Earned Income Tax Credit Eligibility and Participation
Gao ID: GAO-02-290R December 14, 2001The Earned Income Tax Credit (EIC), which is expected to provide more than $20 billion in refundable tax credits in fiscal year 2002, is intended to offset the burden of the Social Security payroll tax on low-income workers and encourage low-income individuals to work. About 75 percent of the 17.2 million eligible households have claimed the credit. GAO found that the participation rate varied by the number of qualifying children in the household. Participation rates for households with one or two qualifying children were 96 percent and 93 percent respectively. In contrast, the participation rate for households with three or more qualifying children was 62.5 percent. The participation rate for households with no qualifying children was 44.7 percent. Although qualifying households were eligible to claim $22.3 billion in EICs in 1999, the Internal Revenue Service estimates that participating households actually claimed $20.9 billion.
GAO-02-290R, Earned Income Tax Credit Eligibility and Participation
This is the accessible text file for GAO report number GAO-02-290R
entitled 'Earned Income Tax Credit Eligibility and Participation' which
was released on December 14, 2001.
This text file was formatted by the U.S. General Accounting Office
(GAO) to be accessible to users with visual impairments, as part of a
longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
GAO-02-290R:
United States General Accounting Office:
Washington, DC 20548:
December 14, 2001:
The Honorable William J. Coyne:
Ranking Minority Member:
Subcommittee on Oversight:
Committee on Ways and Means:
House of Representatives:
Subject: Earned Income Tax Credit Eligibility and Participation:
Dear Mr. Coyne:
The Earned Income Tax Credit (EIC), which is expected to provide over
$30 billion in refundable credits in fiscal year 2002, is a major
federal effort to assist the working poor. The EIC is intended to
offset the burden of the Social Security payroll tax on low-income
workers and to encourage low-income individuals to work. The amounts of
credit that taxpayers receive depend on the taxpayers‘ incomes and the
number of qualifying children they have. [Footnote 1] Taxpayers must
file a tax return in order to claim the credit. Prior evidence suggests
that many eligible households have not received the credit. [Footnote
2] You asked us to provide estimates of (1) the number of eligible
households and the number of those who did and did not participate in
the EIC program and (2) the amounts of credit foregone by
nonparticipating households. You also asked that we provide these
estimates disaggregated by the number of qualifying children in the
households claiming the credit.
We used data from the Census Bureau‘s Current Population Survey (CPS)
for 1999 to estimate the number of households eligible for the EIC. We
obtained estimates from the Internal Revenue Service (IRS) for the
number of eligible taxpayers who claimed the EIC for tax year 1999.
Because the CPS and IRS data are based on samples, our estimates are
subject to sampling error. [Footnote 3] In addition, the CPS database,
while useful for estimating EIC eligibility, do not contain all of the
data needed to definitively determine EIC eligibility. Our methodology
and its limitations are described in further detail in the enclosure.
We sent a draft of this correspondence to IRS for review and comment.
Their comments and our response are summarized at the end of this
letter. We did our work between February and December 2001 in accordance
with generally accepted government auditing standards.
Results:
Table 1 shows the number of eligible households, [Footnote 4] the
number of those households that did and did not participate in the EIC
program, and the participation rate. Of the total of 17.2 million
households that were eligible for the credit, about 12.9 million
claimed the credit, representing a participation rate of about 75
percent. The participation rate varied considerably by number of
qualifying children in the household. The participation rates for
households with one and two qualifying children were about 96 percent
and 93 percent, respectively. In contrast, the participation rate for
households with three or more qualifying children was about 62.5
percent, and the rate for households with no qualifying children was
only about 44.7 percent.
The data available did not enable us to determine the reasons for these
differences. The differences in participation rates may reflect actual
behavioral differences across the household types, but they may also
reflect limitations in the data. Both explanations are discussed in the
enclosure. Given the possibility that limitations in our data may
explain some of the variation in participation rates by number of
qualifying children and the larger confidence intervals for these
subgroups due to their smaller sample size, we believe the estimates
for the subgroups in tables 1 and 2 are less certain than the estimates
for all households.
Table 1: Number of Eligible Households, by Participation Status and
Number of Qualifying Children, 1999[A], (Dollars in millions):
Total:
Households, Total eligible: 17.2 +/- .4;
Households, Eligible participants: 12.9 +/- .4;
Households, Eligible nonparticipants: 4.3 +/- .5
Participation rate: 75.0 +/ 2.7%.
0 qualifying children:
Households, Total eligible: 4.7 +/- .2;
Households, Eligible participants: 2.1 +/- .2;
Households, Eligible nonparticipants:2.6 +/- .3;
Participation rate: 44.7 +/- 3.9%.
1 qualifying child:
Households, Total eligible: 5.0 +/- .2;
Households, Eligible participants: 4.8 +/- .3;
Households, Eligible nonparticipants: 0.2 +/- .4;
Participation rate: 96.0 +/- 7.7%.
2 qualifying children:
Households, Total eligible: 4.3 +/- .2;
Households, Eligible participants: 4.0 +/- .3;
Households, Eligible nonparticipants: 0.3 +/- .4;
Participation rate: 93.0 +/- 8.3%.
3 or more qualifying children:
Households, Total eligible: 3.2 +/- .2;
Households, Eligible participants: 2.0 +/- .2;
Households, Eligible nonparticipants: 1.2 +/- .3;
Participation rate: 62.5 +/- 8.3%.
[A] The actual number of households in any of the subgroups presented
in the table cannot be less than zero and the actual participation
rates cannot exceed 100 percent.
Sources: GAO‘s analysis of data from the CPS and IRS.
[End of table]
In total, about 4.3 million eligible households did not claim the
credit. Figure 1 shows how these households were distributed by number
of qualifying children. More than half (about 60 percent) of the
eligible nonparticipating households had no qualifying children. Most
of the remaining eligible nonparticipating households (about 28 percent
of the total) had three or more qualifying children. Households with
one or two qualifying children accounted for only about 12 percent of
the nonparticipants, even though they represented about 54 percent of
all eligible households.
Figure 1: Eligible Nonparticipating Households, by Number of Qualifying
Children, 1999:
[See PDF for image]
This figure is a pic-chart, depicting the following data:
Eligible Nonparticipating Households, by Number of Qualifying Children,
1999:
No Child: 60%;
One Child: 5%;
Two Children: 7%;
Three or More Children: 28%.
Sources: GAO‘s analysis of data from the CPS and IRS.
[End of figure]
We estimate that in 1999 all qualifying households were eligible to
claim a total of $23.5 billion of EIC. IRS estimates that households
that actually participated in the program were eligible to claim $20.9
billion of EIC. This implies that nonparticipating households did not
receive about $2.7 billion of credits for which they were eligible. The
amount foregone by nonparticipating households represented about 11.1
percent of the total credit that households were eligible to claim.
Table 2 shows the amounts of EIC that nonparticipating households
within each of the qualifying child categories were eligible to claim.
The table compares these amounts to the total amounts of EIC that all
households within those categories were eligible to claim.
Table 2: Amounts of EIC That Participating and Nonparticipating
Households Were Eligible to Claim, by Number of Qualifying Children,
1999[A] (Dollars in billions):
Total:
Total amount that households were eligible to claim: $23.5 +/- .5;
Amount that households who participated were eligible to claim: $20.9
+/- .7;
Amount that households who did not participate were eligible to claim:
$2.7 +/- .7;
Amount that nonparticipants were eligible to claim as a percent of the
total amount that households were eligible to claim: 11.1 +/- 3.5%.
0 qualifying children:
Total amount that households were eligible to claim: $0.8 +/- .0;
Amount that households who participated were eligible to claim: $.4 +/-
.0;
Amount that households who did not participate were eligible to claim:
$0.4 +/- .0;
Amount that nonparticipants were eligible to claim as a percent of the
total amount that households were eligible to claim: $50.0 +/- 4.1%.
1 qualifying child:
Total amount that households were eligible to claim: $7.2 +/- .2;
Amount that households who participated were eligible to claim: $7.1
+/- .3;
Amount that households who did not participate were eligible to claim:
$0.1 +/- .3;
Amount that nonparticipants were eligible to claim as a percent of the
total amount that households were eligible to claim: $1.4 +/- 4.8%.
2 qualifying children:
Total amount that households were eligible to claim: $9.0 +/- .2;
Amount that households who participated were eligible to claim: $9.0
+/- .4;
Amount that households who did not participate were eligible to claim:
$0.0 +/- .5;
Amount that nonparticipants were eligible to claim as a percent of the
total amount that households were eligible to claim: 0.0 +/- 5.4%.
3 or more qualifying children:
Total amount that households were eligible to claim: $6.5 +/- .2;
Amount that households who participated were eligible to claim: $4.3
+/- .3;
Amount that households who did not participate were eligible to claim:
$2.2 +/- .4;
Amount that nonparticipants were eligible to claim as a percent of the
total amount that households were eligible to claim: $33.8 +/- 5.0%.
[A] The actual number of households in any of the subgroups presented
in the table cannot be less than zero. The same is true for the
percentages in the last column. Numbers may not sum to totals due to
rounding.
Sources: GAO‘s analysis of data from the CPS and IRS.
[End of table]
Figure 2 shows that households with three or more qualifying children
accounted for the preponderance (about 81 percent) of the EIC that
nonparticipating households were eligible to claim. Nonparticipating
households with no eligible children accounted for most of the
remainder (about 15 percent).
Figure 2: Distribution of EIC That Nonparticipating Households Were
Eligible to Claim, by Number of Qualifying Children in Household, 1999:
[See PDF for image]
This figure is a pie-chart, depicting the following data:
Distribution of EIC That Nonparticipating Households Were Eligible to
Claim, by Number of Qualifying Children in Household, 1999:
No Child: 15%;
One Child: 4%;
Two Children: 0%;
Three or More Children: 81%.
Sources: GAO‘s analysis of data from the CPS and IRS.
[End of figure]
Agency Comments and Our Evaluation:
On December 12, 2001, we spoke with a representative of the Director of
IRS‘ Office of Research who provided oral comments on our draft letter.
The Director suggested that we add a few more specific caveats to the
ones that we already listed in our methodology discussion regarding the
use of CPS data to determine the number of households eligible for the
EITC. He also suggested that we describe in more detail how we applied
the eligibility rules to CPS data and that we clarify certain statements
made in the draft. We modified the correspondence as appropriate.
As arranged with your staff, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after the date of this letter. At that time, we will send copies to the
Secretary of the Treasury, the Commissioner of Internal Revenue, and
the Chairmen and Ranking Minority Members of the Senate Finance
Committee and the House Ways and Means Committee, as well as the
Chairman of the latter Committee‘s Oversight Subcommittee. The letter
will also be available on GAO‘s home page at [hyperlink,
http://www.gao.gov].
If you have any questions, you may contact Jim Wozny or me at (202) 512-
9110. Kevin Daly, Wendy Ahmed, and MacDonald Phillips made key
contributions to this letter.
Sincerely yours,
Signed by:
James R. White:
Director, Tax Issues:
[End of correspondence]
Enclosure:
Methodology for Estimating Participation Rates for the Earned Income
Tax Credit:
We estimated the number of eligible households (individuals and married
couples) using the eligibility rules under section 32 of the Internal
Revenue Code and data from the Census Bureau‘s Current Population
Survey (CPS). The CPS is a sample of households with information about
their income, age, marital status, number of children, and other
characteristics. We analyzed the data reported in the 2000 March
Supplement of CPS which contains this information for the preceding
year. We identified households in the CPS that met the eligibility
rules under the Internal Revenue Code, and, using the CPS sample
weights, estimated the number of eligible households in the U.S.
population. We also estimated the amount of credit that these
households were eligible to claim.
We obtained estimates of the number of eligible claimants and the
amount of credit that they were eligible to claim from the Internal
Revenue Service (IRS). These estimates were based on a random sample of
1999 tax returns with the EIC claimed on the return. IRS audited these
returns to determine the accuracy of the EIC claim and other tax return
items, as part of their forthcoming tax-year 1999 EIC compliance study.
The estimates of eligible claimants are based on the number of returns
where the examiners did not reduce the EIC claim to zero. The estimates
of the amounts of credit are based on the amounts corrected by the
examiners for overclaims or underclaims on the returns. IRS conducted
consistency and other tests on the data, and the audits were subject to
quality review.
Limitations of Our Analysis:
The CPS does not contain all of the information needed to determine
eligibility. Data such as capital gains and contributions to individual
retirement accounts are not requested in the CPS survey. However, it is
likely that the missing data have little effect on our participation
estimates. These types of income and deductions are not common for the
lower-income people who may be eligible for the credit. To verify this,
we examined the tax returns of households in the 1996 Statistics of
Income Public Use File, the most recent data available. We found that
no more than 3 percent of households that met the other income limits
for credit eligibility had these types of income and deductions.
The CPS also does not have complete information for determining whether
a child is resident long enough in a household to be a ’qualifying
child“ for the purpose of determining the amount of credit that the
households are eligible to claim. Children must reside in the household
for more than half the year (a full year for foster children) in order
to be qualifying children. The CPS survey asks only whether the child
is resident in the household during the week in which the survey is
conducted. This limitation in the CPS data means that some children
reported in the survey may not meet the residency requirement while
others who meet the requirement may not be reported. To test the likely
impact of this limitation, we checked the low-income households that
were surveyed in both the 1999 and 2000 March Supplements of the CPS.
We found that 97 percent of the children who were living in these
households in 2000 were also living in the same household in 1999.
The CPS contains self-reported data from the survey respondents. Some
analysts have raised concerns that this information may not be reported
accurately. A National Research Council study that reviewed studies of
the accuracy of the survey data concluded that wage and salary
information appears to be fairly accurately reported in the CPS. The
study also concluded that other types of income, such as interest and
dividends, may be underreported but that this underreporting is probably
not critical for studies of low-income people for whom these are not
important sources of income. The study did not review the accuracy of
other household characteristics relevant to credit eligibility that are
reported in the CPS. Another limitation of the CPS data is the possible
underreporting of certain populations such as the homeless.
As we noted in the letter, differences in the participation rates
across household types may reflect actual taxpayer behavior. The lower
participation rate for households with three or more children may
indicate that taxpayers in those households may be more likely to be
married and filing jointly which is a filing status with a higher
income threshold for the requirement to file a tax return. Therefore,
fewer of these households may be required to file tax returns than
households that have similar incomes but fewer children. A household
that is required to file a tax return may be more likely to claim the
EIC than a household that otherwise would not be required to file a
return. The relatively low participation rate of households with no
children may be due to the fact that these households receive
significantly smaller benefits from the credit than do households with
qualifying children. Or it may result from the fact that there is a
relatively narrow income range in which taxpayers with no children are
both above the filing threshold and below the income cut-off for EIC
eligibility. [Footnote 5] Because we did not have CPS and IRS data for
the same households, we could not examine characteristics of the
eligible households that would enable us to test these and other
factors that may affect participation.
However, it is also possible that the variation in participation rates
could result from limitations of the data we used. If, for example, low-
income households with no qualifying children inaccurately claimed one
or two qualifying children and IRS did not detect all such cases of
this misreporting, then the number of no-children households in IRS‘
study would be undercounted, while the number of one- and two-children
households would be overcounted. An undercount of no-children
households would mean that our participation rate for that group is
understated. Conversely, an overcount of the other two groups would
mean that our participation rates for them are overstated.
The variation in participation rates across groups also could be
inaccurate if IRS auditors involved in the EIC compliance study spent
less effort (or had more difficulty) determining whether households had
more than two qualifying children than determining whether taxpayers
had one or two qualifying children. The number of children up to two
has a significant effect on the amount of credit that all eligible
households are allowed to claim. The presence of a third eligible child
is important only if one of the first two children that a household
identifies is determined to be ineligible. Moreover, taxpayers are not
asked to identify more than two qualified children on schedule EIC when
claiming the credit. If IRS counted some households that have three or
more qualifying children as two-child households, then our estimate of
the participation rate for households with three or more children would
be understated, and our estimated participation rate for two-child
households would be overstated. The data collection instrument for IRS‘
study did call for auditors to collect information on more than two
qualified children.
At the time that we were issuing this letter the Treasury Inspector
General for Tax Administration (TIGTA) was about to issue a review of
IRS‘ 1997 and 1999 EIC compliance studies. We read a draft of the TIGTA
review and discussed it with officials from TIGTA and IRS‘ Office of
Research, which had a leading role in the compliance studies. The TIGTA
review does not directly address IRS‘ counts of the number of eligible
EIC participants. The review raises questions about potential
inaccuracies in IRS‘ estimates of allowable credits for 1999, which we
report in table 2. However, the review does not provide a basis for us
to determine the extent, if any, of actual inaccuracies. IRS strongly
disagrees with TIGTA‘s assessment and believes that their compliance
estimates are reasonably accurate. We did not verify the accuracy of
IRS‘ study.
[End of enclosure]
Footnotes:
[1] A qualifying child must meet a relationship test (with respect to
the taxpayer claiming the credit), an age test, and a residence test.
In tax year 2001 the maximum amount of credit that a taxpayer with no
qualifying children can earn is $364. The maximum for a taxpayer with 1
qualifying child is $2,428, and the maximum for a taxpayer with 2 or
more qualifying children is $4,008.
[2] See, for example, John Karl Scholz, ’The Earned Income Tax Credit:
Participation, Compliance, and Antipoverty Effectiveness,“ National Tax
Journal, Vol. 47, no. 1, (March 1994), pp. 63-87.
[3] The sampling errors measure the extent to which samples of
different sizes are likely to differ from the populations that they
represent. Each of the sample estimates in tables 1 and 2 is surrounded
by a 95-percent confidence interval indicating that we are 95-percent
confident that the interval contains the actual population value. In
the tables, the upper and lower limits of the intervals are indicated
by the value added to and subtracted from the estimate.
[4] In this letter, households are individuals or married couples.
Eligibility is determined with respect to these persons according to
the income, residency, family relationship and other rules of the EIC.
[5] In fact, none of the taxpayers who file joint returns and are
eligible for the no-child EIC have incomes above the filing threshold.
[End of section]
GAO‘s Mission:
The General Accounting Office, the investigative arm of Congress,
exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO‘s commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO‘s Web site [hyperlink,
http://www.gao.gov] contains abstracts and fulltext files of current
reports and testimony and an expanding archive of older products. The
Web site features a search engine to help you locate documents using
key words and phrases. You can print these documents in their entirety,
including charts and other graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as ’Today‘s Reports,“ on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
[hyperlink, http://www.gao.gov] and select ’Subscribe to daily E-mail
alert for newly released products“ under the GAO Reports heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. General Accounting Office:
441 G Street NW, Room LM:
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director, NelliganJ@gao.gov:
(202) 512-4800:
U.S. General Accounting Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
