Tax Administration:

Earned Income Credit Noncompliance

T-GGD-97-105: Published: May 8, 1997. Publicly Released: May 8, 1997.

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GAO discussed issues surrounding earned income credit (EIC) noncompliance.

GAO noted that: (1) EIC noncompliance has been a concern for a number of years and is a major factor underlying GAO's designation of filing fraud as one of the federal program areas at high risk because of vulnerability to waste, fraud, abuse, and mismanagement; (2) through design changes and administrative actions, noncompliance, expressed as a percentage of total EIC dollars paid out, has been reduced since 1988 but, because of increases in the number of claimants and changes in credit amounts over the past few years, the amount of dollars erroneously paid out has increased dramatically; (3) a root cause of EIC noncompliance is the self-determination of eligibility by taxpayers combined with the Internal Revenue Service's (IRS) limited ability to verify eligibility before the refund is issued; (4) IRS has undertaken, with some success, a variety of efforts to reduce EIC noncompliance in recent years; (5) while the impact of IRS' efforts cannot be precisely quantified, it is reasonable to expect that recent declines in the noncompliance rate were in part the result of IRS' efforts; (6) how much further it can be reduced with available resources is uncertain; (7) it will not be easy to significantly reduce EIC noncompliance because of the nature of the credit and the design of IRS' systems; (8) Treasury has announced eight proposals, six of which would involve legislation, to reduce EIC noncompliance; (9) those proposals provide a starting point for deliberations on what can reasonably be done to address this difficult problem; and (10) various questions need to be answered in assessing those proposals, the most significant being whether they get at the real causes of noncompliance.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Soon after the testimony, several of Treasury's proposals were enacted into law as part of the Taxpayer Relief Act of 1997. Thus, it is too late for Congress or the administration to consider the questions cited in the recommendation.

    Matter: It is important, in further deliberations on Treasury's proposals or those made by others, that Congress and the administration consider whether: (1) the actions being proposed are feasible; (2) potential benefits justify expected costs, especially in light of tighter budgets and other compliance problems facing IRS; and (3) adequate procedures are built in to protect taxpayers' rights.


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