IRS News Release  
October 26, 1994

Statement of Treasury Secretary Lloyd Bentsen
EITC Press Conference

I have a few points to make about the Earned Income Tax Credit program today, and some announcements. I have another meeting I have to go to in a couple of minutes, but this is important to me so I wanted to stop in and say something. I've asked Peggy Richardson, the IRS Commissioner, and our Under Secretary for Enforcement, Ron Noble, to stay and go over the fine points with you.

The Earned Income Tax Credit is an extraordinary program that helps American families stay out of poverty and encourages them to work. It's been around since 1975, and we improved it last year because helping American families is a priority for this administration. It has the potential to help 20 million low income working Americans and their families have a better life -- by rewarding work. The EITC has a refundable tax credit which can be taken as a lump sum at the end of the year, or a partial credit that comes in the form of lower withholding during the year, with a smaller refund at tax time.

Over the years there have been difficulties, and now there are problems in particular with fraud and electronic filing. We have an on-going effort to attack this problem. I named a task force earlier this year to examine the issue, and it made an interim report to Congress earlier this month. We've also worked with the GAO.

Let me quickly go over some numbers for you. In the good news department, the error rates for the EITC program appear to be more than a third lower now than they were in the 1980s. But they're still too high.

The data the IRS put together tell us that for the last two weeks in January, there were 1.3 million electronic returns that claimed the EITC. The work the IRS has done tells us that if we went through those returns line by line we'd find that 29 percent of them, accounting for 24 percent of the total tax credit claimed, or about $358 million, overclaimed what was due. That doesn't necessarily mean the taxpayer wasn't entitled to some tax credit, but that they claimed too much. The figures also tell us that 13 percent of the filers, accounting for about 12 percent of the refund total claimed, may have intentionally overclaimed what was due. The good side of that is that 87 percent of the filers are getting it right. Now as to that 13 percent, I'd like to use some strong language about lying and fraud, but the lawyers tell me I have to bite my tongue because of the issue of intent.

We haven't been sitting on our hands. For nearly two years now we've been going after problems and cracking down, and we're going to be doing more.

First, it may not sound like the place for an EITC provision, but we have a number of proposals in the GATT legislation, such as requiring taxpayer identification numbers for all children, regardless of age. It also has an item to have the Defense Department report some of the non-taxable earned income both to military personnel and to the IRS -- such as housing and subsistence allowances. And, the legislation would deny the EITC to prisoners and to non-resident aliens.

Our welfare reform proposal also has a program to look at other administrative ways to improve EITC compliance.

So far we've taken more than a dozen separate actions in our comprehensive program to improve the EITC, such as deciding to add staff to help detect fraud, and making forms more understandable.

Today we're announcing a number of additional steps to make as certain as we can that only those people who are truly entitled to the Earned Income Tax credit receive it. Some of what we're doing can be done administratively, and some of it will take legislation.

By the time we release the 1996 budget -- early next year -- we will develop measures to deny the Earned Income Tax Credit to illegal aliens. The IRS estimates that over 150,000 illegal aliens claimed the EITC this year for last year's taxes. We looked into this one. There was nothing on the books that made it possible to verify the existence of children claimed by an illegal alien, which leaves an opportunity for fraud that we're closing off.

Second, starting in the next tax season, we will no longer provide preparers who file electronic returns what we call a direct deposit indicator. That indicator means that we don't see anything that would require us to hold the tax credit to pay some other tax bill. It's often used as a signal to lenders who work with preparers that a refund will be on the way shortly.

We've found that a very very high number of EITC fraud schemes involve refund anticipation loans, and those loans are based on the direct deposit indicator we send out. The crooks take the money and run, and the taxpayers and banks get burned. So we're no longer going to tell the electronic filing operations whether a refund is likely to be coming. The taxpayer will still get any refund they're due, but we won't be sending out that notification.

The Earned Income Tax Credit is for those who deserve it, who need that extra encouragement to work full time, to lift their families out of poverty, to join the mainstream in American life. It is not for cheats and frauds and slick operators, and we're going to do our best to weed them out, and prosecute them when we find them.

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