EPA Underreported $63M in Bad Water-Fund Payments, Audit Finds
Summary
A January 2026 EPA Inspector General audit found the agency underreported improper and unknown payments in its Clean Water and Drinking Water State Revolving Fund loan programs by about $63.2 million across just 20 transactions inspectors rechecked. EPA's own fiscal 2022 review tested 412 transactions worth $781.4 million and reported just $226,326 as improper; when inspectors rechecked a $56 million slice of that same sample, 82% of its dollar value turned out to be errors EPA's own testers had missed. EPA revised its testing process for fiscal 2023, but the same failures recurred -- as they did in a 2014 audit the agency had already closed as fixed -- and the Office of Water has not committed to correcting them again, even as the program is set to receive $43.4 billion in infrastructure-law funding through 2026.
$226,326 found, $46.2 million missed
For fiscal 2022, regional staff tested 412 SRF transactions worth $781.4 million and reported just eight improper payments totaling $226,326⧉ -- a result the agency used to conclude its state revolving funds were 'not susceptible to significant improper payments.' To check that conclusion, independently retested 13 of those same 412 transactions, a $56.0 million slice of the sample.
Twelve of the 13 had unknown payments EPA's own regional staff never flagged⧉ -- unapproved construction invoices, payroll summaries that didn't reconcile, training and professional-service costs with no supporting detail. That single-slice recheck alone turned up $46.2 million in missed unknown payments -- 82% of the dollar value inspectors rechecked, and roughly 204 times what had reported as improper across its entire year of testing.
View data as table
| Transactions with undetected errors | 92% | 12 of 13 retested transactions had unknown payments EPA's own regional staff never flagged |
|---|---|---|
| Dollar value affected | 82% | $46.2 million of the $56.0 million OIG rechecked turned out to be unknown or improper payments |
Draws that corrected errors nobody reported as errors
The gap didn't stop at undetected unknown payments. Under the Payment Integrity Information Act, any payment lacking sufficient documentation to confirm it is legitimate must itself be counted as improper -- there is no benefit of the doubt. During FY2022, state revolving funds made 77 'negative draws' -- corrections where a state returns money to a grant -- worth $12,182,557⧉, and at least 54 of those draws, worth $6,989,887, were states fixing improper payments on their own. EPA never reported those 54 corrections to headquarters as improper payments⧉, as its own guidance requires.
Separately, in two more transactions, Office of Water staff had already written down $1.2 million in improper payments on their internal testing worksheets and simply never carried the number into the SRFs' reported total⧉ -- in one case, a $1,164,978 calculation error a reviewer had annotated as corrected but never logged as improper. Add it up -- the missed unknown payments, the unreported corrections, the internally flagged-but-buried total -- and FY2022's real underreporting comes to about $54.4 million.
View data as table
| FY2022 | 54,400,000 | Found by retesting just 13 of the 412 transactions EPA's regions tested that year |
|---|---|---|
| FY2023 | 8,800,000 | Found by retesting just 7 of the 339 payments EPA's contractors tested under a revised, statistically sampled process |
A fix that didn't fix it, and a 2014 rerun
For fiscal 2023, changed its approach: contractors took over testing instead of regional staff, the standard operating procedures were rewritten, and the agency switched from picking transactions by judgment to a statistically based random sample. The new process tested 339 payments worth $1.1 billion and reported 23 improper payments worth $4.5 million⧉. retested seven of those transactions anyway, and found the same three defects: unsupported construction invoices, undocumented payroll and travel costs, and unreported unknown payments -- underreporting FY2023 by about $8.8 million.
This is not a new failure mode. A 2014 EPA OIG audit found the identical three defects⧉ -- regional staff skipping standard procedures, leaving transaction-testing worksheets incomplete, and not treating negative draws as a sign of a prior overpayment -- and closed all of its recommendations as fully implemented by October 2014. Twelve years later, the same defects are back⧉, this time on a program about to receive $43.4 billion in infrastructure-law funding through fiscal 2026, on top of its roughly $2.7-billion-a-year historic base.
issued four recommendations. Three -- rewrite and enforce the testing procedures, build real quality-review controls, and redo the SRF risk assessment in light of this audit -- are directed at the Assistant Administrator for Water, and all three remain unresolved⧉: the Office of Water gave no corrective-action plan and no completion date, telling auditors it 'lacks sufficient information to provide appropriate responses.' Only the fourth recommendation, addressed to 's Chief Financial Officer rather than the Office of Water, is marked resolved, with a completion date of April 1, 2026.
- found 's regions and contractors underreported improper and unknown SRF payments by about $63.2 million across just 20 transactions inspectors independently retested -- $54.4 million from FY2022, $8.8 million from FY2023.
- 's full FY2022 self-testing of 412 transactions worth $781.4 million reported only $226,326 as improper; 's recheck of a 13-transaction, $56.0 million slice of that same sample found 82% of its dollar value was unknown or improper payments had cleared.
- switched to contractor-run, statistically sampled testing for FY2023, but 's retest found the same documentation failures persisting, underreporting that year by $8.8 million.
- A 2014 audit found and closed the same three defects; three of 's four 2026 recommendations remain unresolved, with the Office of Water providing no corrective-action plan, as the SRF program is set to receive $43.4 billion in infrastructure-law funding through fiscal 2026.
All figures come from the Office of Inspector General's Audit of the 's Resolution of Improper Payments Identified Through Its Annual Review of the State Revolving Fund Program (Report No. 26-P-0014, January 29, 2026), independently recomputed from the report's own stated dollar amounts: the $54.4 million FY2022 total as the sum of $46.2 million in missed unknown payments, $6,989,887 in unreported negative-draw corrections, and $1.2 million in internally flagged-but-unreported amounts; the $63.2 million combined total as $54.4 million plus $8.8 million; the 82% and 92% FY2022 retest-failure shares from the $46.2 million/$56.0 million and 12/13 figures the report states directly; and the roughly 204x gap between 's $226,326 FY2022 self-report and the $46.2 million 's smaller recheck alone found, which compares a full-year total to a partial retest sample and is offered as an illustration of scale, not a like-for-like ratio. The 2014 prior-finding characterization is corroborated against Report No. 14-P-0171 directly.
Sources(2) ▾
- U.S. Environmental Protection Agency, Office of Inspector General, Audit of the EPA's Resolution of Improper Payments Identified Through Its Annual Review of the State Revolving Fund Program (Report No. 26-P-0014) (2026-01-29) — The primary document -- the 's performance audit of how the Office of Water identifies, tracks, and reports improper and unknown payments during its annual review of the Clean Water and Drinking Water State Revolving Fund (SRF) programs, covering fiscal years 2022 and 2023. Source for every dollar figure on testing scope, underreporting, negative draws, the recommendation-status table, and the Office of Water's non-response, plus its own account of the 2014 prior finding. oversight.gov · original document
- U.S. Environmental Protection Agency, Office of Inspector General, EPA Needs to Continue to Improve Controls for Improper Payment Identification (Report No. 14-P-0171) (2014-04-10) — The 2014 predecessor audit that found regional staff were not following SOPs for SRF improper-payment transaction testing, not completing required worksheet fields, and not treating negative draws as indicators of prior improper payments -- the same three defects the 2026 audit found recurring. Corroborates the 2026 report's account that this report's recommendations were closed as fully implemented by October 2014. epa.gov · original document
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's Office of Inspector General -- the agency's own internal watchdog, independent of the programs it audits -- has found that cannot accurately count how much of the money it lends states for water infrastructure is being misspent. A January 2026 audit⧉ of 's Clean Water and Drinking Water State Revolving Funds -- zero- and low-interest loan programs that channel federal money through all 50 states plus Puerto Rico to build sewer plants and drinking-water systems -- found that 's annual improper-payment reviews systematically clear payments that should have been flagged, which means cannot tell Congress or the public whether the loan money is actually reaching legitimate, documented work. Rechecking just 20 of the hundreds of transactions itself had already tested, inspectors found $63.2 million in improper or unknown payments EPA's own process missed or failed to report⧉.