IRS Improper Payments on Refundable Tax Credits Rose in FY 2025: What Taxpayers Should Know

Refundable tax credits can provide meaningful financial relief to eligible individuals and families. They can reduce the amount of tax owed and, in some cases, increase a taxpayer's refund even when no federal income tax is due.

A recent government audit, however, found that estimated improper payments associated with four refundable tax credits increased during fiscal year 2025.

According to the Treasury Inspector General for Tax Administration (TIGTA), the overall estimated improper payment rate for the four credits rose from 21.9% in fiscal year 2024 to 26.5% in fiscal year 2025. The estimated improper payments totaled approximately $28.1 billion.

Which tax credits were included?

The audit focused on four refundable tax credit programs the IRS has identified as susceptible to significant improper payments:

• Additional Child Tax Credit (ACTC)

• American Opportunity Tax Credit (AOTC)

• Earned Income Tax Credit (EITC)

• Net Premium Tax Credit (Net PTC)

For fiscal year 2025, the report provided the following estimates:

• Credit

• Estimated improper payment rate

• Estimated improper payments

Additional Child Tax Credit

• 13.6%

• $4.5 billion

American Opportunity Tax Credit

• 30.7%

• $1.5 billion

Earned Income Tax Credit

• 32.7%

• $21.1 billion

Net Premium Tax Credit

• 31.6%

• $0.8 billion

Total

• 26.5%

• $28.1 billion

The estimates were based on tax year 2023 returns filed during 2024 and 2025. Totals may differ slightly because of rounding.

An improper payment does not necessarily mean fraud

The term “improper payment” can sound alarming, but it is broader than fraud. TIGTA defines an improper payment as one that should not have been made or that was made in an incorrect amount. That can include both overpayments and underpayments.

Errors may result from misunderstandings, missing documentation, incorrect information, or difficulty applying detailed eligibility rules. Intentional misrepresentation can also result in an improper payment, but the report does not say that every improper payment was fraudulent.

Why are these credits difficult to administer?

Refundable credit eligibility can depend on facts that are not always easy for the IRS to verify when a return is filed. These may include a taxpayer's income, family relationships, residency, education expenses, health insurance information, and whether another person may claim the same dependent.

The audit identified several continuing challenges:

• Complex eligibility rules that can vary among credits and change over time

• Limited access to reliable third-party data when a return is processed

• Limited authority to correct some eligibility issues automatically

• The need to issue valid refunds promptly while reviewing questionable claims

TIGTA reported that the IRS examined less than 1% of returns claiming the four refundable credits during fiscal years 2023 through 2025. It also found that prerefund examinations involving these credits declined by approximately 70% during that period.

What did TIGTA recommend?

TIGTA made five recommendations designed to improve payment accuracy. They included simplifying refundable-credit eligibility rules, seeking additional authority to correct certain errors, improving data sharing with outside organizations, and expanding taxpayer and preparer education.

The IRS agreed with all five recommendations. In its response, the IRS said the main drivers of improper payments include complicated statutory requirements and its limited ability to verify taxpayer-provided information before issuing refunds. The agency said it plans to continue using education, data-driven compliance efforts, and collaboration with the Treasury Department and Congress to improve payment integrity.

What does this mean for taxpayers?

The report does not eliminate or reduce these credits for eligible taxpayers. It does reinforce the importance of confirming eligibility before a return is filed.

If you plan to claim a refundable credit, consider taking these steps:

• Review the rules each year. Do not assume that qualifying in a prior year means you will qualify again.

• Confirm dependent information. Make sure names, Social Security numbers, relationships, residency, and support information are accurate.

• Keep supporting records. Retain documents related to income, childcare, education costs, health insurance coverage, and household members.

• Reconcile advance Premium Tax Credit payments. If you received advance payments for Marketplace health coverage, use Form 1095-A to complete Form 8962 accurately.

• Work with a trusted tax professional. A qualified professional can help review the rules, identify missing information, and reduce the risk of errors or refund delays.

The bottom line

Refundable tax credits remain valuable, but their eligibility rules can be complicated. Careful recordkeeping and an accurate return are especially important as the IRS and federal oversight agencies place greater attention on improper payments.

If you have questions about whether you qualify for the EITC, ACTC, AOTC, or Premium Tax Credit, contact our office before filing. We can review your circumstances and help you claim the credits for which you are eligible while avoiding preventable mistakes.

This article is for general informational purposes only and is not tax, legal, or financial advice. Tax rules depend on individual facts and may change.