BEYOND THE NUMBERS
Three Facts About EITC Overpayments
- EITC errors occur primarily because of the complexity of the rules surrounding the credit. Most of them thus reflect unintentional errors, rather than fraud. The EITC is one of the most complex elements of the tax code that individual taxpayers face, in part because Congress has tried to target the credit to families in need and thereby minimize its budgetary cost.
EITC overpayments often result from the interaction between the complexity of the EITC rules and the complexity of families’ lives. To cite just one example, a non-custodial parent who pays child support may be entitled, under the terms of a divorce agreement, to claim the child for the personal exemption and the Child Tax Credit; he may understandably — but incorrectly — assume that he can claim the child for the EITC as well.
- IRS studies of EITC overpayments suffer from methodological problems that likely cause them to overstate the actual EITC overpayment rate. These studies are based on random IRS audits of a sample of EITC claimants; if, in the course of the audit, a claimant was unable to document his or her claim to the examiner’s satisfaction, the claim was considered an overpayment.
However, most EITC recipients can’t afford to hire lawyers or accountants to help them navigate an IRS audit, and many have trouble documenting their claim to the examiner’s satisfaction. Nina Olson, the IRS’ National Taxpayer Advocate, has reported that in over 40 percent of audits in which the IRS examiners classified an EITC claim as invalid but the filer later received assistance from the Taxpayer Advocate Service in appealing the ruling, the ruling was reversed.
Most of the EITC claimants in the recent IRS study didn’t have this assistance. Olson has testified that because the IRS studies used to estimate EITC error rates do not provide for an adequate process of this nature, their overpayment estimates are likely overstated.
- The IRS has launched initiatives since 2008 (the year used in the most recent IRS report) to reduce EITC errors, and Congress can take several important steps to make further progress. The IRS launched a major new initiative in 2010 to reduce EITC errors by requiring commercial tax preparers to register as tax preparers with the IRS and pass a competency exam. Commercial preparers file roughly two-thirds of all EITC returns, and the IRS believes most EITC errors occur on commercially prepared returns. Unfortunately, a U.S. District Court ruled in January that the IRS lacked the legal authority to regulate preparers in this manner; if the IRS’s appeal of this ruling fails, Congress should give the IRS the necessary authority.
Congress also should adopt a series of EITC simplification measures that George W. Bush’s Treasury Department proposed in the mid-2000s after enactment of earlier EITC simplifications in 2001 led to a 13 percent drop in overpayments. (Congress never acted on these Treasury simplification proposals.) In addition, Congress should give the IRS the necessary resources to intensify its efforts to identify questionable EITC claims by checking other databases. Increased funding for the IRS to modernize its information technology systems and to have sufficient staff to follow up on more questionable claims would far more than pay for itself by reducing errors in the EITC — and in other parts of the tax code, as well.