhaps even $5,000 every year — to workers who have little or no tax liability.

The problem is, the IRS does little to determine whether recipients actually qualify for the money. A recent report by the IRS inspector general says the agency has given out somewhere between $110 billion and $132 billion in improper Earned Income Tax Credit payments in the last decade. In that time period, between 21 and 30 percent of tax credit payments went to people who didn’t qualify for them.

That is bad enough. But what infuriates lawmakers is that the IRS refuses to do anything about it. Agency officials told the inspector general they couldn’t fix the problem because the tax credit program is very complicated, and also because they are afraid vigorous enforcement would discourage legitimately qualified recipients from applying for credits. And the IRS is not only not working to reduce improper payments, it is refusing to report those payments to Congress as required. The bottom line, in the words of inspector general Russell George: “The IRS is unlikely to achieve any significant reduction in Earned Income Tax Credit improper payments.”

Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, has heard that before. “The IRS has repeatedly ignored the fraud and abuse in the Earned Income Tax Credit program, which has already cost Americans over $100 billion,” Camp said in a statement Monday. “Americans should be confident that their tax dollars are being used properly, but that confidence has been shattered by the blatant disregard this agency has shown for monitoring refundable tax credits and better protecting taxpayers.”

The flow of money has continued despite the Improper Payments Elimination and Recovery Act, which Congress passed and President Obama signed in 2010. The law “requires agencies to achieve an improper payment rate of 10 percent or less for each high-risk program,” says a recent compilation of IRS reports prepared by the Ways and Means Committee. “The Earned Income Tax Credit’s improper payment rate has been above 20 percent since 2003.”

And now comes Obamacare. In the new national health care scheme, the IRS will do basically what it does with the Earned Income Tax Credit: It will determine Americans’ eligibility for subsidies, to be paid in the form of tax credits, and then hand those tax credits out. And that has lawmakers concerned.

“Considering the IRS’s failure to address the Earned Income Tax Credit problem,” says Camp, “there is no reason to think the agency will somehow do a better job administering the refundable tax credits included in Obamacare.”

Indeed, it is easy to imagine the IRS arguing that it simply cannot prevent improper Obamacare tax credits because the health system is so complicated and because it does not want to discourage legitimately qualified Americans from receiving health care subsidies. If the fraud level is anything like the Earned Income Tax Credit program, improper Obamacare payments could soar into the hundreds of billions of dollars.

And what will Congress do about it? Maybe not much. Hill sources say the Ways and Means Committee is “evaluating” the latest tax credit figures and might possibly schedule a hearing. But one source adds, “We have brought this up with IRS officials in the past, but without much impact, as they tend to talk but not act.”

So doesn’t Congress have anything to say about that? If the IRS thumbs its nose at lawmakers, do lawmakers have to take it? Of course not. Congress has broad powers to oversee federal agencies; if lawmakers wanted, they could knock some heads and get the IRS’s attention.

Whether Congress will exercise that power is another question altogether. It certainly hasn’t in the past. But with the arrival of Obamacare, the question of improper payments by the IRS, already an ongoing scandal, might soar to a new level, finally demanding action.