Tax Administration

The rules for claiming dependent exemptions are too complex and burdensome for many taxpayers to comply with. According to the Internal Revenue Service (IRS), taxpayers erroneously claimed exemptions for an estimated 9 million dependents in 1988, improperly lowering their taxable incomes by about $17 billion. IRS also found that an estimated 3 million taxpayers claimed the wrong filing status. This report (1) identifies the sources of erroneous dependent and filing status claims, (2) discusses the need to simplify the laws on dependents and filing status, (3) determines what IRS is doing to address any erroneous claims, and (4) suggests changes IRS could make in its compliance programs.

GAO found that: (1) taxpayers' failure to meet the dependent support test accounted for 73 percent of the erroneous dependent claims for 1988; (2) alternatives to simplify the laws on dependent exemptions include replacing the dependent support test with the residency test when the dependent lives with the taxpayer, replacing the 50-percent support standard with a fixed minimum amount, limiting the dependent exemption to children, and replacing the dependent exemption and standard deduction with a family support allowance; (3) the burden for taxpayers who claim head of household filing status would not change if IRS replaced the dependent support test with the residency test; (4) the head of household filing status accounted for 82 percent of all filing status errors in 1988; (5) IRS needs compliance programs to identify improper claims; and (6) replacing the dependent support test with the residency test and a 100-percent matching program would address 71 percent of the erroneous dependent claims.

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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