oversight

Tax Administration: Earned Income Credit Noncompliance

Published by the Government Accountability Office on 1997-05-08.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                        United States General Accounting Office

GAO                     Testimony
                        Before the Committee on Ways and Means, House of
                        Representatives




For Release
on Delivery
Expected at
                        TAX ADMINISTRATION
10:00 a.m. EDT
Thursday, May 8, 1997

                        Earned Income Credit
                        Noncompliance
                        Statement of Lynda D. Willis, Director, Tax Policy and
                        Administration Issues, General Government Division




GAO/T-GGD-97-105
Statement

Tax Administration: Earned Income Credit
Noncompliance

                 Mr. Chairman and Members of the Committee

                 We are pleased to be here today to participate in the Committee’s inquiry
                 into noncompliance surrounding the Earned Income Credit (EIC)—a
                 refundable tax credit available to low-income, working taxpayers. As used
                 in connection with the EIC, “noncompliance” occurs when persons either
                 claim credits to which they are not entitled or claim credits in excess of
                 the amount to which they are entitled. This statement is based on our past
                 work on the EIC,1 a review of limited data on the results of IRS’ study of EIC
                 filers for tax year 1994,2 and a review of various Department of the
                 Treasury proposals to reduce EIC errors.

                 Our statement makes the following points:

             •   EIC noncompliance has been a concern for a number of years and is a
                 major factor underlying our designation of filing fraud as one of the
                 federal program areas at high risk because of vulnerability to waste, fraud,
                 abuse, and mismanagement.3 Through design changes and administrative
                 actions, noncompliance (expressed as a percentage of total EIC dollars
                 paid out) has been reduced since 1988 but, because of increases in the
                 number of claimants and changes in credit amounts over the past few
                 years, the amount of dollars erroneously paid out has increased
                 dramatically. A root cause of EIC noncompliance is the self-determination
                 of eligibility by taxpayers combined with IRS’ limited ability to verify
                 eligibility before the refund is issued.
             •   IRS has undertaken, with some success, a variety of efforts to reduce EIC
                 noncompliance in recent years. While the impact of IRS’ efforts cannot be
                 precisely quantified, it is reasonable to expect that recent declines in the
                 noncompliance rate were in part the result of IRS’ efforts. How much
                 further it can be reduced with available resources is uncertain.
             •   It will not be easy to significantly reduce EIC noncompliance because of
                 the nature of the credit and the design of IRS’ systems. Treasury has
                 announced eight proposals, six of which would involve legislation, to
                 reduce EIC noncompliance. Those proposals provide a starting point for
                 deliberations on what can reasonably be done to address this difficult
                 problem. Various questions need to be answered in assessing those
                 proposals, the most significant being whether they get at the real causes of
                 noncompliance.

                 1
                  A list of related GAO products is at the end of this testimony.
                 2
                  We did not assess IRS’ study methodology or the reliability of its reported results.
                 3
                  High-Risk Series: IRS Management (GAO/HR-97-8, Feb. 1997).



                 Page 1                                                                              GAO/T-GGD-97-105
             Statement
             Tax Administration: Earned Income Credit
             Noncompliance




             Congress established the EIC in 1975 to (1) offset the impact of Social
Background   Security taxes on low-income families and (2) encourage low-income
             families to seek employment rather than welfare.

             EIC eligibility depends on taxpayers’ amount of earned income4 or, in some
             cases, adjusted gross income (AGI).5 Credit amounts depend on the number
             of qualifying children who meet age, relationship, and residency tests. The
             credit gradually increases with increasing income (the phase-in range),
             plateaus at a maximum amount (the plateau range), and then gradually
             decreases until it reaches zero (the phase-out range). Taxpayers with
             earned income or AGI exceeding the maximum qualifying income level are
             not eligible for the credit. Taxpayers with AGI falling in the credit’s
             phase-out range receive the lesser amount resulting from using their
             earned income or AGI in calculating the credit.

             EIC coverage and benefit rules have been modified several times since
             1990. In the Omnibus Budget Reconciliation Act (OBRA) of 1990, Congress
             made two major changes to the EIC that took effect in tax year 1991. These
             changes (1) adjusted the credit structure to grant different credit amounts
             to taxpayers with one qualifying child and taxpayers with two or more
             qualifying children and (2) added two supplemental credits—one for
             taxpayers with a child under 1 year of age and another for taxpayers who
             paid health insurance premiums on policies covering their children. OBRA
             1990 also allowed taxpayers with a filing status of single to claim the
             credit, as long as they had a qualifying child, and specified a general
             increase in credit rates that was to be phased-in over 4 years (the planned
             increase for 1994, however, was superseded by 1993 legislation).

             OBRA  1993 made two changes in the credit’s structure that went into effect
             in tax year 1994. First, to simplify EIC filing, the act repealed the
             supplemental young child and health insurance credits. Second, the act
             expanded EIC eligibility to include certain taxpayers without qualifying



             4
              Earned income for calculating the EIC includes both taxable and nontaxable earned income. For the
             EIC, taxable earned income includes (1) wages, salaries, and tips; (2) union strike benefits;
             (3) long-term disability benefits received prior to minimum retirement age; and (4) net earnings from
             self-employment. Nontaxable earned income includes (1) voluntary salary deferral such as 401(k)
             plans or the federal thrift savings plan, (2) pay earned in a combat zone, (3) basic quarter and
             subsistence allowances from the U.S. military, (4) housing allowances or rental value of a parsonage
             for the clergy, and (5) excludable dependent care benefits.
             5
              In addition to taxpayers’ taxable earned income, AGI includes their taxable income from other
             sources such as investments, alimony, and unemployment compensation. Beginning in tax year 1996,
             taxpayers are to use a newly defined “modified AGI” that excludes certain losses to determine EIC
             eligibility and to calculate the credit.



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Statement
Tax Administration: Earned Income Credit
Noncompliance




children or “childless adults.”6 OBRA 1993 also increased, over a 3-year
period beginning in tax year 1994, the maximum credit for families with
children.

The maximum basic credit amount for EIC families with two or more
children was $953 in tax year 1990, $1,511 in tax year 1993 (reflecting OBRA
1990), and $3,556 in tax year 1996 (reflecting OBRA 1993). The maximum
credit for childless adults in tax year 1996 was $323.

The Personal Responsibility and Work Opportunity Reconciliation Act of
1996 made three additional changes to the EIC. First, beginning with tax
year 1996 returns, the act made taxpayers with certain investment income
greater than $2,200 ineligible for the EIC, regardless of their earned income
or AGI. Second, the act created a “modified AGI” to be used in calculating
the credit. Modified AGI disregards certain losses from investments and
businesses. And third, the act denied the EIC to filers without valid Social
Security Numbers (SSN).7 Taxpayers were already required to provide valid
SSNs for qualifying children.


As shown in figure 1, both the number of taxpayers claiming the credit and
EIC program costs (in 1996 dollars) increased steadily from tax years 1990
through 1994. In large part, this growth reflects the impact of either
eligibility or benefit expansions implemented in tax years 1991 and 1994,
as discussed earlier.




6
Although referred to as “childless adults,” these taxpayers may be noncustodial parents or may live
with a child who, for some reason, cannot be claimed as an EIC qualifying child.
7
 A valid SSN is one that matches Social Security Administration records.



Page 3                                                                          GAO/T-GGD-97-105
                                      Statement
                                      Tax Administration: Earned Income Credit
                                      Noncompliance




Figure 1: EIC Costs and Number of
Claims, Tax Years 1990 Through 1994
                                      Claims (millions)                                                  Costs (1996 dollars in billions)
                                      50                                                                                                 25
                                                                                                                                         25
                                                                                                                               Total
                                                                                                                                 22

                                      40                                                                                           21    20
                                                                                                                                         20
                                                                                                                            Families
                                                                                                                                 with
                                                                                                                           qualifying
                                      30                                                                                    children     15
                                                                                                                                         15



                                                                                                                               Total
                                      20       9                                                                                 19      10
                                                                                                                                         10


                                               12                                                                                  15
                                      10                                                                                    Families     55
                                                                                                                                 with
                                                                                                                           qualifying
                                                                                                                            children

                                          0                                                                                              00
                                              1990                 1991                  1992              1993                   1994

                                              Tax year

                                                         EIC costs in constant 1996 dollars
                                                         Number of taxpayers claiming EIC




                                      Source: GAO analysis of IRS Statistics of Income data.



                                      Despite efforts over time to change design and administration of the EIC, it
EIC Noncompliance                     is still a major source of noncompliance. That continuing noncompliance
and IRS’ Efforts to                   is one reason why refund fraud remains on our list of high-risk federal
Control It                            program areas.

                                      IRS’study of tax year 1994 EIC filers showed that of $17.2 billion in EIC
                                      claimed, 25.8 percent ($4.4 billion) was overclaimed. While that
                                      percentage of noncompliance is an improvement over the level identified
                                      in the 1988 Taxpayer Compliance Measurement Program (TCMP), the
                                      dollars involved have increased significantly.8 The 1988 TCMP showed that

                                      8
                                       Before IRS’ study of tax year 1994 EIC filers, the 1988 TCMP provided the most current
                                      comprehensive data on EIC noncompliance. IRS did a study of tax year 1993 EIC filers, but that study
                                      only covered returns filed electronically during the last 2 weeks of January 1994.



                                      Page 4                                                                          GAO/T-GGD-97-105
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Tax Administration: Earned Income Credit
Noncompliance




about $1.9 billion, or 34 percent of the total EIC paid out, was awarded
erroneously.

The lower rate of noncompliance since 1988 may be due, at least in part, to
legislative changes since the 1988 TCMP. In that regard, IRS data indicated
that taxpayers who claimed the wrong filing status were the most frequent
source of EIC error in the 1988 TCMP. Legislative action in 1990 simplified
the rules for qualifying for the credit by eliminating different eligibility
rules for different filing statuses. Even with that change, eligibility-related
compliance issues remain. For claimants of the credit for families with
children, eligibility for the credit is still self-determined by the taxpayer
using a three-part test based on the relationship of the child to the
taxpayer, the length of time the child lived with the taxpayer, and the
child’s age.

Congress has long been concerned about the high level of EIC
noncompliance. However, reducing it to more acceptable levels will be
difficult. Many of the noncompliance problems identified by IRS are the
result of a process whereby taxpayers self-determine their eligibility for
the credit and/or the amount of credit they are due. These erroneous
claims frequently related to qualifying children or choosing the wrong
filing status.9 In both instances, IRS faces difficulty in verifying the
information on the return without using field resources to determine
taxpayer eligibility in a fashion similar to that used by organizations
administering welfare programs.

The reported level of EIC noncompliance is much higher than the reported
level of noncompliance in some other federal outlay programs but those
other programs also have much higher administrative costs. For example,
according to the Committee on Ways and Means 1996 Green Book, about
6.1 percent of the dollars paid out under the Aid to Families With
Dependent Children (AFDC) program was overpaid in fiscal year 1993 and
7.3 percent of the dollars paid out in the Food Stamp program was
overpaid in fiscal year 1995. As we noted in June 1995 testimony before the
Senate Finance Committee, those programs not only have lower
noncompliance rates than the EIC program but also have administrative




9
 A change in filing status, per se, will not necessarily disqualify a taxpayer from claiming the EIC. Only
taxpayers who use the married-filing-separately status are ineligible for the credit. However, reporting
an incorrect filing status has implications for correctly reporting income. For example, taxpayers who
file as a head of household when they should have filed as married may underreport income, by
excluding their spouse’s income, and thus overclaim, in whole or in part, the EIC.



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                Noncompliance




                costs that likely are many times higher than those of the EIC program.10
                Data available at that time showed AFDC and Food Stamp administrative
                costs of about 12 percent of total program expenditures in 1993. In
                comparison, we estimated EIC administrative costs to be about 1 percent of
                EIC program costs.11



Causes of EIC   Before deciding on how to reduce EIC noncompliance, it is important to
Noncompliance   know the major causes of that noncompliance. Data IRS made available on
                the results of its study shed little light on that question. According to an
                analysis of IRS’ study by Treasury’s Office of Tax Analysis, however, the
                three most common causes were (1) taxpayers claiming qualifying
                children who did not reside with them for over half the year, (2) taxpayers
                claiming the wrong filing status, and (3) complicated living arrangements
                involving more than one custodial caregiver.

                It seems clear that a major share of the problem can be traced back to the
                nature of the credit, as explained by an IRS consultant in 1993. According
                to the consultant, the EIC, and other tax credits, have historically caused
                problems for IRS because IRS’ systems were designed and, for the most
                part, are operated with the overriding objective of enabling anyone who
                wants to pay their taxes to do it. The distribution of EIC is philosophically
                different from the issuance of traditional refunds, where the government
                returns the taxpayer’s own money after excess withholding. The
                consultant noted that payment of the EIC has much more in common with
                government distribution of welfare benefits through other agencies but
                that the standards of proof required to prove eligibility for EIC are not
                comparable to the standards of proof required for receipt of welfare
                benefits. As he pointed out, establishing eligibility for benefits delivered
                through other agencies normally requires the claimant to deal with
                government employees face to face; to produce proof of identification; and
                to prove the existence of, and relationship with, any relevant dependents.
                These types of controls are foreign to traditional IRS modes of operation.

                A Treasury Task Force on Tax Refund Fraud made similar observations in
                1994. According to the Task Force, (1) every refundable credit provides
                some incentive for the filing of problematic returns, and the incentive rises
                as the amount of the refundable credit rises and (2) the incentive to file
                problematic returns is likely to increase as IRS’ capability to verify

                10
                 Earned Income Credit: Noncompliance and Potential Eligibility Revisions (GAO/T-GGD-95-179,
                June 8, 1995).
                11
                 This estimate is for return and refund processing costs only and does not include the cost of IRS
                enforcement efforts related to EIC noncompliance.


                Page 6                                                                           GAO/T-GGD-97-105
                             Statement
                             Tax Administration: Earned Income Credit
                             Noncompliance




                             information on the return decreases. With the EIC, there are various
                             important pieces of information, such as filing status and the existence of
                             qualifying children, that IRS cannot easily verify. The relationship between
                             verifiable information and compliance is not unique to the EIC. Throughout
                             the tax system, noncompliance tends to be higher whenever there is an
                             absence of easily verifiable data.


IRS Efforts to Control EIC   IRS took several steps in the past few years to combat EIC noncompliance,
Noncompliance                with some success. Although the impact of IRS’ efforts cannot be precisely
                             quantified, it is reasonable to assume that those efforts contributed to the
                             recent decline in the rate of EIC noncompliance.

                             Improved verification of SSNs was a key objective of IRS’ recent efforts. For
                             electronic returns, IRS increased the number of automated filters that are
                             designed to identify and reject submissions that involve missing, invalid,
                             or duplicate SSNs. Through those filters, IRS identified 4.1 million SSN
                             problems on tax year 1994 returns, 1.3 million of which involved the EIC.
                             This year, as of April 24, the filters identified about 3.2 million SSN
                             problems, of which 1.1 million involved the EIC.

                             IRS also emphasized SSN verification on paper returns. For tax year 1994, it
                             identified 3.3 million paper returns with missing or invalid SSNs (how many
                             involved EIC returns is unknown) and followed up on 1 million of those
                             cases (it did not have sufficient resources to follow up on all 3.3 million).
                             IRS continued that effort, but at a reduced level, for tax year 1995 paper
                             returns. According to IRS, these verification efforts resulted in
                             recommended changes to taxpayers’ refunds or tax liabilities of about
                             $900 million in fiscal year 1996. Starting with tax year 1996 returns filed
                             this year, IRS was authorized to treat missing or invalid SSNs on filed
                             returns as math errors. As such, IRS can automatically reduce or deny the
                             taxpayer’s EIC claim, if there is any.

                             Also for tax year 1994, IRS (1) improved the Questionable Refund Program,
                             (2) strengthened the process for checking the suitability of persons
                             applying to participate in the electronic filing program

                             as return preparers or transmitters, and (3) eliminated the direct deposit
                             indicator.12

                             12
                               The direct deposit indicator gave return preparers a quick signal from IRS that a taxpayer was going
                             to receive a refund check and was relied on by providers of Refund Anticipation Loans. IRS’ objective
                             in eliminating the indicator was to give providers of Refund Anticipation Loans greater incentive to
                             check the eligibility of EIC claimants before approving the loans.



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                                       Noncompliance




                                       Despite the various changes discussed above, IRS’ study of tax year 1994
                                       EIC filers indicates that much more needs to be done. For example, even
                                       with the many electronic filing filters, which are intended to keep
                                       erroneous returns from being submitted electronically, the percent of tax
                                       year 1994 electronic returns with EIC overclaims, according to IRS’ data,
                                       was almost as high as the percent of paper returns (25.3 compared with
                                       26.1). Also, IRS determined that even if its study results were adjusted to
                                       reflect the impact of its enforcement efforts in 1995 and the new
                                       math-error procedure being used this year, the overall noncompliance rate
                                       would still be about 21 percent.

                                       It is also interesting to note, as shown in table 1, that the number of
                                       fraudulent returns detected by the Questionable Refund Program has
                                       declined since 1994, with a dramatic decrease in 1996.

Table 1: Questionable Refund Program
Data for 1993 Through 1996                                                                  Amount of              Percent of
                                                                       Number of     fraudulent dollars   fraudulent returns
                                                                fraudulent returns         detected (in     that involved the
                                       Calendar year                     detected             millions)                  EIC
                                       1993                                 77,840              $136.8                    98
                                       1994                                 77,781               160.5                    91
                                       1995                                 62,309               131.7                    73
                                       1996                                 24,919                82.5                    72
                                       Source: IRS data.



                                       According to program officials, a major reason for the decline in
                                       fraudulent returns and dollars detected in 1996 was a staffing reduction
                                       from 553 full-time equivalent staff in 1995 to 379 full-time equivalent staff
                                       in 1996.


                                       It will not be easy to significantly reduce EIC noncompliance without
What More Can Be                       somehow addressing the basic underlying problem—the
Done?                                  self-determination of eligibility by taxpayers and IRS’ limited ability to
                                       verify that eligibility before issuing the refunds. On April 23, 1997, Treasury
                                       announced eight proposals, six of which would require legislation, that it
                                       believes will help reduce noncompliance.

                                       The six proposals requiring legislation would (1) deny future EIC claims
                                       from persons who are found to have claimed the EIC fraudulently or
                                       through reckless or intentional disregard of the rules and regulations;



                                       Page 8                                                             GAO/T-GGD-97-105
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    Noncompliance




    (2) require taxpayers who have had an EIC claim denied after an audit to
    prove their eligibility to IRS before being allowed future credits; (3) allow
    IRS to place liens and execute levies on a portion of unemployment
    compensation, welfare benefits, and other types of assistance in order to
    recapture EIC claims that were found to be erroneous after IRS had paid
    them; (4) penalize preparers who did not meet certain due diligence
    requirements; (5) clarify the definition of a foster child; and (6) conduct
    state tests of new ways to provide the EIC and to verify eligibility. The
    other two proposals would (1) increase IRS’ enforcement efforts and
    (2) expand access to volunteer return preparation services.

    There are not enough details in IRS’ study and Treasury’s announcement to
    identify the major causes of EIC noncompliance or to assess the costs,
    benefits, and administrability of Treasury’s proposals. However, based on
    available information as well as our past work on the EIC specifically and
    tax administration in general, we have identified several issues that
    Congress needs to consider in deliberating on those proposals.

    The most important issue is whether the various proposals get at the real
    causes of noncompliance. According to IRS’ data, for example, a
    disproportionate segment of the noncompliant returns involved incorrect
    filing status. However, IRS’ report provides no information that helps
    explain what it is about those claims that made them noncompliant, and
    none of Treasury’s proposals directly addresses that issue.

    On the other hand, three Treasury proposals address issues that do not
    seem, on their face, to be major causes of noncompliance. Those
    proposals call for (1) clarifying the definition of a foster child; (2) testing
    alternate ways to provide advance EIC payments and, at the same time, to
    verify the eligibility of persons receiving the advance payments; and
    (3) increasing the availability of volunteer return preparation assistance.
    Although each of those actions probably has some merit, IRS’ report and
    Treasury’s proposals provide no evidence that the benefits, in terms of
    reducing EIC noncompliance, would be of any consequence.

    Specifically,

•   IRS’
       report provides no information on the extent to which noncompliance
    can be traced back to confusion over the definition of a foster child or
    even how many EIC claims involve foster children,
•   only about 1 percent of all EIC recipients have historically used the
    advance payment option, and



    Page 9                                                          GAO/T-GGD-97-105
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    Noncompliance




•   IRShas provided no data comparing the noncompliance rate for returns
    done without the help of a preparer and those done by preparers, much
    less volunteer preparers.

    A second issue relates to administrability. Much more information is
    needed on the proposals and how they will be implemented in order to
    determine if they can be easily administered. The proposals that most need
    attention in this regard, because they would apparently involve major
    operating changes, are the ones that would (1) automatically deny the EIC
    for several years to anyone who is found to have claimed the credit
    fraudulently or due to reckless or intentional disregard of the rules and
    regulations, (2) require taxpayers who had an EIC claim denied after an
    audit to prove their eligibility for future credits, and (3) penalize preparers
    who did not meet certain due diligence requirements.

    To assess the administrability of the preparer penalty proposal, for
    example, we would want to know what preparers would have to do to
    demonstrate due diligence and what IRS would have to do enforce those
    requirements. Our interest in this proposal is heightened by the results of
    our past work on preparer penalties. In a 1991 report, we said that IRS’
    examiners and supervisors were reluctant to pursue return preparer
    penalties because of the low dollar amounts of the penalties.13 We wonder
    whether the new penalties proposed by Treasury would be viewed
    similarly.

    In assessing administrability, it is also important that Congress consider
    whether the action being proposed is the most appropriate given the facts.
    In explaining its proposal that certain EIC claims be automatically denied,
    for example, Treasury says that “existing civil penalties do not appear to
    be an effective deterrent against ineligible taxpayers repeatedly claiming
    the [EIC].” We saw nothing from IRS’ study related to the effectiveness of
    penalties. Nor have we seen any information on the extent to which IRS, in
    the past, has asserted available civil and criminal sanctions for fraudulent
    or reckless EIC claims and the extent to which penalized parties have
    submitted fraudulent claims afterwards. Such information would help
    determine if the answer lies in better administering existing procedures or
    establishing new procedures.

    A third issue surrounding Treasury’s proposals involves the need to ensure
    that any legislative or administrative change include adequate controls to

    13
     Tax Administration: Effectiveness of IRS’ Return Preparer Penalty Program Is Questionable
    (GAO/GGD-91-12, Jan. 7, 1991).



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protect taxpayer rights. For example, Treasury is proposing that IRS be
allowed to place liens and execute levies on a portion of unemployment
compensation, welfare benefits, and other types of assistance in order to
recapture EIC claims that were found to be erroneous after IRS had paid
them. Those types of income are now exempt from levy. It is for Congress
to decide whether there is now sufficient reason to revise those
exemptions. But, it is important in doing so that any such change include
adequate controls to protect taxpayers’ rights.

A final issue involves tradeoffs. It is important that concern about EIC
noncompliance not become so encompassing that other areas of
noncompliance are neglected. In that regard, one of Treasury’s proposals
calls for aggressive IRS action to prevent the payment of erroneous EIC
claims. While we support the first part of that proposal—the development
of new profiles to help IRS better target its enforcement efforts—we cannot
support the second part—earmarking substantial resources for an
intensified EIC compliance effort—without knowing the tradeoffs. IRS, like
most of the federal government, is facing stagnant or declining resources
through 2002. Consequently, knowing where the resources will come from
is critical. Equity and financial concerns have already been raised about
IRS reducing its audit coverage of high income individuals in order to target
EIC returns.


To assess tradeoffs, it is important to know what the return on investment
is for EIC-related enforcement efforts compared with other programs. In
fiscal year 1995, for example, all examinations done by tax auditors (those
IRS staff who would normally do EIC-related audits) resulted in average
additional recommended taxes of about $3,500 per return, compared to
the average EIC refund that year of less than $1,500.

Finally, as IRS becomes more and more involved in determining whether
taxpayers are eligible to receive the EIC, the benefits of delivering income
assistance to low income taxpayers through the tax code may erode.
Specifically, administrative costs will increase and participation rates may
fall. In addition, IRS employees will be faced with new job responsibilities
traditionally more related to welfare programs than tax administration.


In conclusion, Mr. Chairman, many questions remain about EIC
noncompliance and the most effective ways to reduce it. IRS efforts have
reduced the level of noncompliance but it still remains above 20 percent,




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Noncompliance




with several billion dollars in overclaimed credits annually. How much
further it can be reduced with available resources is uncertain.

As I noted earlier, it will not be easy to significantly reduce EIC
noncompliance without somehow addressing the basic underlying
problem—the self-determination of eligibility by taxpayers and IRS’ limited
ability to verify that eligibility.

Treasury’s proposals provide a starting point for deliberations on what can
reasonably be done to address this difficult problem. Much more
information is needed on the proposals and IRS’ study findings before any
overall judgment can be made on how much the proposals will contribute
to reducing noncompliance.

It is important, in further deliberations on Treasury’s proposals or those
made by others, that Congress and the administration consider whether
(1) the actions being proposed are feasible; (2) potential benefits justify
expected costs, especially in light of tighter budgets and other compliance
problems facing IRS; and (3) adequate procedures are built in to protect
taxpayers’ rights.

That concludes my statement. We welcome any questions that you may
have.




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Page 13   GAO/T-GGD-97-105
Page 14   GAO/T-GGD-97-105
Page 15   GAO/T-GGD-97-105
Past GAO Products Relating to the EIC


               Earned Income Credit: IRS’ 1995 Controls Stopped Some Noncompliance,
               But Not Without Problems (GAO/GGD-96-172, Sept. 18, 1996)

               Earned Income Credit: Profile of Tax Year 1994 Credit Recipients
               (GAO/GGD-96-122BR, June 13, 1996).

               Earned Income Credit: Noncompliance And Potential Eligibility Revisions
               (GAO/T-GGD-95-179, June 8, 1995)

               Earned Income Credit: Targeting to the Working Poor (GAO/T-GGD-95-136,
               Apr. 4, 1995).

               Earned Income Credit: Targeting to the Working Poor (GAO/GGD-95-122BR,
               Mar. 31, 1995)

               Tax Administration: Earned Income Credit—Data on Noncompliance and
               Illegal Alien Recipients (GAO/GGD-95-27, Oct. 25, 1994).

               Tax Policy: Earned Income Tax Credit: Design and Administration Could
               Be Improved (GAO/GGD-93-145, Sept. 24, 1993).

               Earned Income Tax Credit: Advance Payment Option Is Not Widely Known
               or Understood by the Public (GAO/GGD-92-26, Feb. 19, 1992).

               The New Earned Income Credit Form Is Complex and May Not Be Needed
               (GAO/T-GGD-91-68, Sept. 17, 1991).




(268803)       Page 16                                                   GAO/T-GGD-97-105
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