The IRS Has A $28.1B Refund Problem

Some tax credits can send money back to a taxpayer even when they owe little or no tax. That is the good part. The messy part is proving who really qualifies before the refund leaves the building.

The Number Got Worse

The IRS improper-payment rate on major refundable tax credits rose from 21.9% in fiscal 2024 to 26.5% in fiscal 2025.

That added up to about $28.1 billion in estimated improper payments.

The four high-risk credit programs are the Additional Child Tax Credit, American Opportunity Tax Credit, Earned Income Tax Credit, and Net Premium Tax Credit. They are useful because they can create refunds for taxpayers who need them. They are difficult because eligibility often depends on facts the IRS cannot fully verify during return processing.

That is the core problem. Once a refund goes out, the cleanup gets slower, more expensive, and more painful.

The IRS Cannot Check Everything Fast Enough

The IRS does run automated checks before paying refunds.

But the agency told TIGTA it has limited data to verify some claims on time. Relationship rules are one example. For the Additional Child Tax Credit, the IRS may need to know who the child lived with, who supported the child, and whether the claim matches real family facts.

Those facts are not always sitting in a clean government database.

The IRS used math error authority to cut claims by about $7.6 billion from fiscal 2023 through 2025. But that only reduced total claims by about 2%.

Outside that authority, the IRS usually has to examine questionable claims before the refund goes out. And it examines less than 1% of returns claiming these credits.

The Staffing Math Is Brutal

The report points to a simple tradeoff.

To get the improper-payment rate under the 10% target, the IRS would need far more pre-refund exams. TIGTA said the IRS previously estimated it would need to examine 4.2 million more EITC returns before issuing refunds.

That would now cost about $3.4 billion a year at the current average exam cost. TIGTA also estimated the IRS would need 12,700 more examiners.

Meanwhile, the IRS Refundable Credits Examination Operations Unit lost about 20% of its examiners in fiscal 2025.

So the agency is stuck. It needs more checks to stop bad payments before they happen. But more checks require money, staff, data, and political tolerance for slowing refunds.

This Lands In The Client File

For tax pros, the practical lesson is not that every refundable-credit claim is suspicious.

It is that refundable-credit claims need clean support. Residency, relationship, income, school costs, insurance coverage, and dependent support can all matter. The software answer is not enough if the file does not show why the claim made sense.

The IRS can argue about budgets and authority with Congress.

Preparers still have to answer the client-file question. If this return gets pulled later, what proof is already sitting there?