Earned Income Credit:

Opportunities To Make Recertification Program Less Confusing and More Consistent

GAO-02-449: Published: Apr 25, 2002. Publicly Released: May 28, 2002.

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The earned income credit (EIC) is a refundable tax credit available to low-income, working taxpayers. Administering the EIC is not an easy task for the Internal Revenue Service (IRS). IRS has to balance its efforts to help ensure that all qualified persons claim the credit with its efforts to protect the integrity of the tax system and guard against fraud and other forms of noncompliance associated with EIC. Although IRS made some changes to its correspondence, improved its examiner training, and expanded taxpayer outreach, certain aspects of the recertification process continue to cause problems for taxpayers. Since the inception of the EIC Recertification Program in 1998, IRS has taken steps to improve some of the letters and forms it uses to correspond with taxpayers about the program. However, two standard forms that IRS uses in corresponding with taxpayers as part of the recertification process can lead to unnecessary taxpayer burden. IRS asks taxpayers to submit certain information as part of the process that can be difficult for some EIC claimants to obtain or is inconsistent with what many examiners consider acceptable.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS developed new forms for use in 2003 that replace Form 886-R. It now has separate forms for the EIC (Form 886-H-EIC) and for dependency exemptions (Form 886-H-DEP). Form 886-H-EIC makes clear that the taxpayer does not have to claim a dependent to qualify for the EIC.

    Recommendation: The Commissioner of Internal Revenue should reassess the evidentiary requirements for recertification. As part of that reassessment, the Commissioner should revise form 886-R (and similar forms used for other EIC audits) to clarify that taxpayers who are seeking EIC recertification do not have to demonstrate that their EIC-qualifying child is a dependent to qualify for the EIC.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS developed a new form (886-H-EIC) for use in 2003 that replaces Form 886-R. That form improved significantly on Form 886-R in terms of the guidance given to taxpayers on what documentation they needed to provide to establish their relationship with the EIC qualifying child. It cites various types of relationships and the documents needed to verify those relationships. For example, it clearly spells out that, for an eligible foster child, the taxpayer must provide a letter from the authorized placement agency and that, for a child pending adoption, the taxpayer must provide a letter from an authorized adoption agency.

    Recommendation: The Commissioner of Internal Revenue should reassess the evidentiary requirements for recertification. As part of that reassessment, the Commissioner should revise form 886-R (and similar forms used for other EIC audits) to help taxpayers understand what documentation they must provide (such as birth certificates, adoption papers, etc.) to establish their relationship with the EIC-qualifying child, especially when the child is not their natural born son or daughter.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: IRS developed a new form (886-H-EIC) for use in 2003 that replaces Form 886-R. That form, which tells persons claiming the EIC what documents they need to provide to support their claim, no longer requires that statements from day care providers be notarized.

    Recommendation: The Commissioner of Internal Revenue should reassess the evidentiary requirements for recertification. As part of that reassessment, the Commissioner should revise form 886-R (and similar forms used for other EIC audits) to eliminate the need to have the statement from a child-care provider notarized, since a notary public does not verify the content of the statement and most examiners placed no validity on the notary stamp.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: IRS developed a new form (886-H-EIC) for use in 2003 that replaces Form 886-R. The new form specifically tells taxpayers that they can send more than one document to show that the qualifying child lived with them.

    Recommendation: The Commissioner of Internal Revenue should reassess the evidentiary requirements for recertification. As part of that reassessment, the Commissioner should revise form 886-R (and similar forms used for other EIC audits) to encourage taxpayers to submit more than one type of document to demonstrate that the EIC-qualifying children lived with them.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: IRS developed a new form (886-H-EIC) for use in 2003 that replaces Form 886-R. The new form specifically tells taxpayers that if they send a letter from a relative who provides the day care for their EIC-qualifying child, they MUST send at least one additional letter from a school, a medical provider, their clergy, or a similar organization.

    Recommendation: The Commissioner of Internal Revenue should reassess the evidentiary requirements for recertification. As part of that reassessment, the Commissioner should, if IRS is not willing to accept a relative's child-care statement as evidence that a child lives with a taxpayer, make that clear on Form 886-R, on similar forms used for other EIC audits, and in the EIC decision support tool and suggest additional evidence that a taxpayer might provide.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Implemented

    Comments: In fiscal year 2003, IRS rolled-out an On-line Tax Advisor (OTA), which examiners use to conduct research and evaluate taxpayer information. It states IRS's official position in accepting letters from relatives. Further, examiner training was completed at each campus and quality reviews are on-going to ensure consistent application.

    Recommendation: The Commissioner of Internal Revenue should reassess the evidentiary requirements for recertification. As part of that reassessment, the Commissioner should ensure that, whatever IRS's official position is on statements from relatives, examiners are aware of that position and apply it constantly.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Closed - Implemented

    Comments: IRS implemented GAO's recommendation by revising the Forms 886-R-EIC and 886-H-EIC to show what specific information, such as name, address, and period of time, is required on acceptable documentation, including school and health care provider documentation, in order for taxpayers to substantiate the Earned Income Credit (EIC) for recertification purposes. These forms were rolled out for use starting in fiscal year 2003.

    Recommendation: The Commissioner of Internal Revenue should reassess the evidentiary requirements for recertification. As part of that reassessment, the Commissioner should develop a standard form that taxpayers can give to a school or health-care provider that specifies the information needed and on which examiners can indicate the period of time for which that information is needed.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  8. Status: Closed - Implemented

    Comments: IRS agreed with GAO's assessment of the problem underlying this recommendation, and took different but responsive steps to address the problem than what GAO initially recommended. Taxpayers are no longer required to establish that the child lived with them for the entire tax year, but only for more than half the tax year. Also, taxpayers have more flexibility now in the variety of documents they can send to establish residency. Finally, examiners have more flexibility now to use their professional judgment in reviewing documents establishing residency and closing a recertification review than they did at the time of the audit. Thus, if the examiner uses two documents that do not exactly show that the child lived with the taxpayer for more than six months, he/she can make an inference that the requirement was met so long as the documents reasonably show that that was the case.

    Recommendation: The Commissioner of Internal Revenue should reassess the evidentiary requirements for recertification. As part of that reassessment, the Commissioner should revise Form 886-R, if IRS decides not to develop a standard form, to clearly remind taxpayers that records for parts of two school years are needed to document a living arrangement for the tax year.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  9. Status: Closed - Implemented

    Comments: In our April 2002 report, some examiners incorrectly denied Earned Income Credit (EIC) recertification claims because taxpayers could not substantiate that their child was a dependent. Further, we found that financial support, a factor in determining if a child qualifies as a taxpayer's dependent, should not be a factor in determining if the child is a qualifying child for EIC purposes. In fact, in our interviews with examiners, we found that 53 percent said that at least some of the taxpayers who failed to be recertified failed because they could not provide documentation of the eligible child's financial support--a factor in determining if a child qualifies as a dependent. As a result, we recommended that the Commissioner of the Internal Revenue Service (IRS) take appropriate steps to ensure that the new EIC decision support tool does not continue the inappropriate linkage of financial support to decisions of EIC eligibility. IRS rolled out a new decision support tool in May 2002, which correctly identifies the tests a taxpayer must meet in order to be entitled to the EIC with a qualifying child. Further, during fiscal year 2003, all IRS campuses received training on EIC recertification, which included information about a claimant's child not having to be a dependent in order to qualify for the EIC. As a result, EIC recertification decisions should be more accurate.

    Recommendation: The Commissioner of Internal Revenue should reassess the evidentiary requirements for recertification. As part of that reassessment, the Commissioner should take appropriate steps to ensure that the new EIC decision support tool does not continue the inappropriate linkage of financial support to decisions on EIC eligibility.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  10. Status: Closed - Implemented

    Comments: In fiscal year 2003, IRS rolled out the EIC decision support tool that allows examiners to conduct tax research and evaluate taxpayer information in order to ensure a more consistent approach. Further, all IRS campuses received training on EIC recertification, which included information about a claimant's child not having to be a dependent in order to qualify for the EIC.

    Recommendation: In conjunction with the establishment of the EIC decision support tool, which is intended to improve consistency among EIC examinations, the Commissioner of Internal Revenue should provide examiners with the training needed to better ensure consistent and accurate decisions. Also, as part of the training, the Commissioner of Internal Revenue should emphasize to examiners the difference between the eligibility requirements for an EIC-qualifying child and dependent.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  11. Status: Closed - Implemented

    Comments: IRS implemented GAO's recommendation in December 2004 by clarifying the form's language, based on suggestions from various groups, including the Taxpayer Advocacy Panel's Earned Income Credit (EIC) Issue Committee and a Research Study group, and eliminating information taxpayers were asked to provide that was not used by IRS. IRS's Forms and Publications office agreed that the revisions would make Form 8862 clearer, reduce taxpayer burden, and aid the EIC Recertification process. The form went from 2 pages with 2 pages of separate instructions to a 2 page form with the instructions included. The estimated time to understand and complete the new version is 71 minutes versus 139 minutes with a prior version.

    Recommendation: The Commissioner of Internal Revenue should reassess the evidentiary requirements for recertification. As part of that reassessment, the Commissioner should revise Form 8862 to make it a simple request for recertification that IRS can use to trigger the recertification process and eliminate all of the information that taxpayers are now asked to provide on the form.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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