Earned Income Credit

The earned income credit, which is expected to provide about $22 billion in tax credits in 1995, is a major federal effort to assist the working poor. The credit is intended to offset the impact of Social Security taxes on low-income workers and to encourage the poor to seek employment rather than welfare. GAO testified that a reliable overall measurement of noncompliance with the earned income credit provisions has not been made since 1988, but noncompliance appears to be a problem. The Internal Revenue Service estimates that 29 percent of the returns that it examined in January 1994 claimed too much earned income credit and that about 13 percent of them may have done so intentionally. Although the credit is intended to help the working poor, the credit's eligibility criteria do not consider all of the resources that recipients may have to support themselves and their families. No one knows how many illegal aliens receive the earned income credit. If the all credit recipients needed valid Social Security numbers for work purposes, illegal aliens would no longer qualify. GAO summarized this report in testimony before Congress; see: Earned Income Credit: Targeting to the Working Poor, by Lynda D. Willis, Associate Director for Tax Policy and Administration Issues, before the Senate Committee on Governmental Affairs. GAO/T-GGD-95-136, Apr. 4, 1995 (10 pages).

GAO found that: (1) reliable IRS noncompliance measures for the EIC program do not exist and reliable data on the current extent of noncompliance is unavailable; (2) in 1988, about 42 percent of recipients received too much EIC and about 32 percent could not document their EIC entitlement; (3) 29 percent of the recipients who filed electronic returns in 1994, received too much EIC and 13 percent of these recipients deliberately claimed too much EIC; (4) to detect erroneous EIC claims, IRS developed improved criteria for detecting multiple use of the same social security number (SSN) and valid SSN for qualifying children; (5) adding taxpayers' wealth and other income sources as EIC eligibility criteria could produce significant EIC savings; (6) the additional EIC eligibility criteria would increase EIC complexity and the administrative burden of collecting needed data and treating similar taxpayers equally; (7) IRS does not know how many illegal aliens receive EIC because it does not prohibit them from claiming EIC or require them to identify themselves on IRS forms; (8) Administration and legislative proposals would exclude illegal aliens from EIC eligibility; and (9) the Administration's proposal would require all EIC claimants to have valid work-related SSN and permit streamlined IRS procedures to enforce the requirement.