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PolitiFact: Sen. Rand Paul's statement about tax credit fraud leaves out important details

WASHINGTON, DC - FEBRUARY 03:  Sen. Rand Paul (R-KY) leaves the weekly Republican Senate policy luncheon at the U.S. Capitol February 3, 2015 in Washington, DC. Senate Democrats filibustered the legislation to fund the Homeland Security Department because it included a measure to roll back President Obama's executive order on immigration.  (Photo by Chip Somodevilla/Getty Images) 535712071
WASHINGTON, DC - FEBRUARY 03: Sen. Rand Paul (R-KY) leaves the weekly Republican Senate policy luncheon at the U.S. Capitol February 3, 2015 in Washington, DC. Senate Democrats filibustered the legislation to fund the Homeland Security Department because it included a measure to roll back President Obama's executive order on immigration. (Photo by Chip Somodevilla/Getty Images) 535712071
Published Feb. 6, 2015

The statement

"When you look at the earned income tax credit, it has about a 25 percent fraud rate. We're looking at $20 billion to $30 billion."

Sen. Rand Paul, R-Ky., Jan. 25 at the Freedom Partners 2015 California retreat

The ruling

The Earned Income Tax Credit is the only IRS program that is considered a high-risk for improper payments, the Treasury Inspector General for Tax Administration said in 2014. At the root of the problem is the complex nature of the tax credit: It is available to only low-income individuals, and it fluctuates based on earnings, number of children and other factors. The churn into and out of the program is high — about one-third of all recipients are first-timers, or their eligibility changes year-to-year due to swings in their income. This creates confusion among both recipients and administrators.

The IRS said it is difficult to balance reducing improper benefits with encouraging people who qualify to use the credit.

How prevalent are these improper payments? According to the inspector general, 22 to 26 percent of all payments are improper.

And how much does that cost taxpayers? The entire program totaled $63 billion in 2013, meaning improper payments ranged from $13.3 billion to $15.6 billion.

So Paul's percentage was right, but he overstated the actual annual cost.

Paul's statement, his spokesman Brian Darling said, also included another tax credit highlighted by the auditor's 2014 report, the Additional Income Tax Credit, which similarly provides refunds for some working families with children. The inspector general found improper payments between $5.9 billion and $7 billion in 2013. Combined, improper payments from the two programs would likely top $20 billion.

Not all improper payments, however, are "fraud," as Paul put it. There are six issues that have led to improper payments, one of which is fraud. But none of them "can be considered the primary driver of the (Earned Income Tax Credit) improper payments," the report said.

Improper payments had two root causes: authentication and verification.

For example, an authentication problem would be if a parent claims a child that doesn't live with the parent most of the time. A verification problem would be if a person claims to have a lower income than he has. About 70 percent of improper payments are due to authentication problems.

"The biggest source of error has to do with family status," said Eric Toder, co-director of the Tax Policy Center and former director of research at the IRS. "The size of the EITC has to do with how many kids you have, and the definition of 'child' means they're living with you half the time. And in many low-income homes, kids go back and forth between one parent or another, and it's not obvious who should be claiming the child, or they're claiming the child they shouldn't be."

Of course, there are also ways to make mistakes filing income taxes under both scenarios. The IRS doesn't keep track of how many improper payments are due to fraud and how many are due to human error. Paul's spokesman said the distinction is negligible.

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The statement is partly accurate but leaves out important details, so we rate the claim Half True.

Steve Contorno, Times staff writer

Edited for print. Read the full version at PolitiFact.com.