The Earned Income Tax Credit, which I formulated in 1975, is the perennial leader of improper tax payments, running $16.9 billion in FY10 according to this GAO report. That’s out of $56.2 billion of total cost for the EITC as estimated by the Joint Committee on Taxation here. Some of that $16.9 billion is fraud, and some isn’t. The EITC is complicated, and many poor people walk into the offices of tax preparers early every year to claim it without understanding all the ins and outs of the law. The preparers do the best they can with inadequate documentation, but still, a 30% error rate is not good. The basic purpose of the EITC, to reward the poor for work by offsetting a large portion of their payroll tax payments, is a good one first proposed by Milton Friedman and pushed into law by Presidents Nixon and Ford. When the poor work, they draw less in benefit payments. That same GAO report shows much more is lost in improper Medicare and Medicaid payments.
The First-Time Homebuyer Tax Credit is another example. On April 15, 2011, the Treasury IG published this notice of $513 million of fraudulent claims, including some form 128 IRS employees! On February, 2009, the Joint Committee on Taxation estimated this credit would cost about $4.2 billion over five years, so $513 million is a lot of fraud. The lesson here is that congressional pressure to sell more homes and to create more jobs can waste a lot of money. The other lesson is that Congress often imposes impossible administrative burdens on the IRS to determine if people qualify for such tax credits.