On Monday, the Treasury Inspector General for Tax Administration issued a new report which essentially said that refundable tax credits are “highly vulnerable to fraud.” The report found that millions of dollars in refundable tax credits were in fact, erroneous and/or fraudulent. The determination was not made until after the taxpayers received the credit and the IRS believes it may never recover those amounts of money. The service plans to come down hard on erroneous and fraudulent claims for tax breaks, such as the earned income tax credit.

Other refundable tax credits are: The Additional Child Tax Credit, The American Opportunity Tax Credit for Education and the First Time Home Buyer Credit. The Inspector General, J. Russell George stated “because of the susceptibility of these credits to fraud, and the low success rates in recovering erroneous credits once refunds have been issued, the IRS should take every reasonable step possible to identify potentially questionable credits and validate those credits before associated refunds are issued.”

Generally, the way the IRS ultimately collects on erroneous refundable tax credits is to withhold future tax refunds. This is an obvious problem for them because they have to wait for the next tax season if they are to collect at all. The report indicates that taxpayers were required to repay more than $2.3 billion dollars in erroneous refundable tax credits from 2006 through 2009. Actual collections by the IRS were approximately $1.3 billion dollars, and more than 70% of that was collected through refund offsets.

In order to recoup some of this money, the report by the Treasury Inspector General recommends several avenues for the IRS to pursue, which can get rather complicated, and it seems to me to just add to the bureaucratic boondoggle. Suffice it to say, that if you are claiming any of these credits, be careful that you can justify them and the credits could eventually lead to delays in refunds.

Len Stauffenger is a Tax Lawyer, who focuses his entire practice on helping taxpayers with IRS problems.