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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.


Recommendations for Executive Action

Agency Affected Recommendation Status
Internal Revenue Service 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.
Closed – Implemented
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.
Internal Revenue Service 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.
Closed – Not Implemented
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.
Department of the Treasury 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.
Closed – Implemented
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).

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