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Reducing EITC Errors

“[W]ith almost no regulation of the [commercial tax preparer] industry and a tax code that is forbiddingly complex, the billions flowing into low-income households this time of year, primarily in the form of the earned-income tax credit [EITC], present a ripe target for the unscrupulous,” the New York Times reports.  Inadequate regulation of commercial preparers — the subject of today’s Senate Finance Committee hearing — leads not only to cases of severe overcharging but also many errors in EITC claims.  As our newly revised report explains, Congress should give the IRS the needed authority to reduce EITC errors by commercial preparers:

Commercial preparers file roughly two-thirds of all EITC returns, and the IRS believes most EITC errors occur on commercially prepared returns.  In 2010, the IRS launched a major initiative to require preparers who lack professional credentials to pass a competency examination in order to be certified to prepare tax returns.  A small number of paid preparers challenged this initiative in the courts, arguing that the IRS lacks the necessary statutory authority to implement it.   (Many other preparers have supported the IRS initiative.)

A few weeks ago, the U.S. Court of Appeals for the District of Columbia upheld a lower court’s decision in favor of the preparers who brought the suit.  Congress should quickly provide the IRS with the needed authority.  Without that authority, the IRS cannot move forward with key aspects of its plan to reduce EITC overpayments resulting from preparer errors.

Our report also outlines other ways Congress can reduce EITC errors, such as by reversing its recent course and giving the IRS adequate funding.  IRS funding is at its lowest level in real terms since 2000, despite a 10-percent increase in tax returns over this period.  Cuts in the IRS budget can actually raise budget deficits by making it harder for the IRS to enforce compliance with the EITC rules and other areas of the tax code.  Treasury Secretary Jack Lew has noted, “for every dollar we spend on our enforcement initiatives, we expect to collect six dollars in revenue.”

Chuck Marr
Vicepresidente de Política Tributaria Federal