The Earned Income Tax Credits were intended for poor working families. In his report, IRS inspector general J. Russell George said more than one-fifth of all credits paid under the program went to people who didn't qualify.
"The IRS should be commended for implementing numerous processes to educate Americans and identify and prevent improper EITC payments," George said in a statement. "Unfortunately, it is still distributing more than $11 billion in improper EITC payments each year and that is disturbing."
"The IRS must do a better job of reining in improper payments in this and in other programs," George added.
IRS efforts are hampered by unscrupulous tax preparers as well as honest families that have trouble figuring out how to calculate the complicated credit, the report said.
"The IRS appreciates the inspector general's acknowledgement of all our work to implement processes that identify and prevent improper EITC payments," the IRS said in a statement. "Every year, the IRS conducts 500,000 EITC audits as part of a broader enforcement strategy, and EITC claims are twice as likely to be audited as other tax returns."
The agency said it prevents "nearly $4 billion in improper claims each year and is committed to continuing to work to reduce improper claims."
The EITC is one of the nation's largest anti-poverty programs. In 2011, more than 27 million families received nearly $62 billion in credits.
The credit is attractive because, if it is larger than your total income tax bill, the IRS will pay you the difference. This is especially helpful to low-income families because many pay little or no federal income tax.
It also makes the credit more susceptible to fraud.
"Refundable tax credits are a nightmare to administer and lead to far too much of the American people's money going out to those who aren't eligible," said Sen. Orrin Hatch of Utah, the top Republican on the Senate Finance Committee. "That the IRS can't figure out how to rein in the improper Earned Income Tax Credit payments doesn't bode well for the $1.1 trillion in ObamaCare subsidies."
Using IRS statistics, the inspector general's report provides an estimated range of improper EITC payments from 2003 through 2012. The report says the IRS paid out at least $110.8 billion in improper payments during the period, and perhaps as much as $132.6 billion.
The IRS says it is impossible to know the exact amount of improper EITC payments without auditing all 27 million taxpayers who received them, which isn't feasible.
The amount of improper payments ballooned during the recent economic slump, hitting at least $15.3 billion in 2010, the report said. For 2012, the improper payments totaled between $11.6 billion and $13.6 billion.
Families earn the credits by working and earning money, though there are income limits. The size of the credit depends on your income and the number of children you have.
This year, a married couple with three or more children can earn up to $51,567 and still qualify for the credit. A married couple with two children can earn up to $48,378 and still qualify, according to the IRS.
The maximum credit this year is $6,044 for families with three or more children. The maximum credit for families with two children is $5,372.