Earned Income Tax Credit:

Advance Payment Option Is Not Widely Known or Understood by the Public

GGD-92-26: Published: Feb 19, 1992. Publicly Released: Feb 19, 1992.

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Pursuant to a legislative requirement, GAO studied the effectiveness of the earned income credit (EIC) advance payment system, focusing on: (1) why more eligible workers do not take advantage of the advance payment option; (2) whether making advance payments imposes a burden on employers, especially small businesses; and (3) problems the Internal Revenue Service (IRS) has experienced with administering the advance payment option.

GAO found that: (1) low-income wage earners with children can elect to receive EIC in advance payments from their employer during the year along with their regular pay or as a lump sum refund or tax credit on their year-end federal income tax returns; (2) most of the 438 low-income wage earners surveyed were not aware of EIC or the advance payment options; (3) in 1989, less than 0.5 percent of those who received EIC used the advance payment option; (4) the participation rate was low because many eligible employees and their employers are not aware of the advance payment option, some employees prefer a single lump sum refund payment instead of smaller periodic payments, and IRS outreach efforts emphasized EIC, but not the advance payment option; (5) about 65 percent of the employers who had made advance payments indicated that the advance imposed little or no burden, and this percentage was about the same for participating small businesses with 100 or fewer employees; (6) difficulties employers experienced with advancing the credit included software limitations and computing payments for temporary and part-time workers; (7) about 49 percent of the workers who clearly received advance payments in 1989 and filed a tax return did not report receiving the credit; (8) about 45 percent of those who, according to IRS records, might have received an advance payment never filed a tax return and, if no return was filed, IRS had no way of determining worker eligibility; (9) it is difficult to determine the effectiveness of giving the credit in advance, since so few low-income wage earners know about the advance payment option; and (10) although IRS identifies individuals who do not report advance EIC payments, it rarely follows up or pursues nonfilers.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS has included information regarding advance payment in the reminder-to-file notice. But this is sent only to those who appear to be above the filing threshold. Workers with earned incomes below the tax threshold who have received the advance earned income credit and fail to file a return may have received an excess advance payment which will not be collected. IRS responds that the best way to ensure compliance is to make changes to the Form W-2, which now contains a separate AEIC box. GAO believes that this is an improvement that might spur tax compliance, but is still an inadequate remedy. One option not followed by IRS would be to require employers to send a copy of the W-5 to IRS, where a flag would be assigned to that taxpayer's social security number. Nonfiling would then trigger a notice to file to the taxpayer.

    Recommendation: To improve compliance of those people who receive the advance payment, the Commissioner of Internal Revenue should send, to individuals who do not file tax returns, a notice explaining their requirement to file.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS has agreed to clarify Circular E in the January 1993 revision. IRS has modified Circular E and the instructions appear clearer. It also includes examples as suggested.

    Recommendation: To ensure that eligible taxpayers are aware of the advance EIC option, the Commissioner of Internal Revenue should clarify instructions on advance payments in Circular E.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: Beginning in 1992, IRS has placed text on the face of the W-4 instructions which advises employees to investigate filing a W-5 with their employer in order to obtain the advance earned income credit through lower withholding.

    Recommendation: To ensure that eligible taxpayers are aware of the advance EIC option, the Commissioner of Internal Revenue should encourage employers to notify employees who have no income tax withheld of the advance payment option.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: In 1994, through a direct mail campaign, IRS sent 14.7 million EIC recipients information about the advance earned income credit and how to get it. It coordinated with the Treasury Department, who contacted CEOs. It also contacted national organizations and asked them to pass the information on to their state and local chapters. In 1995, IRS has a public information program focusing on the advance earned income credit that includes television and radio spots.

    Recommendation: To ensure that eligible taxpayers are aware of the advance EIC option, the Commissioner of Internal Revenue should notify taxpayers who receive the credit about the advance payment option.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: IRS has included more information on advance payments of EIC in its traditional EIC outreach materials. It has also expanded overall outreach efforts in cooperation with federal, state, local, and private organizations. Publicity materials (drop-in advertisements, grocery bag and milk carton art, brochures, and posters) were developed and distributed to the public.

    Recommendation: To ensure that eligible taxpayers are aware of the advance EIC option, the Commissioner of Internal Revenue should include information on advance payments of EIC in employee outreach material and programs.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Implemented

    Comments: IRS argues that placing a separate AEIC box on Form W-2 and separate AEIC lines on Forms 1040 and 1040A should improve AEIC compliance. GAO grants that these steps are helpful improvements. But given the high error rate of the amounts reported in the Form W-2 AEIC box, GAO believes that IRS should make a further efforts to explore additional compliance initiatives.

    Recommendation: To improve compliance of those people who receive the advance payment, the Commissioner of Internal Revenue should explore ways to identify those individuals who claim the credit in advance but do not report it, so as to prevent them from receiving the credit a second time.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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