Earned Income Tax Credit

More than 11 million low-income wage earners received $6.5 billion in earned income tax credits for tax year 1989. The earned income tax credit is a refundable credit that certain workers can receive upon filing a tax return. Workers can receive the credit as a lump sum payment after filing a return in advance as part of their paycheck. Yet less than one percent of earned income credit recipients receive the credit in advance each year. This report (1) identifies why few eligible workers take advantage of the advance payment option; (2) determines whether making advance payments imposes a burden on employers, especially small businesses; and (3) identifies any problems the Internal Revenue Service has experienced in administering the advance payment option.

GAO found that: (1) low-income wage earners with children can elect to receive EIC in advance payments from their employer during the year along with their regular pay or as a lump sum refund or tax credit on their year-end federal income tax returns; (2) most of the 438 low-income wage earners surveyed were not aware of EIC or the advance payment options; (3) in 1989, less than 0.5 percent of those who received EIC used the advance payment option; (4) the participation rate was low because many eligible employees and their employers are not aware of the advance payment option, some employees prefer a single lump sum refund payment instead of smaller periodic payments, and IRS outreach efforts emphasized EIC, but not the advance payment option; (5) about 65 percent of the employers who had made advance payments indicated that the advance imposed little or no burden, and this percentage was about the same for participating small businesses with 100 or fewer employees; (6) difficulties employers experienced with advancing the credit included software limitations and computing payments for temporary and part-time workers; (7) about 49 percent of the workers who clearly received advance payments in 1989 and filed a tax return did not report receiving the credit; (8) about 45 percent of those who, according to IRS records, might have received an advance payment never filed a tax return and, if no return was filed, IRS had no way of determining worker eligibility; (9) it is difficult to determine the effectiveness of giving the credit in advance, since so few low-income wage earners know about the advance payment option; and (10) although IRS identifies individuals who do not report advance EIC payments, it rarely follows up or pursues nonfilers.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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