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Senate Bill Would Boost Burdens, Costs to Claim Working Family Tax Credits

August 20, 2015 at 7:30 PM

The Senate Appropriations Committee proposes to impose onerous new paperwork requirements on millions of workers who file their own tax returns and claim certain tax credits.  In particular, the proposed requirement would convert the already complicated one-page Schedule EIC into a four- or five-page form that all individuals preparing their own returns and qualifying for the Earned Income Tax Credit (EITC) would have to fill out. 

That would create substantial new burdens and costs, as well as confusion, for large numbers of these workers and likely lead many of them either to stop claiming tax credits for which they qualify or to pay commercial tax preparers to help them obtain the tax credits that, currently, they’re capable of filing for on their own.  Of note, H&R Block lobbied heavily for this new paperwork requirement.

Currently, workers who claim a child for the EITC must complete Schedule EIC, with questions on such matters as the child’s relationship to the filer, the child’s age, and whether the child lived with the worker more than half of the year.  Commercial tax preparers who file EITC claims for their clients must also submit a four-page, 30-question checklist to show the IRS they’ve properly determined that the filer is eligible.

Going forward, the Senate Appropriations Committee report that accompanies its 2016 funding bill for the Treasury Department, IRS, and other agencies would direct the Treasury and IRS to fundamentally alter, and greatly lengthen, Schedule EIC (and make it much more complex) by adding to it most of the 30 questions on the paid preparer checklist — thereby ballooning Schedule EIC from one page to four or five and imposing substantial new burdens on people of modest income who file their own returns.

Along with undercutting the EITC’s basic purpose — to help low-income working families make ends meet and, in this way, encourage work — by discouraging eligible working families from filing for it, the committee’s proposed directive is unnecessary.  The five pages of Form 1040 instructions on the EITC (along with a separate 37-page IRS publication on EITC eligibility) already cover the eligibility issues that the proposed additions to Schedule EIC would cover.

Moreover, if a tax filer uses commercial tax filing software (such as TurboTax), the software already builds these eligibility issues into its program.  Under the proposed directive, the software makers presumably would have to change the software to force filers to answer these questions as part of their electronic tax filing, burdening filers and complicating the filing process.

Were this directive implemented, no one should be surprised to see large numbers of individuals who now file their own returns either giving up and not claiming the EITC due to the added complexity or turning to paid preparers, who could charge hundreds of dollars for their services.

Beyond the EITC, the Senate Appropriations Committee language also directs the Treasury Department and IRS to add similar sets of questions to the tax forms for filers who qualify for the refundable components of the Child Tax Credit, the American Opportunity Tax Credit for college expenses, and the Premium Tax Credit that helps people pay the cost of health insurance.  Filers already must work through multiple pages of instructions and additional publications to complete the forms through which they claim these credits.  As with the EITC, this directive would add to paperwork burdens for individual filers trying to claim these credits.  Filers who qualify for more than one of these tax credits could face a blizzard of new or much longer tax forms.

These requirements also highlight a double standard when it comes to tax compliance measures for businesses.  The underreporting of business income cost $122 billion in 2006, the latest year for which these estimates are available, and is the single largest contributor to the tax gap — taxes that are owed but go unpaid.  Several years ago, there were signs that policymakers of both parties recognized that they could take steps to increase the collection of business taxes that are already owed.  The Bush Administration pushed successfully for new withholding requirements on government contractors on the heels of investigations that showed widespread tax abuse, and 2010’s Affordable Care Act included tighter reporting requirements on certain business transactions.  Congress, however, repealed both measures before they could take effect.  

Congress needs to pursue a different course.  Rather than imposing heavy new burdens on people who work for modest wages, Congress should encourage the IRS and tax software companies (since most filers preparing their own taxes use tax software to do so) to work together to develop more ways to ensure that they explain the eligibility rules for tax credits clearly throughout the tax filing process.  That would give filers a clearer sense of whether they qualify for the credits and how to compute their credits before they file their returns.  For instance, tax software could include prompts and questions to help ensure that filers using the software properly understand the tax-credit rules and are providing all of the necessary information on their tax returns.