The IRS is testing new ways to improve the Earned Income Tax Credit (EITC).  Our goal is a fair and balanced EITC program – one that clearly encourages eligible taxpayers to apply while reducing an unacceptably high rate of erroneous claims.  Decisions on final changes will take place after in-depth evaluations and outside consultations with numerous stakeholders.

Since its enactment in 1975, the EITC lifted millions of families above the poverty line.  Approximately 20 million taxpayers claimed more than $36 billion in EITC for tax year 2002.  However, studies have consistently shown extremely high erroneous payments. A recent study indicated nearly $10 billion, nearly one-third of the claims, were in error in Tax Year 1999.

To address this issue, the IRS recently announced a five-point initiative to improve service, fairness and compliance. The agency will make a series of internal changes to improve its service to eligible EITC taxpayers. As part of the initiative, the IRS also will ask a small test group of EITC claimants to provide additional proof that they meet the eligibility standards established by Congress.

Starting in 2004, the IRS will conduct limited tests of three different approaches that may help the IRS improve EITC compliance.  The vast majority of EITC recipients will be unaffected by these tests.  However, taxpayers contacted should respond immediately to ensure they receive the EITC they deserve.  Taxpayers with questions should call the telephone number on the letter, or ask their preparers.

• The first test involves the residency requirement between a child and the taxpayer.  IRS will ask 25,000 EITC claimants to verify, when they file their tax return, that the qualifying child claimed for EITC purposes resided with them in the United States for more than half a year as required by law.
• The second test involves the misreporting of income.  The IRS will review the returns of 300,000 taxpayers who claimed the credit but failed in the past to report all their income.  These taxpayers may not be eligible because their income has exceeded the EITC income cap.
• The third test involves filing status claimed by EITC taxpayers.  IRS will review the returns of 36,000 EITC claimants filing as Head of Household or Single who previously filed as married.  These taxpayers will be asked to validate that they have chosen the correct filing status, i.e. head of household.

The IRS will carefully evaluate the results of these tests.  Independent experts are helping to design the evaluation plans and will assist in analyzing the results.  The IRS is committed to engaging stakeholders throughout this process.  As the agency learns, it will engage stakeholders at every level to solicit their ideas on how to proceed with these initiatives. The current unacceptably high error rate is unfair to all taxpayers, but especially unfair to those EITC recipients who abide by the rules. The IRS wants to work with all interested parties to address this issue

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