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IRS is trying to catch stimulus payment fraud, but billions may have been paid - Accounting Today

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The Internal Revenue Service issued more than 4.4 million Economic Impact Payments last year totaling more than $5.5 billion to potentially ineligible people, according to a new report.

The report, released Thursday by the Treasury Inspector General for Tax Administration, found that as of July 16, 2020, those 4.4 million potentially ineligible payments went out to deceased individuals, potentially nonqualified dependents, nonresidents, individuals in U.S. territories (who have also received payments from the territories), and individuals with filing status changes. In response to TIGTA alerting IRS management about the potentially ineligible payments, the IRS added instructions to its website to inform people about their ineligibility and the need to return the payments, including the process they should follow. As of Oct. 1, 2020, they voluntarily returned 65,447 payments totaling more than $80 million.

Fraudsters and identity thieves have been taking advantage of the generous COVID-19 relief programs like the EIP that the federal government rushed out last year in response to the pandemic before authorities began putting in place more controls to deter criminals.

Economic stimulus checks are prepared for printing at the Philadelphia Financial Center.

Jeff Fusco/Getty Images

“Finally, the IRS recognized that the EIP created a new risk for tax-related identity theft,” said the TIGTA report. “In response, the IRS developed specific filters to identify potentially fraudulent filings. Once a return was identified as potentially fraudulent, it was sent to an IRS team for review. As of Nov. 11, 2020, the IRS has identified 457,325 questionable tax returns associated with the EIP for review and determined that 38,273 returns were a fraudulent EIP claim.”

The IRS has largely been successful in delivering and computing the payments authorized by Congress under the CARES Act, TIGTA acknowledged. Of the more than 157 million EIPs issued as of May 21, 2020, TIGTA found last June that the IRS correctly computed the EIP amount for 98 percent (154 million) of these payments. Congress later authorized the IRS to send out a second round of Economic Impact Payments last December as part of the Consolidated Appropriations Act, and as of Dec. 31, 2020, the IRS issued 168.2 million EIPs totaling $280 billion. The IRS has also been busy delivering a third round of EIPs this year authorized in March as part of the American Rescue Plan Act. It disbursed more than 1.8 million additional EIPS totaling over $3.5 billion under the American Rescue Plan in just the past two weeks, the IRS said Wednesday (see story).

The IRS, as required by the CARES Act, began a multipronged public awareness campaign last year to tell taxpayers about the availability of the EIP. Its efforts included coordinating with local community organizations, food banks and homeless shelters to reach unsheltered individuals; notifying approximately 9 million individuals who do not have a tax return filing requirement but may qualify for an EIP; and designating a National EIP Registration Day. The IRS also set up processes to issue a notice to each EIP recipient as required by the CARES Act. The notice gives recipients the amount of their payment and the method used to send their payment, such as direct deposit or paper check/prepaid debit card.

TIGTA made two recommendations for the IRS in the report, suggesting it create a multipronged public awareness campaign to inform the public about the availability of the Recovery Rebate Credit for individuals who died in calendar year 2020, and developing processes to identify and prevent the issuance of future EIPs to individuals who are ineligible based on the dependency requirements.

IRS management disagreed with both of TIGTA’s recommendations in the report, however. Officials contended that a public awareness campaign is unwarranted and its systems don’t have the ability to look to outside data sources to identify and prevent the issuance of future EIPs to ineligible individuals based on applicable dependency requirements.

“We disagree with the finding and related outcome measure that nearly 1.8 million payments attributable to dependents, totaling nearly $1.4 billion, were potentially erroneous,” wrote Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. “The outcome measure includes almost 1.1 million payments for $553.6 million for dependents who were older than 16 years of age at the end of 2020 but were not older than 16 years during the respective tax year on which the EIPs were based.” He noted that under the CARES Act, they would be considered eligible for the payments.

The IRS and Congress have made several changes in terms of the eligibility of widows and widowers to receive payments on behalf of deceased spouses, making the rules somewhat confusing. After TIGTA informed the IRS in May 2020 about the ineligible payments going out to the deceased, and the lack of guidance regarding how an individual can return an EIP that they received in error, the IRS updated the EIP FAQs on its website with new guidance regarding payments that were issued to deceased individuals. The IRS informed those who received the payments for an individual who died before the receipt of the payment that the payment should be returned to the IRS. The IRS also included steps that should be taken to return these payments as part of its FAQs.

In TIGTA’s discussions with IRS management, the IRS said it was relying on individuals to voluntarily return the payments. As of Oct. 1, 2020, a total of 59,500 payments totaling more than $72 million was voluntarily returned. The Treasury Department’s Bureau of the Fiscal Service also stopped 230,086 payments totaling more than $358 million using information from the IRS. However, many payments that should have gone to widows and widowers were also stopped, so the IRS management had to implement corrective programming last September to issue approximately 225,000 recovery payments for the spouse’s portion of the EIP. Banks and undeliverable addresses also held up many of the payments. As of Oct. 1, 2020, out of the nearly 2.2 million payments issued to deceased individuals, a total of 668,277 payments totaling more than $872 million have been rejected by the bank or returned to the IRS as undeliverable. Then in December, a provision passed by Congress in the Consolidated Appropriations Act clarified that individuals who died in 2020 are eligible to receive a Recovery Rebate Credit. The IRS added an item to its EIP FAQ page to explain this, but TIGTA is worried that the changing rules will confuse many families of those who died last year.

“This confusion arises from the fact that prior to the passage of the CAA, the IRS instructed the families of deceased individuals, including those who died in calendar year 2020, to return the decedent’s EIP, i.e., the advance payment of the Recovery Rebate Credit, because they were not entitled to these advance payments,” said the report. “Given the IRS’s extensive messaging and position prior to the passage of the CAA regarding the EIPs sent to deceased individuals, we are concerned that the families and estates of individuals with a date of death in calendar year 2020 may not understand that these deceased individuals are in fact eligible for the Recovery Rebate Credit, and as such may not file a decedent’s tax year 2020 tax return to claim this credit.”

Of the nearly 2.2 million EIPs the IRS issued to the deceased prior to May 2020, 831,958 payments were issued to people who died last year. TIGTA plans to assess the IRS’s processing of final tax returns associated with those who died last year to see if their Recovery Rebate Credit was accurately calculated, and if their families received the amount to which they’re entitled.

Overall, the IRS had to act quickly during the crisis last year to rush out the payments while dealing with the new and changing tax laws. “In 2020, the IRS found itself in uncharted waters, as did the nation,” Corbin wrote. “The coronavirus disease 2019 (COVID-19) pandemic presented some of the greatest challenges to the IRS in its history, both in terms of being able to carry out our mission in protecting the health and safety of taxpayers and our own workforce. On March 13, 2020, the United States declared the COVID-19 pandemic a national emergency. The pandemic presented our nation with unprecedented challenges, and the IRS responded by quickly facilitating financial assistance to millions of deserving and needy Americans.”

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