Earned Income Credit:

IRS' Tax Year 1994 Compliance Study and Recent Efforts to Reduce Noncompliance

GGD-98-150: Published: Jul 28, 1998. Publicly Released: Aug 27, 1998.

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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) 1994 Earned Income Credit (EIC) compliance study, focusing on: (1) evaluating IRS' study methodology to determine if the reported results were reasonably accurate; (2) identifying the primary sources of EIC noncompliance found in the study; and (3) determining whether recent IRS compliance efforts are designed to address the primary sources of noncompliance.

GAO noted that: (1) IRS' estimate of $4.4 billion in EIC overclaims has a 95-percent confidence interval of $4 billion to $4.9 billion; (2) GAO's evaluation of the study methodology showed that the estimate is reasonably accurate and representative of EIC claimants filing between January 15 and April 21, 1995; (3) some aspects of the study methodology affected the precision of the results; but, given the scale of the findings, these limitations do not affect the study's message or its usefulness in designing compliance approaches; (4) although it is a reasonable estimate of EIC overclaims, the entire $4.4 billion should not be viewed as a potential savings to the government had IRS somehow been able to prevent or correct all of these errors; (5) for returns filed with an EIC claim, the tax year 1994 study was designed to evaluate taxpayers' compliance with each EIC eligibility filing requirement, to produce an overall estimate of EIC amounts claimed in error, and to identify the sources of these errors; (6) the study was not designed to detect or quantify EIC claims that taxpayers could have made; (7) the largest source of taxpayer error identified by the tax year 1994 study relates to EIC requirements that are difficult for IRS to verify--those related to qualifying children; (8) unlike income transfer programs, the EIC was designed to be administered through the tax system; (9) this choice generally should result in lower administrative costs and higher participation rates and emphasizes that the credit is for working taxpayers; (10) EIC eligibility is difficult for IRS to verify through its traditional enforcement procedures; (11) thoroughly verifying qualifying child eligibility requires IRS to do an audit of the type done in the EIC compliance studies; (12) with new enforcement tools provided by Congress and an increase in funding designated for EIC-related activities, IRS began implementing in fiscal year 1998 a plan that, over a period of 5 years, calls for attacking EIC noncompliance; (13) most of the efforts that make up the EIC compliance initiative had not progressed far enough at the time GAO completed its audit for it to make any judgment about their effectiveness; (14) IRS plans to measure the overall impact of the compliance initiative on the overclaim rate through annual studies of EIC compliance starting with a baseline study of tax year 1997 returns; and (15) IRS plans to measure the results of the individual initiative components implemented in 1998.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS told GAO that customer service efforts aimed at EIC claimants would be provided much earlier in the 1999 filing season. For example, IRS said that it would start offering Saturday service at its walk-in sites in January. GAO's review of the 1999 filing season showed that IRS did begin providing EIC-related customer service earlier.

    Recommendation: The Commissioner of Internal Revenue should ensure that customer service efforts aimed at EIC claimants be available earlier in the filing season when most EIC claims are filed.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: IRS revised its Schedule EIC instructions for tax year 1998 to include information on the 2-year and 10-year sanctions and the recertification process. However, IRS did not make any changes to the Schedule EIC itself. GAO again recommended such a change in its report on the 1998 tax filing season (GGD-99-21).

    Recommendation: The Commissioner of Internal Revenue should include prominent information regarding the 2-year and 10-year sanctions and the recertification process in the Form 1040 EIC instructions and Schedule EIC.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: According to IRS, it has taken several steps to better help it get timely data on the results of its various compliance initiative components. For example, it has implemented a Compliance Research Initiative Tracking System that it says allows it to quickly extract taxpayer information in order to more expeditiously determine the impact of tested methodologies used to address Earned Income Credit compliance problems. Also according to IRS, it has developed a methodology for measuring the results of its initiatives on a year-to-year basis.

    Recommendation: To provide a basis for continually improving and refocusing EIC compliance efforts, the Commissioner of Internal Revenue should develop evaluation plans for each compliance initiative component that will provide, in succeeding years of the initiative, timely data for decisionmakers.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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