Advance Earned Income Tax Credit:

Low Use and Small Dollars Paid Impede IRS's Efforts to Reduce High Noncompliance

GAO-07-1110: Published: Aug 10, 2007. Publicly Released: Aug 31, 2007.

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The Advance Earned Income Tax Credit (AEITC) allows individuals to receive a portion of the Earned Income Tax Credit (EITC) in their paychecks, instead of receiving all of it when filing their year-end tax return. Limited research has been conducted on the AEITC since GAO last examined it in the early 1990s. GAO was asked to determine (1) how many individuals received the AEITC compared with the EITC in tax years 2002 through 2004, what actions, if any, have been taken to increase use, and the potential for increases in use in the future; (2) the extent of noncompliance, if any, associated with the AEITC; and (3) how well the Internal Revenue Service's (IRS) procedures address the areas of noncompliance. To address these questions, GAO analyzed Forms W-2 and tax return data and interviewed IRS and Social Security Administration (SSA) officials.

AEITC use was low--only about 3 percent of EITC recipients potentially eligible for the advance received it in tax years 2002 through 2004, or about 514,000 of the 17 million potentially eligible individuals each year. About half of all recipients received $100 or less in AEITC and 75 percent received $500 or less for the year, with a total benefit paid of about $146 million each year. Several efforts have been aimed at increasing use over the last approximately 15 years, such as sending notices to individuals informing them that they were potentially eligible for the AEITC and making changes to IRS forms. Despite these efforts, use did not substantially increase and, for several reasons, it may be difficult to increase it in the future. For example, IRS officials, other experts, and prior GAO work suggests that individuals often do not elect the AEITC because they prefer receiving the entire EITC as a lump sum after filing their tax return. As many as 80 percent of AEITC recipients did not comply with at least one of the program requirements GAO reviewed, and some were noncompliant with more than one during the 3 years we reviewed. In tax years 2002 through 2004, about 20 percent, or more than 100,000 AEITC recipients, may not have been eligible for the AEITC because they had an invalid Social Security number (SSN). These individuals received a total of $37 million to $39 million each year. Almost 40 percent (about 200,000 recipients) did not file the required tax return; these individuals received $42 million to $50 million each year. Of the about 60 percent (more than 300,000) AEITC recipients who did file a return, about two-thirds misreported the amount received. IRS's procedures have limited effectiveness in addressing AEITC noncompliance. For example, Automated Underreporter (AUR) staff worked on only a fraction of AEITC cases because of resource constraints and criteria limiting case selection. IRS could address AEITC noncompliance by sending "soft notices" to recipients, requiring employers to verify employee SSNs before providing the AEITC, or creating a Forms W-5, "EITC Advance Payment Certificate," database. Each of these options have advantages, however, they also have potential disadvantages that could limit their effectiveness.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to and consistent with our recommendation, in September 2009, IRS conducted a study analyzing whether to send soft notices to potentially noncompliant AEITC recipients.

    Recommendation: The Acting Commissioner of Internal Revenue should analyze whether any of the following options could cost effectively and significantly reduce AEITC noncompliance: (1) sending potentially noncompliant AEITC recipients soft notices, such as to nonfilers whose Forms W-2 show that they received AEITC and filers who misreported the amount they received or whose SSN and name do not match, (2) requiring employers to verify the SSN of employees seeking AEITC, or (3) requiring employers to submit Form W-5 to IRS and IRS creating and maintaining a database for these forms.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Not Implemented

    Comments: In September 2009, IRS's study of whether to send soft notices concluded that if they were sent, the notice response rate would be too low or result in either little or no return on investment. Consequently, IRS decided not to test whether sending would be an option.

    Recommendation: To better identify the costs and implementation issues as well as the likelihood for these or other options to reduce AEITC noncompliance, where practical, the Acting Commissioner of Internal Revenue should test these options to make a more fully informed judgment about whether any would be worthwhile.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: The President's fiscal year 2010 and 2011 budgets each included a proposal to terminate the advance earned income tax credit (AEITC), and in both years, our report was the sole source the President cited in justifying this recommendation. In both years, the President specifically cited GAO's findings concerning the program's low use, few dollars received, and high noncompliance. On August 10, 2010, the President signed a law which included eliminating the AEITC (Pub. L. No 111-226, sec. 219, 124 Stat. 2389, 2403).

    Recommendation: If the Acting Commissioner of Internal Revenue determines that none of these options would be cost effective and no other remedies are viable, then the Treasury Secretary should inform the Congress of this and provide Treasury's opinion about whether the AEITC should be retained.

    Agency Affected: Department of the Treasury


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