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United States General Accounting Office: 
GAO: 

Report to the Chairman, Subcommittee on Oversight, Committee on Ways 
and Means, House of Representatives: 

April 2002: 

Earned Income Credit: 

Opportunities To Make Recertification Program Less Confusing and More 
Consistent: 

GAO-02-449: 

Contents: 

Letter: 

Results in Brief: 

Background: 

Scope and Methodology: 

One Standard Form Used in the Recertification Process Is of 
Questionable Value to IRS; Another Is Potentially Confusing to 
Taxpayers: 

IRS Asks for Information That Can Be Difficult for Taxpayers to Obtain 
or Is Inconsistent with What Examiners Accept: 

Examiners Are Inconsistent in How They Assess Taxpayer Documentation: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Evolution of the Earned Income Credit Recertification 
Program: 

Taxpayer Outreach and Correspondence and Examiner Training Have 
Improved: 

Appendix II: Recent GAO and TIGTA Recommendations Relating to EIC 
Recertification and IRS Corrective Actions: 

Appendix III: Sampling Methodology and Results: 

Appendix IV: IRS Forms 8862 and 886-R: 

Appendix V: Comments from the Internal Revenue Service: 

Appendix VI: GAO Contacts and Staff Acknowledgments: 
GAO Contacts: 
Acknowledgments: 

Tables: 

Table 1: Recertification Decisions in Five Case Scenarios: 

Table 2: Prior GAO Report Findings on IRS’s Recertification Process 
and IRS’s Corrective Actions: 

Table 3: TIGTA Recertification Report Findings and IRS’s Corrective 
Actions: 

Table 4: GAO Estimates from Its Survey of Examiners Doing 
Recertification Audits: 

Abbreviations: 

EIC: earned income credit: 

IRS: Internal Revenue Service: 

LITC: Low Income Taxpayer Clinic: 

TIGTA: Treasury Inspector General for Tax Administration: 

TRA97: Taxpayer Relief Act of 1997: 

[End of section] 

United States General Accounting Office 
Washington, DC 20548 

April 25, 2002 

The Honorable Amo Houghton: 
Chairman: 
Subcommittee on Oversight: 
Committee on Ways and Means: 
House of Representatives: 

Dear Mr. Chairman: 

The earned income credit (EIC) is a refundable tax credit available to 
low-income, working taxpayers. From January through December 2001, 
according to IRS, about $31 billion was paid to about 19.0 million EIC 
claimants. While it is important to ensure that all persons eligible 
for the EIC receive it, equally important is the need to identify and 
deny erroneous claims, whether due to fraud, negligence, or confusion. 
Because of a concern about the extent of erroneous EIC claims, the 
Congress included provisions in the Taxpayer Relief Act of 1997 
(TRA97)[Footnote 1] that led to the Internal Revenue Service’s (IRS) 
establishment of a compliance effort known as the EIC recertification 
program. Under the program, taxpayers who have been disallowed the EIC 
through an IRS audit are to substantiate their qualification for the 
EIC before IRS recertifies them to receive the credit again. 

Because of the need to strike an appropriate balance between 
compliance and taxpayer burden, you asked us to assess the EIC 
recertification program. Our objectives were to determine whether (1) 
IRS’s communications with taxpayers about recertification meet the 
needs of IRS and taxpayers, (2) information taxpayers are told to 
provide to prove their entitlement to the EIC is reasonably easy to 
obtain and consistent with what IRS examiners accept in making 
recertification decisions, and (3) examiners are consistent in how 
they assess supporting documentation provided by taxpayers. 

Our assessment of the recertification program included analyses of IRS 
forms, correspondence, and guidance related to recertification; 
interviews of IRS examiners who worked on recertification cases; and 
interviews of representatives from organizations who provide 
assistance to low-income taxpayers in controversies with IRS. Although 
our assessment was directed at the EIC Recertification Program, many 
of our findings would also apply to other IRS enforcement efforts 
involving EIC claims. 

Results in Brief: 

Administering the EIC is not an easy task for 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 the 
EIC.[Footnote 2] While the recertification program provides a vehicle 
for combating EIC noncompliance, we believe that the program 
unnecessarily burdens taxpayers while not ensuring that IRS obtains a 
reasonable evidentiary basis for determining whether recertification 
applicants should be granted the EIC. As a consequence, legitimate 
taxpayers may be discouraged from claiming a credit to which they are 
entitled or IRS may make poorly supported decisions in allowing or 
disallowing the credit. 

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. 
In particular, (1) one standard form that is an integral part of the 
recertification process is of questionable value to IRS while another 
is potentially confusing to taxpayers; (2) taxpayers are being asked 
to submit information that is either difficult to obtain or 
inconsistent with what many IRS examiners consider acceptable; and (3) 
IRS examiners’ inconsistent assessment of documentation submitted by 
taxpayers can result in different recertification rulings for 
taxpayers in similar circumstances. 

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. One 
form that all taxpayers seeking recertification must submit is a 2-
page document that requires taxpayers to answer up to 37 questions and 
report detailed information about their children. According to IRS, 
taxpayers need an average of 2 hours and 44 minutes to complete and 
file the form, yet 86 percent of examiners we surveyed said they do 
not use the form. The other form, which is used by examiners to tell 
taxpayers what information they need to provide to establish their 
eligibility for the EIC, is formatted in a way that can easily confuse 
taxpayers into believing that they must satisfy requirements that do 
not apply to the EIC. At the same time, the form provides insufficient 
guidance on what information taxpayers need to provide to prove that 
their relationship to the children listed on their EIC claim meets EIC 
requirements. 

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. According 
to representatives from 10 Low Income Taxpayer Clinics (LITC) and 
various Census Bureau studies, many low-income taxpayers move from 
location to location for job reasons, receive their medical care at 
hospital emergency rooms, and rely on relatives for free child care 
service.[Footnote 3] For such taxpayers, obtaining the kind of school, 
medical, and child care records sought by IRS can be difficult. For 
example, many examiners told us that they would not accept child-care 
provider statements from relatives because of a concern that relatives 
might lie. While we understand the hesitancy to accept a relative’s 
statement, refusing to accept child-care statements from relatives can 
pose a hardship for low-income taxpayers who use relatives for child 
care. IRS also tells taxpayers that the documentation they provide 
from their child-care provider should either be on company letterhead 
or notarized. However, many examiners told us that they would not 
accept a notarized letter because the notary only verifies the 
signature, not the content of the letter. Telling taxpayers that a 
notarized letter is acceptable and then refusing to accept it can 
frustrate taxpayers and cause them to unnecessarily pay whatever fee 
the notary public charged (as much as $10 according to information we 
obtained from an industry publication). 

Examiners are inconsistent in how they assess supporting documentation 
provided by taxpayers. We asked 21 IRS examiners how they would 
evaluate 5 different sets of supporting documents submitted by 
potential taxpayers seeking recertification. For none of the 5 
scenarios did all 21 examiners agree, and, in some cases, the 
examiners reached widely varying judgments about whether the evidence 
was sufficient to support an EIC claim. 

We are making several recommendations that we believe will help make 
the recertification program less confusing to taxpayers and the 
decisions reached by IRS examiners more accurate and consistent. In 
commenting on a draft of this report, the commissioner of Internal 
Revenue mentioned various efforts underway to improve the EIC audit 
process and IRS’s communications with EIC claimants, including the 
development of a decision support tool to help examiners make 
consistent EIC eligibility determinations and establishment of an 
IRS/Treasury task force to review the EIC program. The commissioner 
said that our report findings would be considered during deliberations 
of the task force and that the new decision support tool and revised 
IRS notices generally would incorporate our recommended changes. 

Background: 

Congress created the EIC to offset the impact of Social Security taxes 
and to encourage low-income workers to seek employment rather than 
welfare. Taxpayers earning income below a certain level may claim the 
credit.[Footnote 4] The amount of the EIC increases with increasing 
income, plateaus at a certain level of earnings, and then decreases 
until it reaches zero when earned income exceeds the maximum earning 
level allowed for the credit. Taxpayers with children can claim the 
EIC if they (1) have at least one EIC qualifying child, (2) meet 
income tests, (3) file with any filing status except “married filing 
separately,” and (4) were not a nonresident alien for any part of the 
year.[Footnote 5] To claim the EIC without a qualifying child, 
taxpayers must meet requirements 2, 3, and 4; be at least 25 years old 
but less than 65 at the end of the year; have lived in the United 
States for more than half the year; and not be claimed as a dependent 
on another return. 

Although the EIC has been credited with reducing welfare participation 
and lifting millions of low-income earners out of poverty, it has also 
been susceptible to error and abuse. In a February 28, 2002, report on 
its study of tax year 1999 EIC claims, IRS said that of the estimated 
$31.3 billion in EIC claims for that tax year, between $9.7 billion 
and $11.1 billion (30.9 to 35.5 percent) was overclaimed.[Footnote 6] 
Of the overclaims, the largest amount (about $2.3 billion) was caused 
by taxpayers claiming children who did not meet the qualifying child 
criteria. Most often, according to IRS, these errors were due to 
taxpayers claiming children who did not meet the residency 
requirements. 

EIC eligibility, particularly related to qualifying children, is 
difficult for IRS to verify through its traditional enforcement 
procedures, such as matching return data to third-party information 
reports. Correctly determining whether a child claimed by the taxpayer 
for EIC purposes meets the qualifying tests requires IRS to have 
detailed knowledge of the taxpayer’s household composition and living 
arrangements.[Footnote 7] However, IRS does not have the necessary 
resources to visit taxpayers’ homes and conduct the kind of interviews 
that would help it obtain that kind of detailed knowledge, and there 
is no certainty that the cost of such an effort would be worth the 
results.[Footnote 8] Thus, IRS must rely on its ability to clearly 
communicate to taxpayers what information is needed to certify them 
for the EIC and on taxpayers’ ability to produce documentation to 
substantiate their qualification for the EIC. 

IRS began implementing the recertification process in 1998, when, 
through audits, it disallowed in whole or in part, the EIC claims on 
about 312,000 tax year 1997 returns and placed recertification 
indicators on its computerized accounts for those taxpayers. The 
indicators, which, in effect, tell IRS’s computers not to allow 
payment of any EIC claim to the taxpayers, are to remain until the 
taxpayers successfully recertify. To begin the recertification 
process, taxpayers are to attach a Form 8862 (Information To Claim 
Earned Income Credit After Disallowance) to the next tax return they 
file that includes an EIC claim. If a taxpayer claims the EIC without 
attaching Form 8862, IRS is authorized to disallow the credit, process 
the return without considering the EIC claim, and inform the taxpayer 
why it denied the claim. 

Upon receipt of Form 8862, IRS procedures call for freezing the entire 
refund claimed on the return (not just the portion related to the EIC) 
and determining whether the return should be selected for audit. IRS 
examiners are to select the return for audit unless the taxpayer is no 
longer claiming the EIC children previously disallowed and is not 
claiming a new EIC child.[Footnote 9] Once the return has been 
selected for audit, the recertification process, with some minor 
differences, essentially follows IRS’s normal procedures for 
correspondence audits. These procedures generally involve examiners 
(1) asking taxpayers to provide support, (2) reviewing any support 
provided, and (3) advising taxpayers of the audit results. 

Since the EIC recertification program’s implementation, IRS has, among 
other things, expanded the information on recertification available to 
taxpayers, revised some of the correspondence it sends to taxpayers, 
and improved examiner training. Many of these changes were in response 
to recommendations resulting from prior reviews by us and the Treasury 
Inspector General for Tax Administration (TIGTA). (See appendix I for 
a detailed discussion of the changes in the EIC Recertification 
Program since 1999, and see app. II for information on prior 
recommendations by us and TIGTA and IRS’s corrective actions.) There 
have also been some significant program developments since 1998. Most 
relevant to this report, (1) the definitions of qualifying child and 
eligible foster child for EIC purposes have changed and (2) starting 
with tax returns filed in 2001, IRS, as authorized by TRA97, began 
imposing a 2-year ban on credits to taxpayers who it determines 
negligently claimed the EIC through reckless or intentional disregard 
of the regulations. These developments are discussed in more detail 
later in the report. 

Scope and Methodology: 

To determine whether IRS’s communications with taxpayers about 
recertification meet the needs of IRS and taxpayers, we analyzed IRS’s 
forms and correspondence related to recertification, interviewed a 
representative sample of IRS examiners (as described in the next 
paragraph) about certain forms, and reviewed the results of related 
work done by TIGTA. 

To determine whether information taxpayers are told to provide to 
prove their entitlement to the EIC is reasonably easy to obtain and 
consistent with what examiners accept, we did the following: 

* We surveyed, via telephone, a random sample of 90 tax examiners from 
a list of 323 tax examiners, which, according to IRS, represented the 
population of examiners in its 10 processing centers who were working 
on recertification cases as of April 2001. The purpose of our survey 
was to determine how examiners evaluated evidential support from 
taxpayers and to help identify aspects of the EIC eligibility criteria 
that taxpayers had the most difficulty documenting. More details on 
our survey methods, as well as the confidence intervals of the 
estimates for all examiners that we made from our sample are provided 
in appendix III. 

* We talked with representatives from 10 LITCs about any problems 
taxpayers have in understanding IRS correspondence related to 
recertification and in complying with IRS’s documentation 
requirements. We obtained a list from IRS’s Taxpayer Advocate’s Office 
of the 102 LITCs that were operating in 2001. From that list, we 
randomly selected 20 LITCs. After eliminating those LITCs that either 
chose not to participate or said that they did no EIC recertification 
work, we talked with representatives of 10 LITCs. Given our relatively 
small sample size and the relatively small proportion of the sample 
from which we were able to get useful information, we have no 
assurance that the results from this sample can be reliably 
generalized to all 102 LITCs. However, our sample does provide the 
views of about one-tenth of the listed 102 LITCs. 

To determine whether IRS’s treatment of similarly situated taxpayers 
is consistent, we analyzed IRS guidance and criteria related to the 
EIC and recertification; developed five scenarios involving various 
kinds of documentation that taxpayers might provide IRS in an attempt 
to prove their eligibility for the EIC; and held structured interviews 
with 21 examiners to determine, among other things, how they 
interpreted IRS’s recertification guidance and how they assessed the 
documentation in our five scenarios. We obtained the documents for our 
scenarios from EIC recertification cases that we had reviewed, and we 
deleted taxpayer-identifiable information, such as Social Security 
numbers, from the documents before giving them to the examiners. We 
subjectively selected the 21 examiners, on the basis of their 
availability to meet with us, from the 187 EIC recertification 
examiners at 4 of IRS’s 10 processing centers (Atlanta, Brookhaven, 
Kansas City, and Memphis).[Footnote 10] As such, the results of this 
analysis cannot be generalized beyond the 21 examiners. We also 
reviewed IRS’s plans for developing and implementing a decision 
support tool to be used by examiners working EIC cases, including 
those involving recertification. 

We performed our work between February 2000 and January 2002 in 
accordance with generally accepted government auditing standards. 

One Standard Form Used in the Recertification Process Is of 
Questionable Value to IRS; Another Is Potentially Confusing to 
Taxpayers: 

Although IRS has revised some of the correspondence it sends taxpayers 
as part of the recertification process, two standard forms that are an 
integral part of the process can lead to unnecessary taxpayer burden 
because they (1) are of questionable value to the recertification 
process and/or (2) provide the taxpayer with inadequate or confusing 
information. The forms are Form 8862 and Form 886-R (Supporting 
Documents). Copies of the two forms are in appendix IV. 

Taxpayer confusion can have even more critical implications now that 
IRS has begun imposing a 2-year EIC ban on credits to taxpayers who it 
determines have negligently claimed the EIC through reckless or 
intentional disregard of the regulations. Accurately determining 
whether a taxpayer’s erroneous claim is due to a simple mistake versus 
reckless or intentional disregard of the regulations can be 
complicated when the requirements for claiming the EIC are confusing. 

Form 8862 Is of Questionable Value: 

Taxpayers begin the recertification process by filing Form 8862 with 
their tax return. In a 1999 report, we raised concerns about the 
usefulness of Form 8862 and its potential for misleading or confusing 
taxpayers.[Footnote 11] We recommended that IRS stop using the form if 
it is not needed for recertification purposes. IRS did not eliminate 
the form because it said it relies on the form to “identify the type 
of action to be taken for taxpayers required to recertify.” In that 
regard, IRS does use Form 8862 to decide whether or not to initiate 
the recertification process. If a taxpayer files a return claiming the 
EIC and does not attach a Form 8862, IRS is authorized to disallow the 
credit without going through the recertification process and inform 
the taxpayer that the disallowance is due to the failure to attach 
Form 8862.[Footnote 12] If a taxpayer submits Form 8862, according to 
IRS’s recertification guidelines, the taxpayer’s return is to be 
forwarded for audit if the taxpayer is still claiming the previously 
disallowed EIC child or is claiming a new EIC child. However, Form 
8862 does not assist in this determination, because the names and 
Social Security numbers of the taxpayer’s children that IRS needs to 
match against the prior year’s tax return do not appear on the form. 

On the basis of our telephone survey of IRS examiners, we estimate 
that 86 percent of all examiners working in the recertification 
program do not find Form 8862 useful. A few examiners pointed out that 
Form 8862 is generally not part of the case file they receive when 
they begin recertification. Even when Form 8862 is in the case file, 
some examiners said that they do not use it because there are no 
supporting documents submitted with the form. Although the great 
majority of examiners do not find Form 8862 useful, IRS estimates that 
taxpayers need an average of 2 hours and 44 minutes to complete and 
file the form. In that regard, of the 10 LITC representatives we 
talked with, 7 said that Form 8862 is not easy for most of their 
clients to understand. 

Thirteen of the examiners we surveyed did say that Form 8862 had some 
value. Some pointed out that the form gave them some initial 
information about the taxpayer before seeking additional information. 
Others said that the form would alert taxpayers to the kind of 
documentation they should expect to provide during the recertification 
process. However, taxpayers would have to deduce the type of 
information needed because neither Form 8862 nor its instructions 
specifically tell taxpayers what, if any, documentation they may be 
asked to send IRS. 

On the basis of our telephone survey, we determined that an estimated 
16 percent of examiners believe that Form 8862 misleads taxpayers into 
thinking that IRS’s final decision on their eligibility will be based 
on information in the form. Such a misconception seems understandable 
given the amount of information taxpayers are asked to provide on the 
Form 8862. Form 8862 is a 2-page form that requires taxpayers who are 
claiming the EIC with qualifying children to answer numerous questions 
and report information on such things as (1) the name of the school 
the child attended or the day care provider, (2) addresses where the 
child lived during the year, (3) the name and social security number 
of any other person the child may have lived with for more than half a 
year, and (4) the child’s health care provider or social worker if the 
child was disabled and older than 18. 

Form 886-R Provides Confusing and Incomplete Information: 

Form 886-R is the vehicle IRS examiners use to tell taxpayers what 
information they need to provide to prove their eligibility for the 
EIC as well as to gather information on two other tax issues-—whether 
the taxpayer can also claim dependents and whether the taxpayer 
qualifies as a head of household.[Footnote 13] That form is confusing 
and incomplete. 

Confusing Information: 

Of the 10 LITC representatives we interviewed, 8 did not believe that 
IRS adequately explained to taxpayers how EIC recertification is 
achieved and what documentation is needed to achieve recertification. 
We believe that Form 886-R contributes to that confusion. 

The format of Form 886-R could easily confuse taxpayers. For example, 
in addition to listing documents and information needed to prove 
eligibility for the EIC, the form lists documents and information 
needed to prove eligibility for dependent exemptions and the head of 
household filing status. Requesting documentary evidence to support a 
dependency claim and head of household filing status could confuse or 
mislead taxpayers about the requirements they need to meet for EIC 
recertification. To claim a person as a dependent, for example, a 
taxpayer must generally prove, among other things, that he or she 
provided more than one-half of the person’s total support during the 
calendar year. Therefore, the evidence IRS asks taxpayers to submit to 
prove that a child is their dependent includes documentation relating 
to financial support. However, the law does not require that taxpayers 
meet a financial support test to claim the EIC, and, thus, taxpayers 
can qualify for the EIC even if they cannot meet the financial support 
requirement for the dependency exemption. Form 886-R does not make 
clear that persons can still qualify for the EIC even if they cannot 
prove that their child qualified as a dependent, and there are no 
instructions sent to taxpayers along with the Form 886-R that provide 
that clarification. Thus, persons might incorrectly assume that 
because they cannot substantiate a child as a dependent, they do not 
qualify for the EIC. 

Taxpayers might also be confused by the references in Form 886-R to 
school records. The form tells taxpayers that one acceptable form of 
proof that a child lived with them is a school record or transcript 
containing, among other things, “dates of attendance for the entire 
tax year.” Since a tax year generally runs from January to December of 
the same year and a school year typically runs from September of one 
year to May or June of the next, some taxpayers may not easily discern 
that they need to obtain school records for 2 school years in order to 
provide adequate documentation for 1 tax year. In that regard, an IRS 
taxpayer advocate and an IRS lead examiner in one field office both 
told us that school year versus tax year is a difficult concept for 
taxpayers to understand, and examiners we interviewed said that school 
records submitted by taxpayers often relate to a school year rather 
than a tax year. The lack of more specific guidance on Form 886-R 
about the need for 2 years of school data increases the risk that a 
taxpayer will submit incorrect information, which, at a minimum, could 
(1) cause extra work for the examiner, (2) cause the taxpayer to 
contact the school again, and (3) delay a final decision on the 
taxpayer’s eligibility for the EIC. 

Incomplete Information: 

With a trend toward more nontraditional family units and recent 
changes in the definitions of qualifying child and foster child for 
EIC purposes, taxpayers must clearly understand what evidence IRS 
requires to substantiate the EIC relationship requirement. Form 886-R 
does not satisfy that need. In listing the documentation needed to 
prove eligibility for the EIC, Form 886-R includes (1) the child’s 
birth certificate and (2) the name, address, and Social Security 
number of the child’s mother and father (if other than the taxpayer 
and the taxpayer’s spouse). That documentation would be insufficient, 
however, to prove, for example, that a person is the taxpayer’s 
adopted child, grandchild, stepchild, or foster child—-all of whom 
meet the definition of an EIC qualifying child. For example, as 
described by one examiner, a grandmother raising a grandchild with a 
different last name would have to prove her relationship to the child’
s parents. 

Some examiners we interviewed said that they would accept various 
official documents that established the relationship requirement 
between a nonparental taxpayer and the EIC-qualifying child. The 
official documents they mentioned included birth certificates of the 
various parties, an adoption paper, some social program’s paperwork 
that states the relationship between child and taxpayer, or some 
insurance or medical record that states the relationship. None of 
these documents is mentioned on the Form 886-R. Although an examiner 
may eventually obtain the necessary documentation through follow-up 
correspondence with the taxpayer, the need for additional 
correspondence leads to extra work for examiners and taxpayers and can 
lengthen the time needed to close the audit and pay the EIC, if the 
taxpayer is found eligible. 

Census Bureau statistics provide an indication of the prevalence of 
nontraditional family units. According to 1997 Census Bureau 
statistics, there were 3.9 million children living in homes maintained 
by their grandparents. Of this number, 1.27 million lived with their 
grandparents without the presence of either parent, 1.77 million had 
only a mother present, 0.57 million had both parents present, and 0.28 
million had only a father present. According to Census Bureau 
statistics, the greatest growth between 1992 and 1997 occurred among 
grandchildren living with grandparents with no parent present. The 
Census Bureau attributed the increase in grandchildren in these “
skipped generation” living arrangements to the growth in drug use 
among parents, teen pregnancy, divorce, the rapid rise of single-
parent households, mental and physical illness, AIDS, crime, child 
abuse and neglect, and the incarceration of parents. 

In addition to children living with grandparents without the presence 
of either parent, the Census Bureau found, as of Fall 1996, that 
688,000 children without parents were living with other relatives and 
622,000 children without parents were living with nonrelatives. 

Recent changes in the definitions of qualifying child and foster child 
for EIC purposes further highlight the need for IRS to make clear what 
evidence it requires to substantiate the EIC relationship requirement. 
To qualify as a taxpayer’s qualifying child in tax year 1999, a person 
had to be the taxpayer’s son, daughter, adopted child, grandchild, 
stepchild, or foster child, with a foster child defined as any child 
that (1) the taxpayer cared for as if it were the taxpayer’s own child 
and (2) lived with the taxpayer for the whole year, except for 
temporary absences. Those definitions were revised first by the Ticket 
to Work and Work Incentives Improvement Act of 1999 (P.L. 106-170) and 
then by the Economic Growth and Tax Relief Act of 2001 (P.L. 107-16). 

As a net result of those two laws, the current definition of a 
qualifying child is (1) a son, daughter, stepson, or stepdaughter, or 
a descendant of any such individual; (2) a brother, sister, 
stepbrother, or stepsister, or a descendant of any such individual, 
who the taxpayer cares for as the taxpayer’s own child; or (3) an 
eligible foster child of the taxpayer. An eligible foster child is now 
defined as an individual who is placed with the taxpayer by an 
authorized placement agency and cared for as the taxpayer’s own child. 
Also, a child who is legally adopted or is placed with the taxpayer by 
an authorized placement agency for adoption is considered the taxpayer’
s child by blood for purposes of the EIC relationship test. 

With these definitional changes, for example, a taxpayer claiming a 
nephew as an EIC-qualifying child would have to provide documentation 
to prove that the child is a descendant of the taxpayer’s sibling. 
Before the definitional changes, the taxpayer would not have had to 
prove a blood relationship to the child but only that the taxpayer 
cared for the child as if it were the taxpayer’s own child. 

Imposition of 2-Year Ban for Negligence Makes Clear Communication with 
Taxpayers Even More Important: 

TRA97 authorizes IRS to ban a taxpayer from receiving the EIC for 2 
years if it determines that the taxpayer negligently claimed the EIC 
through reckless or intentional disregard of the regulations. In 
addition to being banned for 2 years from receiving the EIC, taxpayers 
may be penalized an amount equal to 20 percent of their tax liability 
underpayment. IRS began imposing the 2-year ban starting with tax year 
1999 returns (i.e., returns filed in 2000). During calendar year 2000, 
IRS imposed the ban on 7,608 taxpayers. IRS imposed another 14,432 
bans during calendar year 2001. 

IRS provided guidance to its examiners on how to determine whether a 2-
year ban should be imposed. Included in the guidance is the following 
criterion: 

“The taxpayer’s EIC in a prior year was disallowed by audit because 
the taxpayer could not demonstrate the child was the taxpayer’s 
qualifying child. The taxpayer files a subsequent return claiming EIC 
and again cannot demonstrate that the child was the taxpayer’s 
qualifying child. You can consider that the taxpayer intentionally 
disregarded the EIC rules and regulations and impose the two-year ban.” 

No doubt some taxpayers seeking recertification are intentionally 
disregarding the EIC rules and regulations. However, accurately 
differentiating between negligence and simple error can be hampered 
when taxpayers are faced with evidentiary requirements that are 
difficult to understand and/or comply with. 

IRS Asks for Information That Can Be Difficult for Taxpayers to Obtain 
or Is Inconsistent with What Examiners Accept: 

Providing documentation to show that a child lived with the taxpayer 
has consistently been identified as the toughest EIC eligibility 
requirement to substantiate. This is true for EIC claimants in 
general, not just those who have to recertify. With respect to the 
Recertification Program, 80 percent of examiners said that when a 
taxpayer failed to be recertified, most or all of the time the 
taxpayer’s inability to substantiate that a child lived with the 
taxpayer led to the failure. 

As noted in the following excerpt from Form 886-R, IRS provides 
taxpayers with several examples of acceptable documents to establish a 
child’s living arrangement. The quoted excerpt clearly indicates that 
taxpayers only need to submit one of the three types of documentation 
listed (school, child care, or medical).[Footnote 14] 

“School records or transcripts or an administrative statement from a 
school official on school letterhead containing the child’s name, 
address, and dates of attendance for the entire tax year, and the name 
and address of the child’s parent or guardian, or: 

A statement on company letterhead or a notarized statement from a 
child care provider containing the child’s name, address, and dates of 
care for the entire tax year, the name and address of the child’s 
parent or guardian, and the name and taxpayer identification number of 
the child care provider, or: 

Medical records or an administrative statement from a health care 
provider containing the child’s name, address, and dates of medical 
care during the tax year, and the name and address of the child’s 
parent or guardian.” 

Our interviews with LITC representatives and IRS examiners indicated 
that each of these three types of documentation could pose problems 
for EIC claimants. In discussing EIC recertification with LITC 
representatives, we heard of various circumstances facing low-income 
taxpayers that complicate the ability of these taxpayers to obtain 
documents that might not seem so difficult for other taxpayers. Our 
interviews with IRS examiners also indicated that the evidentiary 
requirements related to child care are not consistent with what most 
examiners consider acceptable. 

School and Medical Records: 

In order for school records to be accepted, they must include an 
address for the child and an address for the taxpayer and, as 
discussed earlier, must be for 2 school years in order to cover the 
tax year in question. According to some IRS examiners we interviewed, 
the school records submitted by taxpayers often do not have both the 
child’s and the taxpayer’s addresses and often relate to a school year 
rather than a tax year. Earlier in this report, we discussed the 
problems taxpayers might encounter in distinguishing between a school 
year and a tax year. 

Another potential problem related to school records was raised by 
IRS’s National Taxpayer Advocate in a December 31, 2001, report to the 
Congress.[Footnote 15] In the report, the Advocate noted that 
examiners sometimes disallow the EIC because school records submitted 
by taxpayers reflect the addresses of the taxpayers’ relatives or 
friends. As explained by the Advocate, parents may provide school 
authorities with a relative’s or friend’s address, instead of their 
own, “in order for their child to attend a particular school for 
purposes of busing and facilitating before-school or after-school care.”
 

Medical records can also cause problems for EIC claimants. According 
to some examiners we interviewed, many taxpayers submit their child’s 
immunization records as the medical record to prove residency. Of the 
21 examiners we interviewed, 18 did not accept immunization records as 
proof of residency. Some examiners explained that immunization records 
do not include the addresses of either the child or the taxpayer and, 
as such, cannot be accepted as proof of residency. Some of the 18 
examiners said that they would accept a letter from a physician or an 
official record from a medical center showing the child’s address as 
well as the taxpayer’s address as proof that the taxpayer and child 
have the same address. 

However, according to the LITC representatives we interviewed, many 
low-income taxpayers have no ongoing medical care. In that regard, we 
reported in 1997 that 10.6 million children, living generally in lower-
income working families, were uninsured in 1996.[Footnote 16] We 
further reported that, according to various national studies, 

* a high proportion of these children’s parents worked for small 
employers that most likely did not offer health insurance; 

* even when employers offered medical coverage, the amount that 
employees had to pay toward it to cover their families could have made 
health insurance unaffordable; 

* these uninsured children were less likely to (1) have a usual source 
of care, (2) see a specific physician, (3) receive care from a single 
site, (4) have had a visit to a physician in the past year, and (5) 
ever have had routine care; and; 

* medical care for uninsured children was more likely to be sporadic 
and fragmented. 

Considering the medical coverage of low-income taxpayers, obtaining 
medical records that provide enough information to demonstrate that 
the taxpayer’s and child’s addresses were the same for at least one-
half a year may not be easy. 

LITC representatives said that getting documentation, such as medical 
records or school records, to prove residency or living arrangements 
is not easy. For example, migrant workers would have a tough time 
getting school records from the schools their children attended 
throughout the year. As we reported in October 1999, during 1993-94, 
78 percent of migrant crop worker families lived in two or more 
locations.[Footnote 17] 

Of the 10 LITC representatives we interviewed, 5 said that IRS should 
develop a standard form on which it could indicate the specific period 
of time for which IRS needed support. A taxpayer could then take the 
form to a school or a medical office, which could just write in the 
child’s and taxpayer’s address for the specific tax year IRS wanted. A 
few of the examiners we surveyed also said that they would benefit 
from such a standard form because it would give them the exact 
information they are looking for to recertify taxpayers. 

In 1998, examiners in one processing center started using a locally 
devised form that essentially served the purpose of the standard form 
suggested by the LITC representatives. Use of the form by examiners at 
the center was optional. Although no study was done of its 
effectiveness, anecdotal information indicates that examiners found it 
effective. One examiner who used the form estimated that one-half of 
the taxpayers to whom she sent the form were able to secure 
verification compared with the very few taxpayers who were able to 
secure verification without the form. 

Child-Care Statements: 

Form 886-R states that a notarized statement from a child-care 
provider with certain detailed information about the child and the 
child-care provider would be considered acceptable evidence for 
residency. In our telephone survey, we asked examiners if they would 
accept a notarized statement from babysitters. We estimate that 62 
percent of recertification examiners would not accept a notarized 
statement from a babysitter as evidence. The nonacceptance rate went 
up to 79 percent if the notarized letter was from a relative, such as 
a grandparent, who claimed to be the child’s babysitter. 

Several examiners said that they would not accept the notarized letter 
because the notary public verifies the signature but not the content 
of the letter. These examiners are correct in their understanding of 
the purpose of the notary public. However, a notarized letter from a 
child-care provider is a document listed on Form 886-R as acceptable 
proof of residency. We do not know how many taxpayers failed to 
recertify for the EIC because examiners would not accept a notarized 
letter from their babysitter. However, telling taxpayers that a 
notarized letter is acceptable and then refusing to accept it can 
frustrate taxpayers and subject them to unnecessary burden. Not only 
would those taxpayers have spent unnecessary time and effort writing 
the letters and locating a notary public, but they would have had to 
pay for the notary public’s service.[Footnote 18] 

Perhaps the more problematic issue related to evidence of child care 
is the general unwillingness of examiners to accept statements from 
relatives. 

Some examiners told us, for example, that they would accept child-care 
provider statements if they were from child-care centers, but 
expressed the belief that relatives would lie to help a taxpayer get 
the EIC. While we understand the hesitancy to accept a relative’s 
statement, refusing to accept child-care statements from relatives can 
pose a hardship for low-income taxpayers who use relatives for child 
care. The problem is compounded by the clear implication on Form 886-R 
that a “notarized statement from a child care provider” containing 
certain information, such as the child’s name, address, and dates of 
care for the entire tax year, is acceptable documentation to verify 
that a child lived with the taxpayer. Form 886-R says nothing to alert 
taxpayers that additional documentation may be needed if the child-
care provider is a relative. 

Grandparents and other relatives play an especially large part in the 
care of poor preschoolers. In a March 1996 report entitled, Who’s 
Minding Our Preschoolers?, and an update issued in November 1997, the 
Census Bureau found that, in 1993 and 1994, relatives provided care 
for 62 percent of preschoolers in poor families while their mothers 
were working. This reliance on relatives, and especially grandparents, 
for child care was noted again in Census’ October 2000 report entitled 
Who’s Minding the Kids? Child Care Arrangements. Among other things, 
the report concluded, using Fall 1995 data, that “Fifty percent of 
preschoolers were cared for by a relative, with grandparents being the 
single most frequently mentioned care provider (30 percent).” 

In reports issued in May 1997 and November 1999, we discussed three 
major barriers that confront low-income persons in trying to find 
child care: availability; accessibility; and cost, especially for 
infants and toddlers.[Footnote 19] As discussed in these reports, 

* many parents of low-income families are likely to obtain work at low-
skill jobs, such as janitor or cashier, that operate on nonstandard 
schedules at workplaces that often do not offer child care during 
hours outside the traditional “9 to 5” work schedule; 

* according to a 1999 Urban Institute paper, more than a quarter of 
low-income mothers work night hours; 

* accessibility, such as transportation to get to providers, was 
especially problematic in rural or remote areas; and; 

* child care consumes a high percentage of poor families’ income. 
Regarding the cost of child care, the Census Bureau, in its October 
2000 report, said that poor families, in 1995, who paid for child care “
spent 35 percent of their income on child care, compared with 7 
percent spent by nonpoor families.” Asking relatives to serve as child-
care providers may be one way for poor families to limit the cost of 
child care. In that regard, the Census Bureau noted in its March 1996 
report that preschoolers in poor families were 50 percent more likely 
to be cared for by their grandparents or other relatives than were 
preschoolers in nonpoor families. 

Low-Income Taxpayers Face Problems That Complicate Their Ability to 
Comply with EIC Evidentiary Requirements: 

As noted in several places throughout the preceding discussion, low-
income taxpayers face many problems that complicate their ability to 
satisfy the evidentiary requirements associated with the EIC 
recertification program. For example, many low-income taxpayers 

* move from location to location for job reasons, 

* have children who receive their medical care at hospital emergency 
rooms and have no medical insurance, and, 

* rely on relatives for free child-care service instead of taking 
their child to a child-care center. 

In a December 31, 2001, report to the Congress, IRS’s National 
Taxpayer Advocate identified the 23 most serious problems faced by 
taxpayers. Fifth on that list was “documenting [EIC] eligibility.” In 
discussing this problem, the Advocate said the following: 

“Low-income taxpayers usually cannot afford to take time off from work 
to gather the documentation required. They often do not maintain 
financial records. Many have moved several times, making it even more 
difficult to provide what is asked of them. Obtaining such 
documentation may therefore involve long-distance calls, which are 
beyond the financial means of these taxpayers.” 

In general, the 10 LITC representatives who we talked with said that 
the recertification process was confusing to their clients and 
difficult to comply with. Some representatives noted that these 
problems had caused clients to give up on EIC recertification. One 
LITC representative said that for migrant workers, getting 
documentation might include writing to Mexico for birth certificates 
and other information. According to the representative, (1) some 
agencies or companies may charge a fee for documents; (2) requesting 
information through the mail would be difficult since many low-income 
taxpayers are illiterate; and (3) it takes time to gather support, and 
many taxpayers get discouraged and give up. Another LITC 
representative said his client gave up on the EIC because he had moved 
to another city for a new job and getting the records IRS wanted would 
require him to take time off from work and travel back to his old home 
town, neither of which he could afford to do. 

Examiners Are Inconsistent in How They Assess Taxpayer Documentation: 

Some LITC representatives told us that some examiners were more 
lenient than others in assessing supporting documents and that third-
party statements were not always treated the same. Four of the 10 LITC 
representatives we interviewed said that they have seen some of their 
client’s EIC claims denied because they could not substantiate that 
the child was a dependent. However, an EIC child does not have to be a 
dependent of the taxpayer to qualify that taxpayer for the EIC. As 
such, financial support, which is 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. 

Because we did not review any LITC client case data, we cannot be 
certain whether IRS examiners denied the EIC because a taxpayer could 
not substantiate that the child was a dependent or if the denial was 
for other reasons. However, our interviews of examiners provided 
significant evidence to support the statements by LITC 
representatives. Fifty-three percent of examiners said that a least 
some of the taxpayers who failed to be recertified failed because they 
could not provide documentation of the eligible child’s financial 
support. Also, although we did not do any systematic review of 
recertification audit case files, we did look at some cases to get a 
better understanding of the recertification audit process. In one 
case, we found correspondence from an examiner to a taxpayer that 
exemplified the dependent exemption versus EIC problem. The 
correspondence said: 

“Since you have not verified that you are entitled to the exemption(s) 
claimed on your return, we have disallowed the deduction. Since the 
exemption for your child (or children) has been disallowed, you are 
not entitled to the earned income credit and/or child tax credit; 
therefore we have disallowed it/them.” 

Contrary to those statements, denial of a dependency exemption does 
not automatically mean that a taxpayer is not entitled to the EIC. 

Case Scenarios Indicate Variance in Recertification Decisions: 

In an effort to see how consistently IRS examiners assess evidence 
submitted by taxpayers, we presented 21 examiners at the four 
processing centers we visited with five scenarios involving differing 
sets of supporting documents. We obtained these documents from EIC 
recertification cases that we had reviewed. We deleted taxpayer-
identifiable information, such as names, Social Security numbers, and 
addresses, from the documents before giving them to the examiners. 

The five scenarios were as follows: 

* Case A-—a single mother sending in copies of Social Security cards, 
the child’s birth certificate, and a school record listing the child’s 
address. 

* Case B—-a married couple, filing jointly, sending in copies of 
Social Security cards, the child’s birth certificate, and a locally 
devised IRS form signed by a school official verifying the child’s 
address. 

* Case C-—a single father sending in copies of Social Security cards, 
the child’s birth certificate, an immunization certificate showing the 
taxpayer as the parent and that the child received shots throughout 
the tax year, and a formal lease listing the taxpayer as the leasee 
but with no reference to the child. This case also included a 
notarized letter from the taxpayer’s grandmother stating that she 
provided child care for the taxpayer’s daughter while the taxpayer 
worked. The grandmother gave her own address and Social Security 
number. 

* Case D-—a single father sending copies of Social Security cards, the 
child’s birth certificate, an immunization record that did not have 
either the child’s or the taxpayer’s name, various monthly rental 
receipts not showing the full dates, and a letter from someone 
(without a title) written on apartment letterhead. 

* Case E-—a single father sending in copies of Social Security cards, 
the child’s birth certificate, a lease agreement not listing the 
child’s name, and a non-notarized letter from a babysitter stating 
that she cared for the taxpayer’s child throughout the year while the 
taxpayer was at work. The babysitter mentioned the salary she received 
from the taxpayer, but did not give her address, telephone number, or 
Social Security number. 

As seen in table 1, in no case did all examiners agree and, in some 
cases, their decisions varied significantly. 

Table 1: Recertification Decisions in Five Case Scenarios: 

Decision: Documents support EIC; 
Case A: 13; 
Case B: 19; 
Case C: 3; 
Case D: 7; 
Case E: 4. 

Decision: Documents do not support EIC; 
Case A: 8; 
Case B: 2; 
Case C: 18; 
Case D: 14; 
Case E: 17. 

Source: GAO’s analysis of the results of 21 examiner interviews. 

[End of table] 

Cases B, C, and E showed the most consistent decisions. Of the 19 
examiners who accepted the Case B documentation, 7 said that they did 
so because the taxpayer was married and filed jointly and because the 
child lived with both parents and 1 said that he was swayed by the 
school verification (the other 11 did not explain their reasoning). 
Case C was almost unanimously rejected because examiners would not 
accept a notarized letter from the taxpayer’s grandmother who claimed 
to be the child-care provider. Although the grandmother’s letter had 
met all the specifications listed on Form 886-R, examiners still did 
not accept it as adequate proof of living arrangement. This is 
consistent with the results of our examiner interviews, which, as 
discussed earlier, showed that 79 percent of examiners would not 
accept such a letter. In Case E, we included a nonrelative babysitter’
s letter as evidence of residence. Although the babysitter’s letter 
was not notarized and did not have the babysitter’s Social Security 
number or address, more examiners were willing to accept this letter 
than the notarized letter in Case C from a grandmother who gave her 
Social Security number as required by IRS. 

Examiners’ decisions varied significantly in Cases A and D. For Case 
A, three examiners pointed out that they would not accept the school 
record submitted because it pertained to a school year and not the tax 
year. A taxpayer would have to submit school records for 2 school 
years to cover the tax year in question. Some examiners who decided 
that the documents in Case D did not support recertification thought 
that the apartment letterhead on the letter saying that the taxpayer 
lived there looked too simplistic or fake to be trusted. They pointed 
out that almost anyone with a computer could easily come up with such 
a letterhead. 

IRS is aware of the need for more consistency in the evaluation and 
determination of EIC cases. According to the Director of Reporting 
Compliance in IRS’s Wage and Investment Division,[Footnote 20] IRS is 
in the process of developing a decision support tool to be used by 
examiners working EIC cases. Because all EIC audits involve the same 
basic issue—-proving that the EIC claim satisfies all eligibility 
tests—-the decision tool is to be used for all EIC cases, including 
those involving recertification. The goals of this project are to (1) 
automate the decision process examiners go through when performing 
audits, (2) reduce inconsistency in how EIC audits are conducted 
nationwide and subsequently improve the quality of examinations, and 
(3) decrease the time spent on EIC audits since the logic will be 
built into the tool to determine the appropriate questions for the 
individual case. IRS is planning to implement the first phase of this 
project and deliver training to examiners by May 2002. 

As described to us by the Director of Reporting Compliance, the first 
phase basically involves automating the current process. As such, it 
does not include a reconsideration of the documentation requirements 
discussed in this report. In that regard, for example, we noted, in 
reviewing preliminary information on the tool, that it included 
information to suggest that documentation of financial support was 
necessary to determine EIC eligibility. We advised the Director of our 
concerns in that regard, and he agreed to look into the matter. 
According to the Director, the project team is expected to take on the 
issue of what documentation taxpayers need to submit to prove their 
eligibility for the EIC during phase 2 of the project. 

In a related move, an IRS/Treasury task force was formed in February 
2002 to comprehensively review the EIC program in general. The task 
force’s objective is to develop recommendations for achieving the 
objectives of the EIC program “while reducing taxpayer confusion and 
increasing the accuracy of the administration of benefits.” The task 
force was to complete its work within 4 months. 

Conclusions: 

Administering the EIC is not an easy task for 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 by 
guarding against fraud and other forms of noncompliance associated 
with the EIC. Furthermore, as with other provisions of the tax code, 
IRS must minimize the burden imposed on taxpayers yet ensure that it 
has a reasonable basis for judging whether taxpayers have properly 
claimed the credit. Although the recertification program provides a 
vehicle for combating EIC noncompliance, we believe that the program 
unnecessarily burdens taxpayers and provides inadequate assurance that 
IRS has a reasonable evidentiary basis for determining whether 
recertification applicants should be granted the EIC. As a 
consequence, taxpayers may be discouraged from claiming credits to 
which they are entitled or IRS may make poorly supported decisions in 
allowing or disallowing the credit. 

We identified several opportunities to make the recertification 
program less confusing to taxpayers and the decisions reached more 
accurate and consistent, without adversely affecting IRS’s ability to 
protect against EIC noncompliance. 

Two important forms used in the recertification process are 
problematic. Form 8862 is required of all taxpayers seeking 
recertification, yet 86 percent of IRS examiners who audit 
recertification cases say they do not use it. Since IRS is basically 
using Form 8862 only as a trigger for initiating the recertification 
process, we believe that a simpler version of Form 8862 could serve 
that same purpose. Form 886-R, which tells taxpayers what 
documentation they need to submit to prove their eligibility for the 
EIC, says nothing about documentation that taxpayers in nontraditional 
childrearing arrangements—-which are likely common among the EIC 
recipient population-—need to provide to demonstrate that they meet 
the EIC relationship test. At the same time, Form 886-R lists 
documentation that substantial majorities of examiners said they would 
not accept. The form states that a notarized statement from a child-
care provider is acceptable evidence that a child lived with the 
claimant. However, 62 percent of examiners said that they would not 
accept such statements generally and 79 percent said that they would 
not accept such statements from relatives who provide child care. 

Other documentation listed on Form 886-R, while useful in gauging a 
taxpayer’s eligibility for the EIC, can lead to unnecessary taxpayer 
burden. IRS could minimize that burden and increase the probability of 
obtaining useful information by clarifying Form 886-R itself or 
providing simple supplemental forms that serve the same purpose. For 
instance, taxpayers would be less likely to submit school year 
attendance information rather than tax year attendance information if 
IRS were to develop a simple form that specified the period (e.g., 
January through December 2000) for which taxpayers must provide 
information. A taxpayer could then take the form to the school(s) for 
completion. 

When IRS has gathered information to judge whether a taxpayer should 
be recertified, examiners reviewing the information are likely to 
reach differing conclusions. The 21 examiners who reviewed five case 
scenarios we developed based on actual case files did not all agree on 
any scenario and, in some cases, reached widely varying judgments 
about whether the evidence was sufficient to support an EIC claim. 
Furthermore, 53 percent of the examiners we interviewed said that they 
have sometimes denied recertification because taxpayers did not 
provide documentation of financial support for the EIC-qualifying 
child—reflecting a fundamental misunderstanding of the law since 
financial support is not a criterion for the EIC. 

The results of our review suggest that IRS needs to reassess the 
evidentiary requirements for recertification and take steps to better 
ensure that examiners understand and more consistently apply the 
criteria for recertification. The inability to prove that qualifying 
children have lived with taxpayers for the requisite period of time—-
the residency requirement—-has historically been a major reason why 
taxpayers are judged not eligible for the EIC. IRS examiners will 
continue to exercise discretion in determining whether documentation 
is sufficient even when using IRS’s proposed new decision support 
tool. Furthermore, each of the three types of acceptable documentation 
cited on Form 886-R for establishing residency can prove problematic 
for an EIC claimant. Therefore, the chances of a claimant being able 
to prove to an examiner’s satisfaction that a child’s living 
arrangement meets EIC requirements might be enhanced if taxpayers were 
encouraged to send IRS various types of documentation. Form 886-R, as 
currently worded, encourages taxpayers to send in just one type of 
documentation-—be it school records, medical records, or statements 
from a child care provider-—which can leave an examiner with less than 
conclusive evidence. If taxpayers provided more than one document, an 
examiner could disregard a document that seemed questionable but 
possibly find one or more of the other documents persuasive. Also, a 
pattern of evidence across several corroborating documents may provide 
a more meaningful basis for examiners to judge residency. 

Although our review was directed at the EIC Recertification Program, 
many of our findings would also apply to other IRS audits of EIC 
claims because IRS’s requirements for proving eligibility for the EIC 
apply to all EIC claimants, not just those who have to recertify. In 
that regard, while we understand that it is not possible, and probably 
not desirable, to eliminate all subjectivity from examiners’ decisions 
about EIC eligibility, there is room to bring more consistency to that 
process—not only consistency among examiners but also consistency 
between the requirements of the tax law (e.g., no financial support 
test to claim the EIC) and examiners’ practices. IRS recognizes the 
need for more consistency and is working to develop a decision support 
tool for EIC audits. More broadly, an IRS/Treasury task force has been 
charged with developing recommendations for making the overall EIC 
program less confusing to taxpayers and easier for IRS to administer. 
The results of our work should be useful to IRS in developing the 
decision support tool and to the task force in deliberating on 
possible changes to the EIC program. 

Recommendations for Executive Action: 

We recommend that the commissioner of Internal Revenue reassess the 
evidentiary requirements for recertification. As part of that 
reassessment, we recommend that the commissioner do the following: 

* 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. 

* 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; 

- 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; 

- 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; 
and; 

- encourage taxpayers to submit more than one type of document to 
demonstrate that the EIC-qualifying children lived with them. 

* If IRS is not willing to accept a relative’s child-care statement as 
evidence that a child lives with the 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. 

* Whatever IRS’s official position on statements from relatives, 
ensure that examiners are aware of that position and apply it 
consistently. 

* 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. 

* If IRS decides not to develop a standard form, revise Form 886-R to 
clearly remind taxpayers that records for parts of 2 school years are 
needed to document a living arrangement for the tax year. 

* 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. 

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

Agency Comments and Our Evaluation: 

We requested comments on a draft of this report from IRS. We obtained 
written comments in an April 10, 2002, letter from the commissioner of 
Internal Revenue (see appendix V). 

The commissioner cited several steps being taken with respect to the 
EIC, including the development of the decision support tool and 
convening of the IRS/Treasury task force, referred to earlier, and the 
redesign of EIC taxpayer notices. The commissioner said that the 
IRS/Treasury task force would consider the findings discussed in this 
report in evaluating “legislative and administrative solutions to 
[EIC] recertification problems.” 

With respect to our recommendation that IRS revise Form 8862, the 
commissioner said that the Wage and Investment Division will study the 
use of Form 8862 in EIC recertifications and the examination of 
related issues. Based on the results of that study and our findings, 
IRS “will evaluate possible revisions to the form that will make 
communications clearer, reduce taxpayer burden, and aid the 
recertification and examination processes.” IRS anticipates completion 
of this study by June 2003. Such a study, with the objectives cited by 
the commissioner, would be responsive to our recommendation. 

Regarding our recommendation that IRS revise Form 886-R and similar 
forms, the commissioner said that IRS plans to have revised forms that 
incorporate feedback from taxpayers and tax practitioners by the 2003 
filing season. We agree wholeheartedly with the plan to obtain 
feedback from taxpayers and practitioners and look forward to seeing 
the results of these efforts. However, the commissioner’s response did 
not clearly indicate that the intended revisions to the forms would 
reflect the specific changes we recommended. We encourage the 
commissioner to ensure that the recommended changes are made. 

In response to our two recommendations relating to child care provided 
by a taxpayer’s relative, the commissioner said the following: 

* “A child-care provider’s statement by itself may not be sufficient 
to verify eligibility. In that instance, the taxpayer will need to 
provide additional collaborating evidence to support his or her [EIC] 
claim. We will show examples of this evidence on Form 886-R.” 

* IRS will enhance examiner awareness of IRS’s official position on 
this issue and the consistency of its application through the decision 
support tool, in examiner training and the Internal Revenue Manual, 
and during quality reviews. 

The actions referred to by the commissioner would be responsive to our 
recommendations. 

With respect to our two recommendations about helping ensure that 
taxpayers obtain documentation for the proper time period, the 
commissioner said that IRS was revising Form 886-R to clearly remind 
taxpayers that records for parts of 2 school years are needed to 
document a living arrangement for the tax year. That would be 
responsive to our recommendation. 

Finally, the commissioner said that the new EIC decision support tool 
has been revised to incorporate our recommendation that IRS take 
appropriate steps to ensure that the new tool does not continue the 
inappropriate linkage of financial support to decisions on EIC 
eligibility. The new tool is to be rolled out nationwide in May 2002. 

As agreed with your office, unless you publicly announce the contents 
of this report earlier, we plan no further distribution of it until 30 
days from the date of this report. We will then send copies to the 
Chairmen and Ranking Minority Members of the Senate Committee on 
Finance and the House Committee on Ways and Means; the Ranking 
Minority Member of this Subcommittee; the secretary of the Treasury; 
the commissioner of Internal Revenue; the director, Office of 
Management and Budget; and other interested parties. We will also make 
copies available to others on request. 

This report was prepared under the direction of David J. Attianese, 
Assistant Director. Other major contributors to this report are 
acknowledged in appendix VI. If you have any questions, contact Mr. 
Attianese or me on (202) 512-9110. 

Sincerely yours, 

Signed by: 

Michael Brostek: 
Director, Tax Issues: 

[End of section] 

Appendix I: Evolution of the Earned Income Credit Recertification 
Program: 

The Congress established the earned income credit (EIC) in 1975 to 
offset the impact of Social Security taxes paid by low-income workers 
and to encourage low-income persons to choose work over welfare. A 
significant number of taxpayers are affected by EIC. In 2001, 18.7 
million taxpayers claimed a total of $31 billion in EIC. 

Since 1995, we have identified EIC noncompliance as one of the high-
risk areas within IRS.[Footnote 21] EIC noncompliance has resulted in 
billions of dollars in EIC claims that IRS paid, but should not have. 
In its most recent EIC compliance study, IRS determined that of an 
estimated $31.3 billion in EIC claims for tax year 1999, between $9.7 
billion and $11.1 billion was overclaimed. After deducting the 
estimated amount of those overclaims that it recovered during the 
processing of returns and through enforcement programs, IRS determined 
that between $8.5 billion and $9.9 billion in tax year 1999 EIC claims 
was paid out that should not have been. 

The Taxpayer Relief Act of 1997 reflects the Congress’ concern about 
the level of EIC noncompliance. Among other things, the 1997 act 
amended the Internal Revenue Code to provide that taxpayers who are 
denied EIC during an IRS audit are ineligible to receive the EIC in 
subsequent years unless they provide documentation to demonstrate 
their eligibility. IRS developed a recertification program designed to 
deal with this new requirement. Taxpayers were first required to 
recertify, based on a 1997 audit, when submitting their 1998 tax 
returns. 

Taxpayer Outreach and Correspondence and Examiner Training Have 
Improved: 

Tax year 1998 returns filed in 1999 were the first returns to which 
affected EIC claimants would have to attach a Form 8862 for 
recertification. In preparation for that event, IRS provided little 
information to taxpayers on what to expect when they sought 
recertification. IRS issued recertification guidelines to service 
center examiners at the beginning of the 1999 filing season but, 
according to examiners we interviewed, gave no formal training on 
recertification to examination staff. As described in appendix II, we 
and TIGTA found that service centers did not consistently follow the 
recertification guidelines, and a number of forms and letters IRS used 
for recertification contained inconsistent or irrelevant information. 

IRS’s outreach and correspondence to taxpayers and its training of 
examiners have improved since then. For example, IRS began to 
distribute basic information on the recertification program through 
its web site on the Internet, Publication 596 (Earned Income Credit) 
was revised to include a section on what taxpayers need to do if they 
have been disallowed the EIC as a result of audit, some changes were 
made to improve the quality of IRS correspondence, and more guidance 
was provided to examiners. 

Slow Start—1999, First Year of Recertification Requirement: 

In 1998, IRS disallowed, through audits, the EIC claims on about 
312,000 taxpayers. According to IRS’s Recertification Guidelines, 
these taxpayers were to be sent Letter 3094 notifying them that: 

“The law now requires when we deny EIC [as a result of deficiency 
procedures], we must also deny it for any succeeding years unless you 
provide information showing you are entitled to the credit. 

You must, therefore, complete and attach Form 8862, Information to 
Claim Earned Income Credit After Disallowance, to the next return on 
which you claim EIC. While we determine if you are entitled to the 
credit, we will delay any refund due. If you claim EIC on your return 
without attaching a completed Form 8862, we will disallow the credit. 

You can get Form 8862 at most locations where tax forms are available. 
You will also be able to submit Form 8862 electronically when you file 
federal tax return…” 

None of the 1999 IRS publications, forms, and instructions regarding 
the EIC provided any information on the recertification process or 
requirements other than the need to file Form 8862.[Footnote 22] Even 
IRS’s publication of the need to file Form 8862 was not completely 
effective. An internal IRS study found that of the 312,000 required-to-
recertify taxpayers, 38 percent (118,989) claimed the EIC again for 
tax year 1998. However, nearly 46 percent of these taxpayers (54,194 
of the 118,989) did not attach the Form 8862 with their returns and 
thus were automatically denied the EIC. 

Within IRS, there was also confusion over the recertification process. 
At the beginning of the 1999 filing season, IRS issued recertification 
guidelines for Service Center examiners, but examiners we interviewed 
said that there was no formal training for examiners on 
recertification. With some exceptions pertaining to which EIC children 
an examiner should seek verification and how the recertification 
indicator should be handled after a taxpayer has been recertified, the 
recertification process essentially follows IRS’s normal process for 
conducting examinations via correspondence. 

During our review of the 1999 filing season, we found that (1) form 
letters that IRS sent to taxpayers seeking recertification contained 
inconsistent and irrelevant information; (2) form letters that IRS 
sent to taxpayers asked for information beyond that specified in the 
recertification guidelines; and (3) service centers were not 
consistently following the recertification process.[Footnote 23] 

A more detailed review by TIGTA disclosed, among other things, that 

(1) the indicator used to identify taxpayers who must recertify was 
not always removed accurately; (2) some suspended refunds were not 
released timely; (3) recertification audits were not always processed 
in a timely manner; (4) not all recertification determinations were 
accurate; and (5) IRS correspondence was unclear.[Footnote 24] TIGTA 
attributed these problems, in part, to (1) the IRS correspondence used 
did not clearly explain how the program worked or what was required 
for the taxpayer to be recertified and (2) IRS did not ensure that 
employees received, understood, and implemented recertification 
procedures. (See appendix II for TIGTA’s findings and IRS’s corrective 
actions.) 

Improvements During the 2000 and 2001 Filing Seasons: 

Outreach to taxpayers for filing seasons 2000 and 2001 improved 
compared with 1999. For example, in 2000, IRS revised Publication 596 
(Earned Income Credit) by expanding the section on EIC 
recertification. The publication provided examples of who would be 
required to file Form 8862 and alerted taxpayers that they may have to 
provide additional documentation before being recertified. In 2001, 
IRS included questions on EIC recertification in the “Frequently Asked 
Questions” section of its Web site and further expanded the chapter on 
EIC recertification in Publication 596. 

The 2001 improvement in outreach was especially critical because the 
Ticket to Work and Work Incentives Improvement Act of 1999 (P.L. 
106170) had tightened the definition of an eligible foster child for 
EIC purposes. IRS publicized this change on its Web site, in 
Publications 596 and 553 (Highlights of 2000 Tax Changes), and on 
Schedule EIC. 

Recertification training for examiners also improved compared with 
1999. EIC training videos that were sent to IRS’s processing centers 
for the 2001 filing season included materials on recertification. IRS 
also incorporated the recertification guidelines into the Internal 
Revenue Manual section dealing with correspondence examinations in an 
effort to improve program consistency. Forms and letters were revised 
and examiners were instructed, via IRS’s internal Taxpayer Service 
Electronic Bulletin Board, to correct improper handling of 
recertification cases. 

[End of section] 

Appendix II: Recent GAO and TIGTA Recommendations Relating to EIC 
Recertification and IRS Corrective Actions 

Since July 1999, we[Footnote 25] and the Treasury Inspector General 
for Tax Administration (TIGTA)[Footnote 26] have reported several 
concerns about the EIC Recertification Program and have made several 
recommendations. In response to those recommendations, IRS implemented 
several corrective actions. The recommendations and corrective actions 
are described in tables 2 and 3. 

Table 2: Prior GAO Report Findings on IRS’s Recertification Process 
and IRS’s Corrective Actions: 

GAO findings: Irrelevant information in IRS Letter 3094 could confuse 
taxpayers. 
GAO recommendations: Revise Letter 3094 by either (1) making the 
paragraph relating to reckless or intentional disregard of law and 
fraud an optional paragraph to be used only when it is relevant; (2) 
restricting letter 3094 to cases that do not involve reckless or 
intentional disregard of the law or fraud; or (3) rewording the 
paragraph to make it clear that it does not apply to the specific 
audit finding covered by the letter but is being provided to alert 
taxpayers to the potential consequences if they continue their 
noncompliant behavior. 
IRS corrective actions: IRS revised Letter 3094 by eliminating the 2-
year penalty warning for those taxpayers who were not found reckless. 
This revised letter also included a statement that “Even though you 
attach Form 8862, we may
request additional documentation to substantiate your EIC claim.” A 
new letter, 3094A, was designed for those taxpayers who were found 
recklessly disregarding the EIC rules. Letter 3094A tells taxpayers 
that (1) they were found to have recklessly or intentionally 
disregarded the EIC rules and would be subjected to the 2-year penalty 
and (2) when and how they can claim the EIC in the future. 

GAO findings: IRS Letters 3177 and 3183 contain inconsistent 
information. 
GAO recommendations: Revise Letter 3177 and/or letter 3183 so that 
consistent refund issuance time frames are cited in frames are cited 
in both letters. 
IRS corrective actions: Revised Letters 3177 and 3183 for fiscal year 
2000 so that consistent refund issuance time both letters. 

GAO findings: IRS Letter 3184 and Form 886-H are inconsistent with 
IRS’s operating procedures. 
GAO recommendations: Make the documentation requirements in Letter 
3184 and Form 886-H more consistent with the requirements in IRS’s 
internal recertification guidelines. 
IRS corrective actions: Letter 3184 was discontinued, and Form 886-R, 
which IRS now uses in recertification cases instead of Form 886-H, was 
revised in November 1999. 

GAO findings: IRS examiners did not rely on the information on Form 
8862 to recertify taxpayers claiming EIC based on a qualifying child. 
Form 8862 may mislead taxpayers to believe the information they 
provide on the form would be sufficient for recertification. 
GAO recommendations: If IRS does not rely on Form 8862 for 
recertification purposes, discontinue its use. If IRS continues using 
Form 8862 for recertification purposes, redesign the form to include 
reference to the documentation listed on Form 886H and any other 
documentation that IRS thinks is necessary for recertification so that 
taxpayers who are required to recertify know as early as possible what 
documentation is required for recertification. 
IRS corrective actions: IRS said that it relies on Form 8862 to “
identify the type of action to be taken for taxpayers required to 
recertify.” IRS also noted that redesigning Form 8862 to include 
references to documentation that might be needed for recertification 
may be counterproductive to IRS’s efforts to reduce taxpayer burden. 
We revisited the need for and design of Form 8862 as part of this 
review of the Recertification Program and have a recommendation in 
this report that supersedes our prior recommendation. 

GAO findings: Despite the issuance of national guidance on the 
recertification process, procedures were not being followed 
consistently. 
GAO recommendations: Ensure that all service centers implement the 
recertification procedures according to national guidelines to avoid 
possible disparate treatment of taxpayers. 
IRS corrective actions: According to IRS (1) the guidelines were 
incorporated into the Internal Revenue Manual, (2) adherence to 
procedures in the manual is mandatory, and (3) special reviews were to 
be done during fiscal year 2000 to assess conformance to the 
procedures. 

Source: GAO/GGD-99-112R and GAO/GGD-00-37. 

[End of table] 

Table 3: TIGTA Recertification Report Findings and IRS’s Corrective 
Actions: 

TIGTA findings: IRS did not always remove the recertification 
indicators accurately. IRS allowed the EIC but did not remove the 
recertification indicator for an estimated 11,400 taxpayers 
nationwide. Additionally, IRS erroneously removed the recertification 
indicator for an estimated 4,100 taxpayers nationwide. IRS should 
remove the recertification indicators from those accounts where 
taxpayers have proven their EIC eligibility and should improve its 
quality review process to help ensure employees remove indicators when 
appropriate.
TIGTA recommendation: 
(1) IRS should ensure that the recertificiaton indicators on 
taxpayers' accounts are accurate. Accordingly, it should remove 
indicators from taxpayers' accounts if they have proven their EIC 
eligibility. 
IRS’s corrective actions: In January 2000, IRS formalized EIC 
recertification procedures by including them in the Internal Revenue 
Manual that is available to all EIC examiners.
TIGTA recommendation: 
(2) IRS should improve its quality review process to help ensure 
employees remove indicators when appropriate. 
IRS’s corrective actions: 
TIGTA recommendation: IRS disagreed with the need to revise the 
quality review process since closed recertification cases accounted 
for only 1.4 percent of all EIC cases. However, IRS said it would 
revise its procedures and training to ensure employees remove 
indicators when appropriate. IRS agreed to reconsider its quality 
review procedures if future reviews indicate problems. 
TIGTA recommendation: 
(3) IRS should clarify its procedures to specifically instruct 
employees as to what information and actions are needed to prove 
taxpayers are qualified to receive the income-only EIC. These 
procedures should also be clarified to ensure that taxpayers are not 
considered recertified when they file Forms 8862 but do not claim or 
receive an EIC. 
IRS’s corrective actions: IRS revised its procedures to specifically 
instruct employees as to what information and actions are needed to 
prove taxpayers are qualified to receive the income-only EIC. IRS also 
revised Letter 3094 to explain to taxpayers how to claim income-only 
EIC. 

TIGTA findings: Some suspended refunds were not released timely. In a 
sample of 200 accounts with actions to suspend any refunds, TIGTA 
identified that IRS did not release refunds timely for 86 (43%) 
accounts.
TIGTA recommendation: 
(4) IRS should identify and resolve recertification accounts with 
incorrectly suspended refunds. 
IRS’s corrective actions: IRS performed a one-time extract to identify 
recertification accounts with suspended refunds and issued 
instructions to examination personnel for working these cases. Also, 
according to IRS, it has been generating, since January 2001, a 
monthly extract of nonreversed refunds, which is forwarded to each 
Examination Branch for action and resolution.
TIGTA recommendation: 
(5) IRS should modify computer programs to ensure that the weekly 
listings used to determine whether to release suspended refunds or to 
conduct an audit include all applicable taxpayer accounts with 
suspended refunds. 
IRS’s corrective actions: IRS said it (1) corrected the programming by 
automating transaction codes on pick-up cases, which should ensure 
that weekly listings contain all accounts with suspended refunds and 
(2) issued instructions to Examination personnel to work the list 
within 5 business days and included the instructions in the Internal 
Revenue Manual. 

TIGTA findings: Recertification audits were not always completed 
timely. TIGTA reviewed 104 EIC recertification audits and identified 
59 (57%) that had not been timely processed. The delays ranged from 2 
weeks to 29 weeks and averaged 8 weeks.
TIGTA recommendation: 
(6) IRS should ensure that inventory reports are effectively used to 
monitor and identify processing delays and provide timely feedback to 
offices where delays occur.
IRS’s corrective actions: The monthly extract in Corrective Action #4 
above should assist examiners in identifying and resolving processing 
delays. IRS's National Office was to perform monthly oversight to 
ensure feedback is provided to offices where delays occur. Other IRS 
monitoring tools included (1) status workload reports that were to be 
generated every 2 weeks in each processing center and (2) monthly 
inventory oversight by headquarters and field office analysts. 
TIGTA recommendation: 
(7) IRS should use the correct project codes to identify 
recertification audits.
IRS’s corrective actions: IRS corrected the programming on pick-up 
cases by automating relevant transaction codes and the project code, 
which will ensure all cases contain the correct code. 

TIGTA findings: TIGTA found that not all recertification 
determinations were accurate. TIGTA identified 40 returns where IRS 
allowed child-related EIC totaling about $82,000 without sufficient 
documentation provided by taxpayers. These 40 returns included 22 
returns from a sample of 69
returns that had been audited and 18 returns from a sample of 37 
returns that had not been audited. 
TIGTA recommendation: 
(8) IRS should establish minimum standards for auditors determining 
the extent of source documents required to allow child-related EIC and 
children claimed as exemptions.
IRS’s corrective actions: IRS said that (1) it revised the Internal 
Revenue Manual to include guidelines for EIC examiners, (2) training 
packages for the applicable tax law allowing deductions and credits 
are available to the EIC examiners, (3) performance reviews are done 
to ensure that the Manual and tax laws are followed, and (4) a 
national training tape was provided to all centers to ensure 
consistency in training. 
TIGTA recommendation: 
(9) IRS should emphasize the procedures to send Recertification 
Program claims to the Examination function.
IRS’s corrective actions: IRS said it would update the Internal 
Revenue Manual to emphasize procedures for the Recertification Program 
for Customer Account Service employees. 

TIGTA findings: Correspondence to taxpayers about the recertification 
process was not always clear or was not sent. 
TIGTA recommendation: 
(10) IRS should revise letters sent to taxpayers in the 
Recertification Program to ensure letter accuracy and to better 
explain the program and should revise computer programming to ensure 
only appropriate letters are generated.
IRS’s corrective actions: IRS revised Letter 3094 to inform taxpayers 
that additional documentation may be required to substantiate their 
claims for EITC when they file Form 8862 following disallowance. In 
addition, IRS designed a letter, CP 75A, specifically for the 
Recertification Program, which tells taxpayers that their refund will 
be delayed. IRS also implemented a program change to suppress the CP 
75A when the taxpayer has a balance due on the original filing. 
TIGTA recommendation: 
(11) IRS should notify potentially qualified taxpayers subject to 
recertification that they might be entitled to income-only EIC. Any 
corrective action should take into consideration the rules for 
taxpayers previously denied the EIC due to reckless or intentional 
disregard for the law or fraud. 
IRS’s corrective actions: IRS revised Letter 3094 to tell taxpayers 
that they may qualify for income-only EIC even though child-related 
EIC was denied. 

TIGTA findings: Recertification Program procedures and the 
recertification indicators are not based on the reasons the EIC is 
denied. Taxpayers who receive income-only EIC when child-related EIC 
had been previously denied should not be considered recertified. 
TIGTA recommendation: 
(12) To increase revenue protection, IRS should consider changing the 
Recertification Program regarding when taxpayers are recertified. If 
this recommendation is adopted, IRS should make a business decision as 
to what actions are necessary for taxpayers to receive income-only EIC 
after child-related EIC has been denied. Any changes should take into 
consideration the rules for taxpayers previously denied the EIC due to 
reckless or intentional disregard for the law or fraud.
IRS’s corrective actions: IRS issued Final Rules on Eligibility for 
Earned Income Credit Following Denial, which state that IRS will 
explore whether, and to what extent, its system is capable of 
undertaking a change to have taxpayers establish eligibility the next 
time they claim the credit with one or more qualifying children rather 
than the next time they claim the credit. 

Source: TIGTA, Reference No. 2001-40-030. 

[End of table] 

[End of section] 

Appendix III: Sampling Methodology and Results: 

To help identify any problems taxpayers may have in understanding and 
complying with the EIC recertification process and determine how 
consistently IRS examiners assess evidentiary support, we conducted a 
telephone survey of IRS examiners doing recertification audits. We 
obtained from IRS a list of all examiners who were working on EIC 
recertification cases as of April 2001. From that list of 323 
examiners, we selected a simple random sample of 105 examiners. We 
found that 12 of those 105 examiners were not doing recertification 
audits at the time of our survey and 3 others were unavailable for us 
to interview during our survey timeframe.[Footnote 27] Therefore, our 
survey results represent the views of about 277, or about 97 percent, 
of the estimated 286 examiners doing recertification audits at the 
time of our survey.[Footnote 28] 

The estimates we made from our telephone survey and their 95-percent 
confidence intervals are provided in table 4. 

Table 4: GAO Estimates from Its Survey of Examiners Doing 
Recertification Audits: 

Of about 277 examiners doing recertification audits at the time of our 
review, the percentage that: 

Did not find Form 8862 useful; 
Estimate: 86%; 
95-percent confidence interval: 
Lower estimate: 78%;
Upper estimate: 91%. 

Believed that Form 8862 had some value; 
Estimate: 13%; 
95-percent confidence interval: 
Lower estimate: 8%; 
Upper estimate: 21%. 

Believed that Form 8862 misleads taxpayers into thinking that IRS’s 
final decision on their eligibility will be based on information in 
the form; 
Estimate: 16%;
95-percent confidence interval: 
Lower estimate: 10%;
Upper estimate: 24%. 

Said that when a taxpayer failed to be recertified, most or all of the 
time the taxpayer’s inability to substantiate that a child lived with 
the taxpayer led to the failure; 
Estimate: 80%;
95-percent confidence interval: 
Lower estimate: 72%;
Upper estimate: 87%. 

Would not accept a notarized statement as evidence; 
Estimate: 62%;
95-percent confidence interval: 
Lower estimate: 53%;
Upper estimate: 71%. 

Would not accept a notarized letter from a relative, such as a 
grandparent; 
Estimate: 79%;
95-percent confidence interval: 
Lower estimate: 70%;
Upper estimate: 86%. 

Examined the filing status and dependent exemptions on a taxpayer’s 
return in addition to the EIC; 
Estimate: 97%; 
95-percent confidence interval: 
Lower estimate: 91%; 
Upper estimate: 99%. 

Also audited other items such as child tax, child care, and education 
credits; 
Estimate: 57%; 
95-percent confidence interval: 
Lower estimate: 47%; 
Upper estimate: 66%. 

Said that at least some of the taxpayers who failed to be recertified 
failed because they couldn't provide documentation of the eligible 
child’s financial support; 
Estimate: 53%; 
95-percent confidence interval: 
Lower estimate: 44%; 
Upper estimate: 63%. 

Note: Confidence intervals were computed using the hypergeometric 
distribution. In doing these computations, we used a population size 
of 323 and a sample size of 90. Had we known exactly how many of the 
323 examiners were doing recertification audits at the time of our 
survey, the confidence intervals we computed would have been somewhat 
narrower. 

Source: GAO’s survey of IRS examiners. 

[End of table] 

[End of section] 

Appendix IV: IRS Forms 8862 and 886-R: 

[Refer to PDF for image: illustration of IRS Forms 8862 and 886-R] 

[End of figure] 

[End of section] 

Appendix V: Comments from the Internal Revenue Service: 

Department of the Treasury: 
Internal Revenue Service: 
Commissioner: 
Washington, D.C. 20224: 

April 10, 2002: 

Mr. Michael Brostek: 
Director, Tax Issues: 
U.S. General Accounting Office:
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Mr. Brostek: 

I appreciate your recognition of our efforts to reduce taxpayer burden 
since we implemented the Earned Income Tax Credit (EITC) 
recertification program. These improvements include expanded outreach 
to stakeholders, revised taxpayer correspondence, and improved 
examiner training. 

The IRS is continuing efforts to improve the EITC audit process. These 
include an inventory management tool and a decision support tool that 
we will deploy in May. These tools will help examiners and managers 
make consistent determinations on EITC eligibility. We are also 
redesigning EITC taxpayer notices used by Examination. The notice 
redesign process will include feedback from impacted stakeholders 
including the Taxpayer Advocate, practitioners, and Low Income 
Taxpayer Clinics. 

The Assistant Secretary for Tax Policy and I have convened a high-
level IRS/Treasury task force to review the EITC Program. This group 
will develop recommendations to achieve the congressional objectives 
of the EITC Program, make it easier for taxpayers to comply with the 
rules, and allow us to efficiently and effectively administer the 
rules. The group will also evaluate legislative and administrative 
solutions to EITC recertification problems and consider your draft 
report findings. The Assistant Secretary for Tax Policy and I will 
personally oversee the task force and present its recommendations to 
Secretary O'Neill. 

Our comments on your recommendations follow: 

Recommendation 1: 

Revise Form 8862, Information to Claim Earned Income Credit After 
Disallowance, 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. 

Comments: 

The Director, Reporting Compliance, Wage and Investment (W&I) will 
study the use of Form 8862 in EITC recertifications and the 
examination of related issues. Based on the results of this study and 
your findings, we will evaluate possible revisions to the form that 
will make communications clearer, reduce taxpayer burden, and aid the 
recertification and examination processes. We anticipate completion of 
this study by June 2003. 

Recommendation 2: 

Revise Form 886-H, Explanation of Items, and Form 886-R, Supporting 
Documents for Recertification (and similar forms used for other EITC 
audits) to: 

* Clarify that taxpayers who are seeking EITC recertification do not 
have to demonstrate that the EITC qualifying child is a dependent to 
qualify for EITC. 

* Help taxpayers understand what documentation they must provide (such 
as birth certificates, adoption papers, etc.) to establish their 
relationship with the EITC qualifying child, especially when the child 
is not their natural born son or daughter. 

* Eliminate the need to have the statement from the child care 
provider notarized, since a notary public does not verify the content 
of the statement and most examiners place no validity on the notary 
stamp. 

* Encourage taxpayers to submit more than one type of document to 
demonstrate that the EITC qualifying children live with them. 

Comments: 

We are revising Forms 886H and R. We are working with our W&I 
Examination Process Improvement Team and the Dynamic Notices Project 
Team to revise the forms into different categories based on the 
relationship between the taxpayer and child (natural, adopted, 
grandchild, or foster) as claimed by the taxpayer. We will ask for 
feedback on the revisions at the National Tax Forums held in various 
cities this summer. Additionally, the Dynamic Notices Project Team is 
meeting with focus groups of affected taxpayers to obtain their 
feedback on the revised forms. We plan to have a revised product that 
will incorporate this feedback by the 2003 filing season. 

Recommendation 3: 

If IRS is not willing to accept a relative's childcare statement as 
evidence that a child lives with the taxpayer, it should be clear on 
Form 886-R, on similar forms used for other EITC audits, and in the 
EITC decision support tool. The IRS should also suggest additional 
evidence that the taxpayer may provide. 

Comments: 

A childcare provider's statement by itself may not be sufficient to 
verify eligibility. In that instance, the taxpayer will need to 
provide additional collaborating evidence to support his or her EITC 
claim. We will show examples of this evidence on Form 886-R. We plan 
to have a revised product that will incorporate all changes by January 
2003. 

Recommendation 4: 

Whatever IRS' official position on statements from relatives, ensure 
that examiners are aware of that position and apply it consistently. 

Comments: 

We will enhance awareness and consistency of our position through the 
EITC decision support tool, in examiner training and the current IRM, 
and during quality reviews. We plan to have a revised product that 
will incorporate all changes by January 2003. 

Recommendation 5: 

Develop a standard form that taxpayers can give to the school or 
healthcare provider that specifies the information needed, and on 
which examiners can indicate the period of time for which the 
information is needed. 

Comments: 

We are revising Form 886-R to accomplish the objective of this 
recommendation. 

Recommendation 6: 

If IRS decides not to develop a standard form, revise Form 886-R to 
clearly remind taxpayers that records for parts of two school years 
are needed to document a living arrangement for the tax year. 

Comments: 

We are revising Form 886-R to clearly remind taxpayers that records 
for parts of two school years are needed to document a living 
arrangement for the tax year. We plan to have a revised product that 
will incorporate all changes by January 2003. 

Recommendation 7: 

Take appropriate steps to ensure that the new EITC decision support 
tool does not continue the inappropriate linkage of financial support 
to decisions on EITC eligibility. 

Comments: 

The Director, Reporting Compliance, VV&I has incorporated your 
recommendation into the EITC decision support tool. The tool will be 
rolled out nationwide in May 2002. 

If you have any questions, please contact William Zachery, Director, 
Reporting Compliance, W&I at (404) 338-7643. 

Sincerely, 

Signed by: 

Charles O. Rossotti: 

[End of section] 

Appendix VI: GAO Contacts and Staff Acknowledgments 

GAO Contacts: 

Michael Brostek (202) 512-9110: 
David Attianese (202) 512-9110: 

Acknowledgments: 

In addition to those named above, Karen Bracey, Tara Carter, Art 
Davis, Ben Douglas, Ann Lee, Susan Mak, Anne Rhodes-Kline, Clarence 
Tull, and James Ungvarsky made key contributions to this report. 

[End of section] 

Footnotes: 

1. P.L. 105-34. 

2. U.S. General Accounting Office, Earned Income Tax Credit 
Eligibility and Participation, [hyperlink, 
http://www.gao.gov/products/GAO-02-290R] (Washington, D.C.: Dec. 14, 
2001) has an estimate of how many households are eligible for the EIC 
but do not receive it. 

3. LITCs provide assistance to low-income taxpayers in controversies 
with IRS and/or taxpayers for whom English is a second language. 

4. For tax year 2001, earned income had to be less than (1) $10,710 
for taxpayers with no qualifying children; (2) $28,281 for taxpayers 
with one qualifying child; and (3) $32,121 for taxpayers with more 
than one qualifying child. 

5. A person qualifies as the taxpayer’s qualifying child if the person 
(1) meets certain relationship requirements that are discussed later 
in the report; (2) was, at the end of the tax year, under age 19 or 
under age 24 and a student, or permanently and totally disabled at any 
time during the year regardless of age; and (3) lived with the 
taxpayer in the United States for more than half of the tax year. 

6. It is not known how much of the overclaims was due to simple error 
versus negligence or fraud. 

7. This is not unique to the EIC. IRS faces similar problems, for 
example, in correctly determining whether a person claimed as a 
dependent meets the qualifying tests for a dependent. 

8. In August 1998, we reported that investigators in four states, 
which accounted for 35 percent of the nation’s participants in the 
Food Stamp Program, said that even with the ability to visit homes and 
contact claimants’ friends, neighbors, or landlords for information, 
these verification techniques are hit-or-miss, time-consuming, costly 
undertakings and provide information that is only as reliable as its 
source. (U.S. General Accounting Office, Food Stamp Overpayments: 
Households in Different States Collect Benefits for the Same 
Individuals, [hyperlink, http://www.gao.gov/products/GAO/RCED-98-228] 
(Washington, D.C.: Aug. 6, 1998)). 

9. Assume, for example, that a taxpayer, on the tax year 1997 return, 
claimed two EIC-qualifying children and that IRS, upon audit, 
disallowed child #1 but allowed child #2. Because part of the 
taxpayer’s EIC claim would have been disallowed, the taxpayer would be 
required to recertify. If the taxpayer claimed the EIC again on the 
tax year 1998 return and showed child #1 and/or a new child as EIC-
qualifying children, the return should be selected for audit as part 
of the EIC recertification program. However, if the taxpayer showed 
child #2 as the only EIC-qualifying child, the return should not be 
selected for audit as part of the recertification program. 

10. We selected these four centers because (1) Brookhaven is the site 
of the EIC Correspondence Exam National Office, (2) Memphis had the 
most recertification cases in 1999, and (3) we had staff available to 
do work in Atlanta and Kansas City. 

11. U.S. General Accounting Office, Tax Administration: IRS’ 1999 Tax 
Filing Season, [hyperlink, http://www.gao.gov/products/GAO/GGD-00-37] 
(Washington, D.C.: Dec. 15, 1999). 

12. If a taxpayer, after being informed of a disallowance for failure 
to submit Form 8862, sends IRS a Form 8862, IRS is to begin the 
recertification process. 

13. Because other IRS audits of EIC claims have the same basic purpose 
as recertification audits (proving that the claimant meets the EIC 
eligibility requirements), IRS has a similar form (886-H) that it 
sends to claimants who are being audited outside of the 
Recertification Program. 

14. This same language is in Form 886-H, which IRS sends to EIC 
claimants who are being audited outside of the Recertification Program. 

15. National Taxpayer Advocate FY2001 Annual Report to Congress (Dec. 
31, 2001). 

16. U.S. General Accounting Office, Health Insurance: Coverage Leads 
to Increased Health Care Access for Children, [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-98-14] (Washington, D.C.: Nov. 
24, 1997). 

17. U.S. General Accounting Office, Migrant Children: Education and 
HHS Need to Improve the Exchange of Participant Information, 
[hyperlink, http://www.gao.gov/products/GAO/HEHS-00-4] (Washington, 
D.C.: Oct. 15, 1999). 

18. According to The National Notary (May 2001), notaries public 
charge anywhere from $0.50 to $10.00 for each notarized signature. 

19. U.S. General Accounting Office, Welfare Reform: Implications of 
Increased Work Participation for Child Care, [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-97-75] (Washington, D.C.: May 29, 
1997) and U.S. General Accounting Office, Education and Care: Early 
Childhood Programs and Services for Low-Income Families, [hyperlink, 
http://www.gao.gov/products/GAO/HEHS-00-11] (Washington, D.C.: Nov. 
15, 1999). 

20. As a result of a recent reorganization, IRS has four main 
operating divisions, each responsible for a distinct group of 
taxpayers. The Wage and Investment Division is responsible for 
taxpayers whose only income comes from wages and investments. That 
Division is responsible for audits done under the EIC Recertification 
Program. 

21. Initially, this high-risk area was referred to as “IRS Tax Filing 
Fraud.” In January 2001, we narrowed the focus of the high-risk area 
and renamed it “Noncompliance With EIC.” 

22. We reviewed the following IRS information: Form 8862 and the 
accompanying instructions, Publication 17 (Your Federal Income Tax), 
Publication 596 (Earned Income Credit), Form 1040 and the accompanying 
instructions, and a transcript of pre-recorded EIC information 
available on IRS’s TeleTax system. 

23. [hyperlink, http://www.gao.gov/products/GAO/GGD-00-37]. 

24. TIGTA, Reference No. 2001-40-030. 

25. U.S. General Accounting Office, IRS Correspondence to Taxpayers on 
Earned Income Credit Recertification, [hyperlink, 
http://www.gao.gov/products/GAO/GGD-99-112R] (Washington, D.C.: July 
30,1999.) and [hyperlink, http://www.gao.gov/products/GAO/GGD-00-37]. 

26. Improvements Are Needed in the Earned Income Credit 
Recertification Program, TIGTA, Reference No. 2001-40-030, Dec. 29, 
2000. 

27. The 12 included 3 examiners on extended leave, 7 examiners no 
longer doing recertification audits, and 2 examiner who reported never 
having done any recertification audits. 

28. The confidence interval for our estimate of 277 is from 254 to 
294. The confidence interval for our estimate of 97 percent is from 92 
to 99 percent. The confidence interval for our estimate of 286 is from 
265 to 301. All confidence intervals are at the 95-percent level of 
confidence. 

[End of section] 

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