Tax Administration

"Noncompliance" with the earned income credit (EIC) involves persons who either claim credits to which they are not entitled or claim credits in excess of the amount to which they are entitled. The Internal Revenue Service (IRS) has reduced the level of noncompliance, but it remains above 20 percent, with several billion dollars in overclaimed credits annually. A root cause of EIC noncompliance is the self-determination of eligibility by taxpayers combined with IRS' limited ability to verify eligibility before the refund is issued. The Treasury Department has announced eight proposals, six of which would entail legislation, to reduce EIC noncompliance. Those proposals provide a starting point for deliberations on what can reasonably be done to address this difficult problem. Various questions need to be answered in assessing those proposals, the most significant being whether they get at the real causes of noncompliance.

GAO noted that: (1) EIC noncompliance has been a concern for a number of years and is a major factor underlying GAO's designation of filing fraud as one of the federal program areas at high risk because of vulnerability to waste, fraud, abuse, and mismanagement; (2) through design changes and administrative actions, noncompliance, expressed as a percentage of total EIC dollars paid out, has been reduced since 1988 but, because of increases in the number of claimants and changes in credit amounts over the past few years, the amount of dollars erroneously paid out has increased dramatically; (3) a root cause of EIC noncompliance is the self-determination of eligibility by taxpayers combined with the Internal Revenue Service's (IRS) limited ability to verify eligibility before the refund is issued; (4) IRS has undertaken, with some success, a variety of efforts to reduce EIC noncompliance in recent years; (5) while the impact of IRS' efforts cannot be precisely quantified, it is reasonable to expect that recent declines in the noncompliance rate were in part the result of IRS' efforts; (6) how much further it can be reduced with available resources is uncertain; (7) it will not be easy to significantly reduce EIC noncompliance because of the nature of the credit and the design of IRS' systems; (8) Treasury has announced eight proposals, six of which would involve legislation, to reduce EIC noncompliance; (9) those proposals provide a starting point for deliberations on what can reasonably be done to address this difficult problem; and (10) various questions need to be answered in assessing those proposals, the most significant being whether they get at the real causes of noncompliance.

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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