Internal Revenue Service - Refundable Premium Assistance Tax Credit

High-priority program

Home > Agencies & Programs > Internal Revenue Service - Refundable Premium Assistance Tax Credit

Program level Payment Integrity results

Sponsoring agency: Department of the Treasury

The Net Premium Tax Credit (PTC) is a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Marketplace. $0.72B of Net PTC overclaims are from the inability to authenticate eligibility. $0.11B of Net PTC overclaims are from program design limitations because the data needed to confirm payment accuracy does not exist at the time of processing. Authentication is difficult because the IRS relies primarily on the self-reported information from the taxpayers and there is a lack of internal or external databases available with information that would help the IRS determine eligibility.

View on Federal Program Inventory

PROGRAM METRICS

$2,107 M

in FY 2022 outlays, with a

72.6%

payment accuracy rate

PROGRAM METRICS

$3,680 M

in FY 2023 outlays, with a

74.0%

payment accuracy rate

PROGRAM METRICS

$2,305 M

in FY 2024 outlays, with a

71.5%

payment accuracy rate

PROGRAM METRICS

$2,623 M

in FY 2025 outlays, with a

68.4%

payment accuracy rate

  • Improper payment estimates over time
    View as:

    Chart toggle amounts:
    Proper payments
    Overpayment
    Underpayment
    Technically improper
    Unknown

Payment Integrity results

  • FY 2022 improper payment estimates

    Chart legend and breakdown

    Payment accuracy rate

    Improper payment rate

    Unknown payment rate


    Sampling & estimation methodology details

    Sampling timeframe:

    01/2019 - 12/2019


    Confidence interval:

    95% to <100%


    Margin of error:

    +/-7.22

Overpayments

Overpayment root cause Overpayment amount
Amount of overpayments within the agency's control $0 M

Overpayment root cause Overpayment amount
Amount of overpayments outside the agency's control $577.94 M
Amount of overpayments that occurred because the data/information needed to validate payment accuracy prior to making a payment does not exist $502.81 M
The amount of overpayments that occurred because of an inability to access the data/information needed to validate payment accuracy prior to making a payment $75.13 M
The amount of overpayments that occurred because of a failure to access data/information needed to validate payment accuracy prior to making a payment $0.0 M

Underpayments

Underpayment root cause Underpayment amount
Amount of underpayments $0 M

Technically improper payments

The amount of improper payments that were paid to the right recipient for the correct amount but were considered technically improper because of failure to follow statute or regulation $0.0 M

Additional information

$0 M

Unknown Payment Details

Evaluation of corrective actions

The IRS runs various automated checks of certain data on a tax return before payment of a refund but is otherwise limited in its ability to question and correct the taxpayer’s claim. The IRS must deploy a variety of costly enforcement tools, including audits, to verify the information on the tax return and then prevent
the payment of tax refunds or collect any tax due. As a result, the IRS allocates a disproportionate amount of its enforcement resources to audit returns that claim one or more RTCs. This creates several problems. Because lower-income taxpayers make up the majority of those claiming RTCs, they are subjected to a
disproportionate number of audits (RTC claimants are audited at almost three times the rate of other taxpayers.) Since lower-income taxpayers make up a significant portion of taxpayers claiming RTCs, auditing these taxpayers can lead to a negative perception of IRS’s treatment of taxpayers. This runs
counter to the IRS’s mission of fairness to all taxpayers.

The IRS has internal controls in place to verify eligibility when data is available. Treasury and IRS analyses have consistently found that RTC overclaims are largely attributable to the statutory design and complex eligibility requirements, and not rooted in internal control weaknesses, financial management deficiencies or reporting failures. The IRS has a strong internal control environment around refundable credit programs administered and makes decisions based on overall cost-benefit considerations. The IRS annually reviews and enhances its refundable credits compliance plan that addresses erroneous claims. Therefore, legislative changes are the most effective means of addressing the causes of these improper payments.

Future payment integrity outlook

Internal Revenue Service - Refundable Premium Assistance Tax Credit has NOT established a baseline.

Out-Year improper payment and unknown payment projections and target
Current year +1 estimated future outlays $4,022.26 M
Current year +1 estimated future improper payments $1,103.31 M
Current year +1 estimated future unknown payments $0 M
Current year +1 estimated future improper payment and unknown payment rate 27.43 %

The program's current year improper payment and unknown payment rate of 27.43 % may or may not be the tolerable rate. The agency has not yet determined the tolerable rate for this program.

This is the first year this program is reporting an improper payment rate and amount.

To reduce overclaim rates to less than 10 percent, to meet Payment Integrity Information Act (PIIA) compliance standards, the IRS estimated, in a Fiscal Year 2021 study, that it would need additional or reallocated resources of $2.5 billion to audit 4.2 million additional RTC returns in the pre-refund environment. If the IRS must reallocate enforcement resources to be compliant with PIIA, a substantial loss in enforcement revenue, estimated at $6.4 billion, would result because the IRS would divert resources from more valuable programs and tax gap elements to audits of RTC returns. Moreover, such enforcement actions would place substantial burden on low-income taxpayers through increased audits and delayed refunds, violating the IRS requirement of enforcing the tax law with integrity and fairness. As such, IRS has long held that focusing enforcement resources on the larger tax gap is a more efficient and cost effective way to minimize the tax gap and maximize tax collections. We further support the reporting of RTC overclaims within the Tax Gap Analysis to reflect better how the IRS approaches taxpayer compliance relative to the U.S. tax system.

For FY 2023 , the Administration included the following proposals in its Budget submission:
(1) Increase Oversight of Paid Tax Return Preparers.
The proposal would amend Title 31, U.S. Code (Money and Finance) to provide the Secretary with explicit authority to regulate all paid preparers of Federal tax returns, including by establishing mandatory minimum competency standards.

(2) Expand and increase penalties for return preparation and e-filing –
The proposal would increase and expand the IRS’s authority to address noncompliance or inappropriate behavior by paid tax return preparers and e-file providers. First, it would increase the penalty amounts that apply to paid tax return preparers for willful, reckless or unreasonable understatements, as well as for forms of noncompliance that do not involve an understatement of tax. Second, the proposal would establish new penalties for the appropriation of Preparer Tax Identification Numbers (PTINs) and Electronic Filing Identification
Numbers (EFINs) and for failing to disclose the use of a paid tax return preparer. Third, the proposal would increase the limitations period during which the penalty for a failure to furnish the preparer’s identifying number may be assessed from three years to six years. Fourth, the proposal would clarify the
Secretary’s authority to regulate the conduct and suitability of persons who participate in the authorized e-file program, including setting standards and imposing sanctions to protect the integrity of the e-file program.

Additional programmatic information

In FY 2019, net Premium Tax Credits (PTC) were determined to be susceptible to significant improper payments due to the dollar amount of overclaims. However, Treasury notified OMB that it would delay the annual reporting of improper payments for PTC. In the interim, Treasury collaborated with the HHS to develop a joint methodology for assessing improper payment risk for PTC. The PTC program is operationally divided between HHS and Treasury. The HHS, through the Centers for Medicare & Medicaid Services (CMS), administers advance payments to insurance providers on behalf of applicants/taxpayers through the federally facilitated exchange. These payments are referred to as advance payments of the Premium Tax Credit (advance PTC or APTC). Treasury and the Internal Revenue Service (IRS) administer the federal income tax return process where a tax credit (payment or zero are other possibilities) is based on reconciliation of APTC amounts with final allowable PTC determined in tax filing. Payment of this credit is referred to as net PTC.

HHS will report APTC in its improper payment table within its Agency Financial report (AFR). Treasury will report net PTC in its improper payment table within its AFR. Both Departments will disclose the combined advance and net PTC rates in their AFRs. To satisfy reporting to OMB and paymentaccurracy.gov requirements, CMS will report disbursements/outlays, estimated error rate, and other data for APTC. The IRS will similarly report estimated overclaims and error rate for net PTC. The combined advance and net PTC rates are for informational purposes only and will not be included in either Department’s overall improper payment rate and will not be reported to PaymentAccuracy.gov.

  • FY 2023 improper payment estimates

    Chart legend and breakdown

    Payment accuracy rate

    Improper payment rate

    Unknown payment rate


    Sampling & estimation methodology details

    Sampling timeframe:

    01/2020 - 12/2020


    Confidence interval:

    95% to <100%


    Margin of error:

    +/-5.14

  • Actions taken & planned to mitigate improper payments

    Mitigation strategy Description of the corrective action Completion date Status
    Change Process
    The IRS held its annual Dependent Database (DDb) meetings with stakeholders in the Wage & Investment, Small Business & Self Employed, and IT divisions, to adjust the value of prior-year compliance filters for audit selection of returns claiming the Premium Tax Credit (PTC) and identify improvement opportunities for the filing season.
    FY2022 Q4
    Completed
    Cross Enterprise Sharing
    The IRS collaborated with the Department of Health and Human Services (HHS), Centers for Medicare and Medicaid Services (CMS) through the Premium Tax Credit Workgroup and Sub-Workgroup on issues related to improper payments of the Premium Tax Credit (PTC). Further, the IRS organized five Nationwide Tax Forums in various cities to provide valuable information, updates and training on various tax-related topics, such as tax law changes to refundable tax credits.
    FY2022 Q4
    Completed
    Change Process
    The IRS will continue to hold the annual Dependent Database (DDb) meetings with stakeholders in the Wage & Investment, Small Business & Self Employed, and IT divisions, to evaluate the value of prior-year compliance filters for audit selection of returns claiming the Premium Tax Credit (PTC) and identify improvement opportunities for next filing season.
    FY2024
    Planned
    Cross Enterprise Sharing
    The IRS will continue to collaborate with the Department of Health and Human Services (HHS), Centers for Medicare and Medicaid Services (CMS) through the Premium Tax Credit Workgroup and Sub-Workgroup on issues related to improper payments of the Premium Tax Credit (PTC).
    FY2024
    Planned

Overpayments

Overpayment root cause Overpayment amount
Amount of overpayments within the agency's control $0 M

The challenge in administering refundable tax credits (RTCs) is that RTCs do not have the characteristics of a typical payment program. The regulatory structure of the Net Premium Tax Credit (PTC), to include the lack of a preapproval process (notwithstanding anything that occurs in the Advance PTC process) and IRS reliance on taxpayer self-certification that tax returns are accurate, is the primary root cause of Net PTC improper payments. Specifically, at the time of filing/payment, the IRS cannot readily verify certain information, i.e., taxpayer income misreporting related to self-employment income and other income where the income is not reported to the IRS by a third party. This is due to the fact that the data needed to validate eligibility is not available or does not exist. In addition, each year there are many taxpayers who receive PTC for the first time, who have to understand and apply complex requirements. The statutory structure and design for administering refundable tax credit refunds, including Net PTC, prevents the IRS from verifying or validating such pertinent data prior to making a refund.
Overpayment root cause Overpayment amount
Amount of overpayments outside the agency's control $958.15 M
Amount of overpayments that occurred because the data/information needed to validate payment accuracy prior to making a payment does not exist $833.59 M
The amount of overpayments that occurred because of an inability to access the data/information needed to validate payment accuracy prior to making a payment $124.56 M
The amount of overpayments that occurred because of a failure to access data/information needed to validate payment accuracy prior to making a payment $0.0 M

Overpayment type Eligibility element/information needed Eligibility amount
Overpayments Outside Agency Control Financial $881.5 M
Overpayments Outside Agency Control Household Size $38.33 M
Overpayments Outside Agency Control Marital Status $38.33 M

Underpayments

Underpayment root cause Underpayment amount
Amount of underpayments $0 M

Technically improper payments

The amount of improper payments that were paid to the right recipient for the correct amount but were considered technically improper because of failure to follow statute or regulation $0.0 M

Additional information

$0 M

Unknown Payment Details

Evaluation of corrective actions

The IRS has the ability to identify Net Premium Tax Credit (PTC) errors by type. Correlating remediation efforts to success is challenging. Given its limited authority to directly prevent and stop these errors, the IRS focuses on positively influencing taxpayer behavior and working with paid preparers and tax preparation software/online filing service providers. Further, the IRS has sought legislative authority to enhance verification procedures for taxpayers claiming the PTC. Taxpayer education and outreach efforts, such as the IRS's annual Dependent Database (DDb) meetings, inform taxpayers about program eligibility requirements.

Future payment integrity outlook

Internal Revenue Service - Refundable Premium Assistance Tax Credit has established a baseline.

The FY 2024 Estimated Improper Payment Rate is the same as the FY 2023 Improper Payment Rate. The unique nature of tax administration means that traditional target-setting as a means of approaching reductions in RTC improper payments will be ineffective. The RTC statute is such that IRS has limited
authority to make changes to the claims during return processing. More so, most of the eligibility and credit determination requirements depends on factors that are generally not known by the IRS at the time of filing. The IRS heavily relies on taxpayer-provided information without verifiability by third-party
sources. The complexity of the law contributes to confusion around eligibility requirements and is one of the major contributing factors of improper payments. Error prevention and recoveries are achieved through time-consuming and resource-intensive examinations and other compliance activities. IRS does not have the resources to audit every return claiming RTCs, and the adjustments able to be attained through this process are small relative to the amount of improper payments estimated for the program. Without legislative change to greatly improve effective tools to administer these credits, the improper payment rate
will not change significantly.

Out-Year improper payment and unknown payment projections and target
Current year +1 estimated future outlays $2,425.8 M
Current year +1 estimated future improper payments $631.68 M
Current year +1 estimated future unknown payments $0 M
Current year +1 estimated future improper payment and unknown payment rate 26.04 %
Current year +1 estimated future improper payment and unknown payment reduction target 26.04 %

The program's current year improper payment and unknown payment rate of 26.04 % may or may not be the tolerable rate. The agency has not yet determined the tolerable rate for this program.

Similar to the previous year, IRS has not yet determined a tolerable rate. Reducing the improper payment rate to less than 10 percent would require significant restructuring of the RTC programs, to include legislative action. Accordingly, the IRS does not have a current target date to report the tolerable rate.

The IRS has support with respect to internal control, human capital and information system and other infrastructure to reduce Net Premium Tax Credit (PTC) Improper Payments and Unknown Payments to a tolerable rate. The issue with PTC is statutory program design and reliance on taxpayer self-certification. The IRS has a strong internal control environment around PTC and makes decisions based on overall cost-benefit considerations, with a well-trained, technically capable program staff.

The IRS is realigning resources internally to accelerate progress against its strategic priorities. The IRS will substantially be reducing the number of correspondence audits focused specifically on certain refundable credits, including the Net Premium Tax Credit (PTC). Focusing on helping taxpayer submit accurate filings upfront will increase payment accuracy while reducing administrative burdens for the IRS and the tax filer.

Additional programmatic information

Treasury collaborated with the HHS to develop a joint methodology for assessing improper payment risk for PTC. The PTC program is operationally divided between HHS and Treasury. The HHS, through the Centers for Medicare & Medicaid Services (CMS), administers advance payments to insurance providers on behalf of applicants/taxpayers through the federally facilitated exchange. These payments are referred to as advance payments of the Premium Tax Credit (advance PTC or APTC). Treasury and the Internal Revenue Service (IRS) administer the federal income tax return process where a tax credit (payment or zero are other possibilities) is based on reconciliation of APTC amounts with final allowable PTC determined in tax filing. Payment of this credit is referred to as net PTC. HHS will report APTC in its improper payment table within its Agency Financial report (AFR). Treasury will report net PTC in its improper payment table within its AFR. Both Departments will disclose the combined advance and net PTC rates in their AFRs. To satisfy reporting to OMB and paymentaccurracy.gov requirements, CMS will report disbursements/outlays, estimated error rate, and other data for APTC. The IRS will similarly report estimated overclaims and error rate for net PTC. The combined advance and net PTC rates are for informational purposes only and will not be included in either Department’s overall improper payment rate and will not be reported to PaymentAccuracy.gov.

  • FY 2024 improper payment estimates

    Chart legend and breakdown

    Payment accuracy rate

    Improper payment rate

    Unknown payment rate


    Sampling & estimation methodology details

    Sampling timeframe:

    01/2020 - 12/2021


    Confidence interval:

    95% to <100%


    Margin of error:

    +/-11.8

  • Actions taken & planned to mitigate improper payments

    Mitigation strategy Description of the corrective action Completion date Status
    Change Process
    The IRS held its annual Dependent Database (DDb) meeting with stakeholders in Taxpayer Services, Small Business & Self Employed, and IT divisions, to evaluate the effectiveness of prior-year compliance filters and enhance future filters for audit selection of returns claiming the Premium Tax Credit (PTC) and to identify improvement opportunities for next filing season. This process involves analyzing data from prior years to fine-tune criteria used to flag potentially erroneous returns. For example, patterns from prior filing seasons can reveal common errors, and by refining the IRS filters, the IRS can better prioritize returns with higher likelihoods of errors and prevent improper payments by intervening earlier in the process. As mentioned, throughout the IRS's history of refundable tax credit management, the primary root causes of improper payments of refundable tax credits (RTCs) are reliance on taxpayer self-certification of an accurate return and the lack of a pre-approval process. Because taxpayers are not required to prove their eligibility for RTCs upfront (as would be the case with a traditional payment program), errors can occur due to taxpayer misrepresentation or misunderstanding of key points of eligibility. Improved compliance filters can catch these issues after returns are filed but before payments are issued, helping to reduce improper payments. The primary result of this approach is enhanced targeting of resources to areas in which errors are most likely to occur.
    FY2024 Q4
    Completed
    Cross Enterprise Sharing
    The IRS leveraged data-sharing agreements with the Department of Health and Human Services (HHS), Centers for Medicare and Medicaid Services (CMS) to access critical information that aids in validating eligibility for the Premium Tax Credit (PTC). This data-sharing involves the exchange of key data points, such as income thresholds and enrollment in a qualified health plan. With this information, the IRS can more accurately assess whether taxpayers meet the eligibility requirements for the PTC. Cross Enterprise Sharing allows the IRS to detect discrepancies in taxpayer filings, such as the taxpayer not being in a qualified health plan and prevent improper payments during the return processing stage. An additional root cause of improper payments of refundable tax credits (RTCs), in addition to data needed does not exist and inability to access data, is taxpayer misreporting or misunderstanding of eligibility requirements. Given that RTCs rely heavily on taxpayer self-reported information, taxpayers may inaccurately claim the Premium Tax Credit due to misunderstanding income limits or dependency. By leveraging third-party data sources from CMS, the IRS can verify key elements of returns. This is especially important given the lack of a pre-approval process for these credits.
    FY2024 Q4
    Completed
    Change Process
    The IRS will continue to hold the annual Dependent Database (DDb) meetings with stakeholders in Taxpayer Services, Small Business & Self Employed, and Information Technology divisions, to review and adjust the value of prior-year compliance filters for audit selection of returns claiming the Premium Tax Credit (PTC). Based on analysis of prior-year data, the IRS refines the IRS filters to better prioritize returns with higher likelihoods of errors; this helps prevent improper payments by intervening earlier in the process. As mentioned, throughout the IRS's history of refundable tax credit management, the primary root causes of refundable tax credit-related improper payments is reliance on taxpayer self-certification of an accurate return and the lack of a pre-approval process. Because taxpayers are not required to prove their eligibility for RTCs upfront, errors (both unintentional and intentional) can occur. Improved compliance filters can catch these issues after returns are filed but before payments are issued, helping to reduce improper payments. The primary result of this approach is enhanced targeting of resources to areas in which errors are most likely to occur. By helping taxpayers file accurate returns upfront, quickly fixing errors that delay refunds and ensuring taxpayers claim the credits and deductions for which they are eligible, the IRS will correct payment accuracy issues without substantially increasing the burden on taxpayers and the IRS.
    FY2025
    Planned
    Cross Enterprise Sharing
    The IRS will continue to leverage data-sharing agreements with the Department of Health and Human Services (HHS), Centers for Medicare and Medicaid Services (CMS) to access critical information that aids in validating eligibility for the Premium Tax Credit (PTC). This data-sharing involves the exchange of key data points, such as income thresholds and enrollment in a qualified health plan. With this information, the IRS can more accurately assess whether taxpayers meet the eligibility requirements for the PTC. Cross Enterprise Sharing allows the IRS to detect discrepancies in taxpayer filings, such as the taxpayer not being in a qualified health plan and prevent improper payments during the return processing stage. An additional root cause of improper payments of refundable tax credits (RTCs), in addition to data needed does not exist and inability to access data, is taxpayer misreporting or misunderstanding of eligibility requirements. Given that RTCs rely heavily on taxpayer self-reported information, taxpayers may inaccurately claim the PTC due to misunderstanding income limits or dependency. By leveraging third-party data sources from CMS, the IRS can verify key elements of returns. This is especially important given the lack of a pre-approval process for these credits.
    FY2025
    Planned

Overpayments

Overpayment root cause Overpayment amount
Amount of overpayments within the agency's control $0.0 M

These overpayments outside of the agency control include the inability to authenticate data, primarily because the data does not exist. Authentication is difficult because the IRS relies primarily on self-reported information from taxpayers, and there is a lack of internal or external databases available with information that would help the IRS determine eligibility. These overpayments outside of the agency control also include the inability to authenticate data due to program design limitations. Barriers caused by program design occur when information needed to confirm payment accuracy is not available at the time the return is processed.
Overpayment root cause Overpayment amount
Amount of overpayments outside the agency's control $657.73 M
Amount of overpayments that occurred because the data/information needed to validate payment accuracy prior to making a payment does not exist $572.23 M
The amount of overpayments that occurred because of an inability to access the data/information needed to validate payment accuracy prior to making a payment $85.5 M
The amount of overpayments that occurred because of a failure to access data/information needed to validate payment accuracy prior to making a payment $0.0 M

Overpayment type Eligibility element/information needed Eligibility amount
Overpayments Outside Agency Control Financial $605.11 M
Overpayments Outside Agency Control Household Size $26.31 M
Overpayments Outside Agency Control Marital Status $26.31 M

Underpayments

Underpayment root cause Underpayment amount
Amount of underpayments $0.0 M

Technically improper payments

The amount of improper payments that were paid to the right recipient for the correct amount but were considered technically improper because of failure to follow statute or regulation $0.0 M

Additional information

$0 M

Unknown Payment Details

Evaluation of corrective actions

The challenge in administering refundable tax credits (RTCs) is that RTCs do not have the characteristics of a typical payment program. The fundamental root causes of the Premium Tax Credit improper payments are as follows: (1) there is a statutory lack of a required pre-approval process; (2) an inability to wholesale deny payments (refunds) and (3) the information needed to verify taxpayer claims of eligibility belongs primarily to the taxpayer without any third-party data source available at the time of filing, thus requiring the IRS to rely on taxpayer self-certification that all return information is accurate. RTCs are managed within and follow the regulatory scheme of tax administration and enforcement. At a lower level, the root causes are that, at the time of filing/payment: (a) there's an inability to authenticate eligibility (typically due to a series of complex eligibility rules, many with relationship and residency tests containing with many nuances); (b) there's instances where taxpayer income is misreported, particularly related to self-employment income and other income not reported to the IRS by a third party; and (c) there's a turnover of taxpayer who receive certain credits for the first time and fail to understand the complex requirements of claiming the credit. Pursuant to federal statute, the IRS generally does not have the capability to deny even incorrect claims, given the lack of math authority. However, the IRS's information technology platform includes a number of filters that the IRS uses to monitor the accuracy of eligibility rules compliance and payment certification. The annual Dependent Database (DDb) meetings, collaborations/data sharing with other federal agencies and outreach/education efforts aid the Service in mitigating the impact of these root causes. Lastly, the IRS has a number of outreach and education programs in place, to help taxpayers and tax preparers understand the program eligibility rules and file accurate returns claiming RTCs.

The regulatory structure of refundable tax credits (RTCs), which lacks a pre-approval process and causes the IRS to rely heavily on taxpayer self-certification that their returns claiming RTCs are accurate, is a key factor contributing to RTC improper payments. Despite these constraints, the IRS has strategically designed corrective actions to address the root causes of improper payments by improving the accuracy of filed returns and mitigating the risks associated with taxpayer self-certification. The IRS has implemented a series of corrective actions focused on mitigating these root causes. The annual Dependent Database (DDb) meetings focus on reviewing and adjusting compliance filters used in audit selection, which allows the IRS to detect errors earlier. The IRS also cross-collaborates with the Department of Health and Human Services (HHS), the Social Security Administration (SSA) and the Office of Child Support Enforcement (OCSE) to share data that would enable the IRS to identify discrepancies in taxpayer claims. The IRS is re-aligning its efforts to further its strategic initiatives; accordingly, the IRS is investing in taxpayer outreach and education, in lieu of conducting additional pre-refund audits. By helping taxpayers file accurate returns upfront, quickly fixing errors that delay refunds and ensuring taxpayers claim the credits and deductions for which they are eligible, the IRS will correct payment accuracy issues without substantially increasing the burden on taxpayers and the IRS.

The primary challenge in administering refundable tax credits (RTCs), such as the Premium Tax Credit (Net PTC), is the complexity of the credits' statutory eligibility requirements. As a result, the key root causes of RTC improper payments are as follows: (1) the lack of a pre-approval process and inability to authenticate eligibility at the point of return filing; (2) taxpayer misrepresentation or misunderstanding of key points of eligibility, especially for self-employment or other income not reported to the IRS by third-parties; and (3) the inability for the IRS to wholesale deny refunds. Because of these root causes, the IRS has to rely on taxpayer self-certification of an accurate return. The IRS has implemented a series of corrective actions focused on mitigating these root causes. The annual Dependent Database (DDb) meetings focus on reviewing and adjusting compliance filters used in audit selection, which allows the IRS to detect errors earlier. The IRS also cross-collaborates with the Department of Health and Human Services (HHS), the Social Security Administration (SSA) and the Office of Child Support Enforcement (OCSE) to share data that would enable the IRS to identify discrepancies in taxpayer claims. Finally, the IRS has invested in taxpayer education and outreach efforts, through such venues as the IRS's Nationwide Tax Forums and Latino Tax Fest, to educate tax preparers about their responsibilities to verify taxpayer eligibility before filing claims. The IRS is re-aligning its efforts to further its strategic initiatives; accordingly, the IRS is investing in taxpayer outreach and education, in lieu of conducting additional pre-refund audits. By helping taxpayers file accurate returns upfront, quickly fixing errors that delay refunds and ensuring taxpayers claim the credits and deductions for which they are eligible, the IRS will correct payment accuracy issues without substantially increasing the burden on taxpayers and the IRS. All of these corrective actions are strategically designed to address the root causes of improper payments by improving the accuracy of filed returns and mitigating the risks associated with taxpayer self-certification.

The regulatory structure of refundable tax credits (RTCs), which lacks a pre-approval process and causes the IRS to rely heavily on taxpayer self-certification that their returns claiming RTCs are accurate, is a key factor contributing to RTC improper payments. Despite these constraints, the IRS has strategically designed corrective actions to address the root causes of improper payments by improving the accuracy of filed returns and mitigating the risks associated with taxpayer self-certification. The IRS has implemented a series of corrective actions focused on mitigating these root causes. The IRS prioritizes its corrective actions based on the magnitude of the root causes they address and the potential impact of each action on reducing improper payments. Data-driven analyses are critical in determining which area gain focus. For example, the IRS is re-aligning its efforts to further its strategic initiatives; accordingly, the IRS is investing in taxpayer outreach and education, in lieu of conducting additional pre-refund audits. By helping taxpayers file accurate returns upfront, quickly fixing errors that delay refunds and ensuring taxpayers claim the credits and deductions for which they are eligible, the IRS will correct payment accuracy issues without substantially increasing the burden on taxpayers and the IRS. The IRS ensures that its corrective actions are continuously monitored, effectively implemented and reprioritized based on their ability to address the root causes of RTC improper payments.

Future payment integrity outlook

Internal Revenue Service - Refundable Premium Assistance Tax Credit has established a baseline.

The FY 2025 estimated improper payment rate is the same as the FY 2024 improper payment rate. The unique nature of tax administration means that traditional target-setting as a means of approaching reductions in refundable tax credit (RTC) improper payments will be ineffective. The RTC statute is such
that IRS has limited authority to make changes to the claims during return processing. More so, most of the eligibility and credit determination requirements depends on factors that are generally not known by the IRS at the time of filing. The IRS heavily relies on taxpayer provided information without verifiability
by third-party sources. The complexity of the law contributes to confusion around eligibility requirements and is one of the major contributing factors to improper payments. Error prevention and recoveries are achieved through time-consuming and resource-intensive examinations and other compliance activities. IRS does not have the resources to audit every return claiming RTCs, and the adjustments able to be attained through this process are small relative to the amount of improper payments estimated for the program. Without legislative change to greatly improve effective tools to administer these credits, the improper payment rate will not change significantly.

Out-Year improper payment and unknown payment projections and target
Current year +1 estimated future outlays $2,499.96 M
Current year +1 estimated future improper payments $713.49 M
Current year +1 estimated future unknown payments $0 M
Current year +1 estimated future improper payment and unknown payment rate 28.54 %
Current year +1 estimated future improper payment and unknown payment reduction target 28.54 %

The program's current year improper payment and unknown payment rate of 28.54 % may or may not be the tolerable rate. The agency has not yet determined the tolerable rate for this program.

Similar to previous years, reporting a tolerable rate has not yet been determined. It is important to note the Refundable Tax Credits (RTCs) do not have the characteristics of a typical payment program. The primary root causes of improper payments of RTCs are the inability to authenticate eligibility at return filing because the data needed does not exist, and taxpayer income misreporting related to self-employment income and other income where the income is not reported to the IRS by a third party. Put simply, payment eligibility and certification decisions for RTCs are made by the taxpayer during the filing process.

Reducing the improper payment rate to less than 10 percent would require significant restructuring of the RTC programs, to include legislative action. Accordingly, the IRS does not have a current target date to report the tolerable rate.

The IRS has what is needed with respect to internal control, human capital and information system and other infrastructure to reduce Refundable Tax Credits (RTCs) Improper Payments and Unknown Payments to a tolerable rate. The issue with RTCs is statutory program design and reliance on taxpayer self-certification. The IRS has a strong internal control environment around RTCs and makes decisions based on overall cost-benefit considerations, with a well-trained, technically capable program staff whose tenure far exceeds that of other agencies. The Treasury Inspector General for Tax Administration (TIGTA) has traditionally reported that the issue with improper payments is not an internal control deficiency.

Reducing the improper payment rate to less than 10 percent would require significant restructuring of the RTC programs, to include legislative action.

Further improving the integrity of refundable tax credit (RTC) programs will take actions beyond our control. We have proposed various legislative changes over the years aimed at providing more effective tools for managing RTCs. For the FY 2025 budget submission, the Administration included the following proposals:

1. Expand and increase Penalties for Return Preparation and E-filing - The proposal would increase and expand the IRS’s authority to address noncompliance or inappropriate behavior by paid tax return preparers and e-file providers. First, it would increase the penalty amounts that apply to paid tax return preparers for willful, reckless or unreasonable understatements, as well as for forms of noncompliance that do not involve an understatement of tax. Second, the proposal would establish new penalties for the appropriation of Preparer Tax Identification Numbers (PTINs) and Electronic Filing Identification Numbers (EFINs) and for failing to disclose the use of a paid tax return preparer. Third, the proposal would increase the limitations period during which the penalty for a failure to furnish the preparer’s identifying number may be assessed from three years to six years. Fourth, the proposal would clarify the Secretary’s authority to regulate the conduct and suitability of persons who participate in the authorized e-file program, including setting standards and imposing sanctions to protect the integrity of the e-file program.

2. Increase Oversight of Paid Tax Return Preparers - The proposal would amend Title 31, U.S. Code (Money and Finance) to provide the Secretary with explicit authority to regulate all paid preparers of federal tax returns, including by establishing mandatory minimum competency standards.

These statutory changes may help reduce RTC errors to some degree. However, a meaningful reduction in the estimated error rate is unlikely without independent data sources through which the IRS can verify taxpayer-provided information and additional time and resources for the IRS to address any issues identified.

Additional programmatic information

Accountability for detecting, preventing, and recovering improper payments

The IRS has a strong internal control environment around refundable credit programs administered and makes decisions based on overall cost-benefit considerations. The IRS annually reviews and enhances its refundable credits compliance plan that addresses erroneous claims. Each year the IRS updates its strategy using the most recent research findings, prior year audit results, TIGTA/GAO audit findings and legislative updates. The IRS also submits legislative proposals which, if approved by Congress, may further enhance efforts to address areas of risk and reduce improper payments.

The IRS reviews and updates Internal Revenue Manuals throughout the year and ensures that IRS employees who administer refundable credits receive annual training and have the requisite knowledge to address the evolving nature of improper payments and fraud. Employees are also encouraged to recommend changes that may further strengthen the IRS's internal controls and procedures.

The IRS performance plans also balance the outreach and awareness component with its examination program. Again, the IRS looks to find ways to enhance the taxpayer experience and improve the knowledge of taxpayers and paid return preparers of the eligibility and criteria for RTCs.

Reducing the improper payment rate to less than 10 percent would require significant restructuring of the RTC programs, to include legislative action.

  • FY 2025 improper payment estimates

    Chart legend and breakdown

    Payment accuracy rate

    Improper payment rate

    Unknown payment rate


    Sampling & estimation methodology details

    Sampling timeframe:

    01/2023 - 12/2023


    Confidence interval:

    95% to <100%


    Margin of error:

    +/-4.06

Causes

These overpayments include the inability to authenticate data, primarily because the data does not exist. Authentication is difficult because the IRS relies primarily on self-reported information from taxpayers that cannot be verified at the time of filing, and there is a lack of comprehensive internal or external databases available with information that would help the IRS determine eligibility. These overpayments also include the inability to authenticate data due to program design and statutory limitations. Barriers caused by program design occur when information needed to confirm payment accuracy is not available at the time the return is processed. Statutory limitations include statutory requirements, such as issuing refunds within 45 days of the filing deadline without paying interest.

Overpayment root cause Overpayment amount
Amount of overpayments within the agency's control $0.0 M
Amount of overpayments outside the agency's control $829.18 M
Amount of overpayments that occurred because the data/information needed to validate payment accuracy prior to making a payment does not exist $721.39 M
Amount of overpayments that occurred because of an inability to access the data/information needed to validate payment accuracy prior to making a payment $107.79 M
Amount of overpayments that occurred because of a failure to access data/information needed to validate payment accuracy prior to making a payment $0.0 M

Underpayment root cause Underpayment amount
Amount of underpayments $0.0 M

The amount of improper payments that were paid to the right recipient for the correct amount but were considered technically improper because of failure to follow statute or regulation $0.0 M

The amount that could either be proper or improper but the agency is unable to determine whether it was proper or improper as a result of insufficient or lack of documentation $0.0 M

Prevention

The IRS has undertaken several targeted corrective actions across its refundable tax credit programs to address and reduce improper and unknown payments. These actions, all scheduled for completion by Q4 of FY 2026, reflect the agency’s cross-functional collaboration and data-driven process improvement strategy.

For Net Premium Tax Credit (PTC), the IRS conducted its annual Dependent Database (DDb) meeting with stakeholders from Taxpayer Services (TS), Small Business & Self-Employed (SBSE), and IT divisions. These meetings were designed to recalibrate prior-year compliance filters to better target audit selection of returns claiming refundable tax credits (RTCs). By refining these filters based on past data, the IRS aims to increase the precision of its audit selections. This strategic change process helps to mitigate erroneous RTC payments.

In addition, the IRS utilized cross-enterprise data sharing to validate eligibility and reduce improper payments. For example, for the Net PTC, collaboration with the Department of Health and Human Services (HHS) and the Centers for Medicare & Medicaid Services (CMS) allowed the IRS to leverage data through the PTC Workgroup and Sub-Workgroup, addressing systemic issues related to improper PTC payments.

To further strengthen compliance, the IRS continued its annual training efforts for tax professionals focused on IRC 6695(g) due diligence requirements. This training was disseminated via national venues selected for the IRS Nationwide Tax Forums and filing season readiness webinars. These efforts are intended to improve taxpayer and preparer understanding of RTC eligibility rules, thereby addressing root causes of improper payments due to preparer error or misunderstanding. All actions outlined were completed or are planned for completion in Q4 FY 2026, consistent with IRS’s commitment to continuous improvement.
RTCs present unique challenges in payment integrity because they are administered within the tax system and do not operate like traditional payment programs with upfront eligibility determinations. The fundamental root cause of RTC improper and unknown payments is the statutory lack of a required pre-approval process, coupled with the IRS’s limited authority to deny claims outright prior to refund issuance. As a result, the IRS must largely rely on taxpayer self-certification of eligibility at the time of filing, which increases the risk of error.

The IRS has identified several contributing factors to improper payments: (a) the inability to verify eligibility criteria at the time of filing—particularly those involving complex relationship and residency tests; (b) the misreporting of income, especially self-employment income or earnings not reported by third parties; and (c) the lack of taxpayer understanding, particularly among first-time claimants unfamiliar with the rules governing RTC eligibility. These factors significantly increase both the rate and dollar amount of improper payments across RTC programs.

To address these risks proportionally, the IRS has implemented a layered and data-informed corrective action plan. This includes annual optimization of compliance filters through the Dependent Database (DDb) meetings, which involve cross-functional IRS teams to refine audit selection algorithms based on evolving taxpayer behavior. Additionally, cross-agency data sharing efforts—such as collaborations with HHS, CMS—help the IRS verify key eligibility data outside its traditional systems. These initiatives directly target the root causes by improving the IRS’s ability to validate claims without requiring pre-payment denials.

Recognizing that education is a critical tool in preventing errors, the IRS also invests in extensive taxpayer and tax professional outreach. These combined efforts—including systemic filter recalibration, interagency data matching, and taxpayer education—reflect a comprehensive and proportional approach to the severity of the improper payment risks inherent in RTC administration.

The IRS implements and prioritizes corrective actions for RTCs through a comprehensive, data-informed strategy that addresses both the structural and behavioral root causes of improper and unknown payments. The primary challenge stems from the statutory and regulatory framework of RTCs, which does not include a pre-approval process and instead relies heavily on taxpayer self-certification at the time of filing. This fundamental limitation restricts the IRS’s ability to proactively prevent erroneous payments and instead requires a strategy focused on influencing taxpayer behavior, improving compliance through outreach and education, and leveraging third-party partners, such as paid preparers and tax software providers.

Corrective actions are prioritized based on a combination of improper payment risk, return error trends, and the systemic challenges associated with verifying eligibility at the time of filing. Efforts such as annual DDb meetings allow the IRS to refine audit selection filters and compliance criteria based on past return data. In parallel, the agency collaborates with external partners—such as the HHS, CMS—to validate key eligibility data. While the IRS has the capability to identify errors by type, correlating those with specific remedies is complex due to limited statutory authority to deny or suspend claims before refunds are issued. As such, the agency places heavy emphasis on preventative efforts, such as educating taxpayers and tax preparers, and improving accuracy within return preparation software.

This multipronged approach allows the IRS to maximize limited resources by addressing improper payments through taxpayer education, preparer engagement, and systemic data validation. While statutory targets have not yet been met, the IRS continues to refine its strategies and remains transparent about the structural barriers—such as the lack of pre-approval authority and reliance on self-certification—that limit its ability to fully prevent errors at filing. The corrective actions in place reflect a long-term commitment to reducing improper and unknown payments.

Payment type Mitigation strategies taken Mitigation strategies planned
Overpayments Change Process, Cross Enterprise Sharing Change Process, Cross Enterprise Sharing

Eligibility element/information needed Description of the eligbility element/information
Financial The financial position or status of a beneficiary, recipient, or their family
Household Number of family members in a household
Marital Status A person's state of being single, married, separated, divorced, or widowed

Additional information

Reduction target

31.61 %

The IRS has built a strong foundation of internal controls, data-driven compliance filters, and targeted outreach strategies to address improper and unknown payments. However, its ability to further reduce these payments is constrained by statutory limitations, such as the narrow scope of math error authority and the absence of regulatory oversight over unenrolled paid return preparers. These constraints limit the agency’s capacity to prevent errors before refunds are issued, despite having the human capital and information systems in place to act more proactively.

If provided with additional legislative authority in these areas, the IRS could more effectively leverage its existing infrastructure to achieve greater reductions in improper payments. At that point, further investments in compliance systems, staffing, and enforcement tools would likely yield benefits that outweigh their costs by increasing the accuracy of payments and reducing the volume of recoveries needed after issuance.

The IRS has requested targeted investments to support payment integrity through enhancing compliance tools and technology modernization. The agency is prioritizing technology upgrades aimed at expanding automation, improving data integration, and enhancing system uniformity to better support audit selections and taxpayer data validation. These modernization efforts are designed to standardize data across the enterprise, strengthen analytics and reporting, and accelerate the delivery of digital services, which will ultimately improve the agency’s ability to prevent and detect improper and unknown payments.

A key initiative is the continued expansion of the Enterprise Case Management (ECM) system. The IRS projects that by the end of calendar year 2025, approximately 15,000 staff will be using ECM to reduce time and cost associated with critical compliance functions. Furthermore, during the 2025 filing season, the IRS used new identity theft filters that successfully identified and prevented issuance of approximately $1?billion in fraudulent refunds across more than 84,000 tax returns. These resource allocations reflect a strategic, data-driven approach to improving payment integrity while maximizing return on investment.

The IRS has implemented multiple measures to ensure executive leaders, program managers, and key personnel are held accountable for reducing improper payments, detecting and recovering overpayments, and improving overall program integrity. Specifically, the Directors of Refund Integrity and Compliance Services (RICS) and Refundable Credits Program Management (RCPM) have performance plan commitments tied to reducing improper payments and improving return accuracy for RTCs. These performance metrics are reviewed through quarterly operational reviews between RICS, RCPM, and Refundable Credits Examination Operations (RCEO), ensuring ongoing accountability and progress tracking. Program goals focus on both pre-refund compliance and proactive outreach and include steps to improve audit response rates and influence taxpayer and preparer behavior.

In coordination with external stakeholders, such as paid preparers and software developers, the IRS emphasizes shared responsibility in advancing accurate return filing. While the agency continues to explore enhancements, meeting statutory targets remains a challenge without additional legislative authority and program restructuring. Nonetheless, leadership is held accountable through defined appraisal criteria to drive progress toward long-term improper payment reduction goals.

$0 M