Earned Income Credit

The Internal Revenue Service (IRS) took several steps to prevent and detect earned income credit noncompliance in 1995. IRS data suggest that those steps reduced noncompliance. However, there were also some problems. For example, IRS procedures generated a workload that far exceeded the agency's capabilities. Although 3.3 million paper returns were identified with missing or invalid social security numbers, IRS had enough resources to follow up on only about one million. Also, IRS' procedures for deciding which cases warranted follow-up did not ensure that the most productive cases would be selected. IRS was unable to follow through on plans to check for duplicate use of social security numbers. As a result, IRS delayed refunds on about four million earned income credit returns that did not have a problem, mainly to give itself more time to determine whether other returns were filed using the same social security numbers. In the end, IRS released almost all of those refunds, after holding them for several weeks, without checking for duplicate social security numbers. IRS' efforts and the publicity surrounding them may have had a significant deterrent effect, at least in the short term: More than two million fewer claims for the earned income credit were filed in 1995 than IRS had expected. However, IRS data were not sufficient to make an overall assessment of the impact of IRS' initiatives on earned income credit noncompliance.

GAO found that: (1) the up-front controls used by IRS in its Electronic Filing System helped IRS reduce some EIC noncompliance and identify about 1.3 million social security number (SSN) problems on electronically filed tax returns in 1995; (2) IRS placed increased emphasis on validating SSN on paper returns, since it identified about 3.3 million returns with missing or invalid SSN for EIC-qualifying children; (3) although IRS identified 3.3 million returns with problems, IRS only had the resources to follow up on 1 million cases; (4) IRS delayed refunds on about 4 million EIC returns that did not have any SSN problems to check for the use of duplicate SSN, but released almost all of those refunds without checking for duplicate SSN; (5) IRS has taken steps to better utilize its resources in 1996, such as attempting to identify more productive cases and limiting the number of delayed refunds; and (6) the overall impact on IRS efforts to reduce EIC noncompliance cannot be assessed because IRS commingled 1995 data with data from previous years.

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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