EITC Reform Initiative

Overview

The Internal Revenue Service (IRS) is responsible for administering the Earned Income Tax Credit (EITC), which is a refundable Federal income tax credit for low-income working individuals and families. Congress originally approved the tax credit legislation in 1975, in part to offset the burden of social security taxes and give these individuals an incentive to work. Since its adoption in 1975, the amount of the EITC has increased in dollar amount, as well as in the number of individuals and families benefiting from it.

Approximately 19 million taxpayers - roughly one out of every seven families who filed -claimed over $32 billion of such credits on tax year (TY) 2002 returns.

Although the EITC has been successful in lifting millions of low-income taxpayers and their children above the poverty line, it has been plagued by persistent compliance problems. In 1997 the IRS released a compliance study that showed a high rate of noncompliance with the EITC. In response Congress provided a special $716 million appropriation for 5 years (FY 1998 to 2002) to reduce EITC errors through expanded customer service and public outreach programs, strengthened enforcement activities, and enhanced research efforts.

Despite these efforts, the IRS has been unable to significantly reduce noncompliance. The most recent compliance study (of TY 1999 returns), reported that between $8.4 and $9.9 billion in EITC claims (27% to 32%) had been improperly paid. Based on “significant compliance problems” associated with the EITC, the General Accounting Office has listed the administration of the credit as a “high risk area for the federal government.”

The EITC is a social benefits program embedded in the tax code. While traditional government benefits programs generally require proof of eligibility prior to payment, the tax system primarily relies on self-reporting. Thus, unlike most benefits programs, the IRS has not required proof of eligibility prior to payment and has relied on a claimant´s self-assessment that he or she meets the EITC eligibility criteria. In addition, it is difficult for the IRS to confirm or refute crucial facts about an EITC claimant´s eligibility (e.g., marital status, residency of a claimed child) without resorting to an examination. For claimants selected for examination, the entire refund is frozen pending resolution of the disputed issues.

EITC Reform Initiative

Recognizing the importance of the EITC to millions of hard working taxpayers, today the IRS is announcing a five-point EITC initiative to: (1) reduce the backlog of pending EITC examinations to ensure that eligible claimants receive the refunds quickly, (2) review the existing audit process to minimize the burden on taxpayers and improve the quality of communications with taxpayers, including notices, (3) increase outreach efforts to improve participation and to ensure that the requirements for claiming the credit are clearly understood, (4) enhance compliance efforts with regard to taxpayers who have claimed the credit but are ineligible because their income is too high, and (5) pilot a certification effort to establish prior to payment that certain higher risk taxpayers lived with the children they claim for the EITC for the required length of time (more than half of the year).

Reducing the Backlog of EITC Examinations

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