In its recently released 2021 audit report, the Government Accountability Office found that more than $662 billion was lost due to improper payments ($281 billion) and tax fraud ($381 billion). That’s more than the total income taxes paid by 94% of the country — all those earning $200,000 or less.

Sixteen agencies were responsible for the $281 billion lost in 2021; the worst programs being Medicaid ($99 billion), Unemployment Insurance ($78 billion); and Medicare ($50 billion). Four other programs reported improper payments of $5 billion or more.

Unemployment fraud was up $70 billion over 2020. The auditors reported, “this large increase resulted from (1) the doubling of the improper payment rate from 9.2% in fiscal year 2020 to 18.9% in fiscal year 2021, and (2) the large increase of reported outlays in the Unemployment Insurance program from $87 billion in fiscal year 2020 to $413 billion in fiscal year 2021.”

Improper payments actually exceed the $281 billion identified by the auditors because that number generally does not include COVID-19-related programs, such as the Paycheck Protection Program. The Small Business Administration Office of the Inspector General and the Secret Service found nearly $100 billion of fraud in COVID-19 relief programs. The massive amount spent and the haste with which it was administered were root causes.

According to the auditors, the full extent of improper payments may never be known. In addition to the COVID-19 programs, the auditors “identified some risk-susceptible programs for which agencies did not report fiscal year 2021 estimated improper payment amounts, including HHS’s (Health and Human Services’) Temporary Assistance for Needy Families, HHS’s Advance Premium Tax Credit, and the Department of Agriculture’s Supplemental Nutrition Assistance Program.”

“The Department of Labor’s three new unemployment insurance programs created under the COVID laws have no plans to begin reporting improper payment estimates until fiscal year 2022, if at all.”

Improper payments have consistently been a governmentwide issue, totaling an estimated $206 billion for fiscal year 2020 and $175 billion for fiscal year 2019. Since fiscal year 2003, cumulative improper payment estimates have totaled about $1.9 trillion.

The breadth of fraud is shocking, involving 98 federal programs across 21 agencies.

Twenty-four programs had improper payment rates of 10% or more. Welfare and Defense programs were prime targets. The following each lost more than $1 billion to fraud in 2020:

  1. Children’s Health Insurance Program.
  2. Additional Child Tax credit.
  3. American Opportunity Tax Credit.
  4. DOD’s Civilian Pay.
  5. DOD’s Military Pay – Army.
  6. DOD’s Military Pay – Air Force.
  7. Supplemental Nutrition Assistance Program.
  8. National School Lunch Program.
  9. Department of Veterans Affairs’ Purchased Long-Term Services and Support.
  10. Social Security Administration’s Old-Age, Survivors, and Disability Insurance.

Fraud and mismanagement were not confined to spending. The nation’s financial statements report the annual federal tax gap, which reflects lost taxes due to failure to report or misreporting was $381 billion. The IRS commissioner believes the real gap is much higher, possibly exceeding $1 trillion dollars annually.

More than 70% of the loss is related to individuals. Complexity has a lot to do with it.

The auditors have identified lack of controls that could prevent fraud as a serious deficiency since 1997. They have and continue to make detailed recommendations, many of which have been adopted with limited results.

In 2019, Congress passed the Payment Integrity Information Act, which was expected to curb the problem — but to no avail. Several administrations — Republicans and Democrats — have tried to reduce fraud, with no success.

The fact is, as the auditors observed, “the size and complexity of the federal government continue to present a formidable management challenge. ...”

A government that is too big to manage its finances is too big. Streamline and simplify.

Why do we need federal and state unemployment programs, especially when nearly 1 out of every 5 federal dollars is spent in error? Cut spending, especially spending in haste. Selectively outsource certain functions.

Most third-party administrators have strong controls. At a minimum, private contractors could be on the hook for improper payments. Tighten oversight on the worst offenders. Tie pay to performance. Provide better training or replace at-fault workers. Simplify the tax code and enhance third-party reporting.

Congress in its oversight capacity should hold federal officials, managers and employees accountable. No federal program should be exempt from reporting improper payments.

William R. Titera is a retired auditor and was a partner at Ernst & Young LLP for 25 years. He was a member of EY’s national Professional Practice group and also served as chairman of the American Institute of CPA’s Assurance Services Executive Committee.