Taxpayer Losses to COVID Relief Fraud Far Exceed New Revenues from Hiring 87,000 IRS Agents
The recently enacted Inflation Reduction Act calls for 87,000 new IRS agents to collect billions of dollars in higher tax revenues, stoking debate on where this surplus revenue will come from. Supporters insist those earning less than $400,000 per year won’t be affected, which opponents dispute and argue violates a Biden campaign pledge.
But one thing is clear: Whatever new revenue comes in and whoever pays it over the coming decade, it will be just a fraction of taxpayer losses from unprecedented COVID relief fraud in the past two years.
Let’s break down the numbers. The non-partisan Congressional Budget Office’s most recent estimate suggests that $80 billion in additional funding for the IRS will yield $180 billion in extra revenue from 2022-2031 — for net deficit reduction of $100 billion. Most of that new revenue will result from increased audits, which Republicans argue will hit low- and middle-income taxpayers, and not just the rich.
No matter who is affected, that’s a lot of revenue. But it pales in comparison with what taxpayers just lost in the form of misspent pandemic benefits. For example, the Department of Labor’s Inspector General in March conservatively estimated there were $163 billion in “improper payments” through the nation’s unemployment benefit system during the pandemic. That system was massively expanded in March 2020, and the Inspector General acknowledges his estimate is an understatement, as it omits losses under Pandemic Unemployment Assistance, the most widely abused temporary program. Counting that program, some experts say losses could reach an astonishing $400 billion — or twice the higher taxes all those additional IRS agents are expected to bring in over a decade. And that’s just misspent unemployment benefits, which doesn’t count tens of billions stolen from pandemic employer subsidies and other benefits.
Some senior lawmakers have suggested going after pandemic fraud as an alternative to expanding the reach of the IRS. Rep. Brad Wenstrup (R-OH) last week suggested that if “you’re trying to recoup money, how about all the fraud that has taken place from the unemployment insurance, the unemployment benefits that went out during COVID?”
He’s certainly right that policymakers should aggressively pursue the criminals who defrauded these programs. But only a small percentage of stolen unemployment benefits has been recouped so far, and efforts to chase this type of fraud are usually met with only limited success. The share recovered this time may be even slimmer, since “Russian mobsters, Chinese hackers and Nigerian scammers” and other foreign criminals account for “at least half” of the losses, according to law enforcement officials. Most have long since made off with the money and covered their tracks.
The way benefits were paid — and might be recouped — also contributes to doubts about significant recoveries. Most of the misspent money involved federal benefits paid out by the state agencies that run this system. States experience administrative expenses when they try to recover misspent funds, and any federal money they recover must be returned to the federal government. That leaves states with no incentive to pursue most misspending. To overcome that, senior Republican lawmakers have proposed allowing states to retain some recovered federal funds, but that legislation has gone nowhere on Capitol Hill.
At the very least, Congress should prevent a repeat of these massive losses in the future. The policies and practices to avoid are obvious. For example, the New York Times recently recognized key flaws in how Congress designed pandemic unemployment benefits, including letting claimants “self-certify” their eligibility in the hope of getting money out the door quickly: “Applicants did not need to provide proof they had lost income because of Covid-19; they simply had to swear it was true.” That flaw was recognized within weeks of pandemic benefits starting, but it took nine months for Congress to close just part of the loophole. By then, most of the damage had been done. Other flaws include paying benefits before a claimant’s identity is verified, paying benefits that exceed prior wages, and paying benefits to those who didn’t pay taxes into the system before.
State benefit systems also need work. But the big risk is that Congress doesn’t learn those policy lessons, and instead revives pandemic style payments in a future crisis without addressing the design flaws that left them wide open to historic abuse. If that happens, whatever additional taxes a beefed up IRS collects in the coming decade will fall even further behind the historic rip-off that taxpayers have experienced as a result of poor program design and the rush to get unemployment checks out the door.
Matt Weidinger is a Rowe Fellow in poverty studies at the American Enterprise Institute.
