Tax Policy:

Earned Income Tax Credit: Design and Administration Could Be Improved

GGD-93-145: Published: Sep 24, 1993. Publicly Released: Sep 24, 1993.

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Pursuant to a congressional request, GAO reviewed the Earned Income Credit (EIC), focusing on: (1) whether EIC meets it objectives; (2) the Internal Revenue Service's (IRS) problems in administering EIC; (3) the distribution of EIC benefits among taxpayers; (4) the extent that EIC offsets the payroll tax; and (5) EIC impact on work incentives.

GAO found that: (1) most low-income families are not eligible for EIC, since it is targeted to working families with children; (2) the EIC participation rate cannot be estimated, since the eligible population is not known; (3) EIC benefits have increased significantly since 1975, and the average EIC will increase to $1,067 in 1994; (4) only 18 percent of low-income filers have received EIC; (5) EIC will offset almost all payroll taxes for the average low-income recipient in 1994; (6) low-income workers without children are not relieved of their payroll tax burden; (7) EIC enhances work incentives particularly for low-income workers, but slightly reduces the work hours of other qualified recipients; (8) IRS administrative burdens have been reduced by simplifying EIC eligibility requirements, but new provisions have created problems in EIC administration; (9) IRS returns processing procedures do not treat EIC filers consistently and allow ineligible taxpayers to receive EIC; (10) many eligible families do not receive EIC; and (11) IRS needs to increase its efforts to notify eligible taxpayers of EIC.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: The Uruguay Round Agreement Act of 1994 requires DOD to include the nontaxed value of housing allowances and subsistence for military personnel on the Form W-2. However, no method for valuing these benefits is explicitly mentioned. Given that GAO's recommendation to include these nontaxed items on Form W-2 was accepted by Congress, it is unlikely that Congress will revisit this issue of accounting methodology.

    Matter: To reduce the number of EIC claimants who are mistakenly given the credit or given too large a credit, as well as to reduce IRS administrative burden, Congress should allow a simplified method for calculating the value of military housing and subsistence allowances.

  2. Status: Closed - Implemented

    Comments: The Uruguay Round Agreement Act of 1994 (URAA) requires the Department of Defense to provide military personnel and IRS with information regarding housing and subsistence allowances. These allowances are not taxable, but are includable in earned income for determining EITC eligibility. Thus, Congress has enacted into law GAO's recommendation.

    Matter: To reduce the number of EIC claimants who are mistakenly given the credit or given too large a credit, as well as to reduce IRS administrative burden, Congress should require Department of Defense agencies to show on Form W-2 the amount of nontaxable earned income military personnel receive.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: IRS rejected this recommendation. IRS stated that its outreach efforts would reach the appropriate taxpayers. GAO believes that a more direct approach to taxpayers who fail to file returns will get more action than general media publicity about the credit. This is true especially for taxpayers who earn less than the amount required to file returns.

    Recommendation: To help ensure that eligible taxpayers receive the credit in a timely manner, the Commissioner of Internal Revenue should send notices that explain EIC requirements, including the need to file a return to get the credit, to all nonfilers who have low earned incomes.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: Beginning with tax year 1995, IRS has added in bold print that taxpayers must fill out the form to claim the credit.

    Recommendation: To help ensure that eligible taxpayers receive the credit in a timely manner, the Commissioner of Internal Revenue should clarify taxpayer instructions on the need to provide complete information of EIC eligibility.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Not Implemented

    Comments: IRS completely changed its Schedule EIC. Information needed to calculate the credit which was on the reverse of the schedule has been shifted to a worksheet in the instruction booklet. Definitions of qualifying children are still on the face of Schedule EIC and continue to the reverse side. Given IRS' resistance to changing the dependent's box on the face of Forms 1040 and 1040A and the fuller treatment of the qualifying child definition on Schedule EIC, GAO sees no purpose in maintaining this recommendation as an open item.

    Recommendation: To help ensure that eligible taxpayers receive the credit in a timely manner, the Commissioner of Internal Revenue should modify Forms 1040 and 1040A to collect the data now required by Schedule EIC.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: IRS has changed its returns processing procedures in conjunction with its revision of Schedule EIC for 1994. Whereas before if a qualifying child's social security number was missing and all other needed information for determining the credit was available on the schedule or on the Forms 1040 or 1040A, the credit would be awarded. Now a tax filer claiming the credit must submit the social security number of the qualifying child. IRS will look for this SSN in the dependency section of Form 1040 or 1040A if it is missing from Schedule EIC. If it is missing in both places, IRS will correspond with the tax filer.

    Recommendation: To help ensure that eligible taxpayers receive the credit in a timely manner, the Commissioner of Internal Revenue should modify returns processing procedures to ensure that all potentially eligible taxpayers who submit similar information are treated consistently.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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