Advance Earned Income Tax Credit
Low Use and Small Dollars Paid Impede IRS's Efforts to Reduce High Noncompliance Gao ID: GAO-07-1110 August 10, 2007The Advance Earned Income Tax Credit (AEITC) allows individuals to receive a portion of the Earned Income Tax Credit (EITC) in their paychecks, instead of receiving all of it when filing their year-end tax return. Limited research has been conducted on the AEITC since GAO last examined it in the early 1990s. GAO was asked to determine (1) how many individuals received the AEITC compared with the EITC in tax years 2002 through 2004, what actions, if any, have been taken to increase use, and the potential for increases in use in the future; (2) the extent of noncompliance, if any, associated with the AEITC; and (3) how well the Internal Revenue Service's (IRS) procedures address the areas of noncompliance. To address these questions, GAO analyzed Forms W-2 and tax return data and interviewed IRS and Social Security Administration (SSA) officials.
AEITC use was low--only about 3 percent of EITC recipients potentially eligible for the advance received it in tax years 2002 through 2004, or about 514,000 of the 17 million potentially eligible individuals each year. About half of all recipients received $100 or less in AEITC and 75 percent received $500 or less for the year, with a total benefit paid of about $146 million each year. Several efforts have been aimed at increasing use over the last approximately 15 years, such as sending notices to individuals informing them that they were potentially eligible for the AEITC and making changes to IRS forms. Despite these efforts, use did not substantially increase and, for several reasons, it may be difficult to increase it in the future. For example, IRS officials, other experts, and prior GAO work suggests that individuals often do not elect the AEITC because they prefer receiving the entire EITC as a lump sum after filing their tax return. As many as 80 percent of AEITC recipients did not comply with at least one of the program requirements GAO reviewed, and some were noncompliant with more than one during the 3 years we reviewed. In tax years 2002 through 2004, about 20 percent, or more than 100,000 AEITC recipients, may not have been eligible for the AEITC because they had an invalid Social Security number (SSN). These individuals received a total of $37 million to $39 million each year. Almost 40 percent (about 200,000 recipients) did not file the required tax return; these individuals received $42 million to $50 million each year. Of the about 60 percent (more than 300,000) AEITC recipients who did file a return, about two-thirds misreported the amount received. IRS's procedures have limited effectiveness in addressing AEITC noncompliance. For example, Automated Underreporter (AUR) staff worked on only a fraction of AEITC cases because of resource constraints and criteria limiting case selection. IRS could address AEITC noncompliance by sending "soft notices" to recipients, requiring employers to verify employee SSNs before providing the AEITC, or creating a Forms W-5, "EITC Advance Payment Certificate," database. Each of these options have advantages, however, they also have potential disadvantages that could limit their effectiveness.
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Report to the Joint Committee on Taxation:
United States Government Accountability Office:
GAO:
August 2007:
Advance Earned Income Tax Credit:
Low Use and Small Dollars Paid Impede IRS's Efforts to Reduce High
Noncompliance:
Advance Earned Income Tax Credit:
GAO-07-1110:
GAO Highlights:
Highlights of GAO-07-1110, a report to the Chairman and Vice Chairman
of the Joint Committee on Taxation.
Why GAO Did This Study:
The Advance Earned Income Tax Credit (AEITC) allows individuals to
receive a portion of the Earned Income Tax Credit (EITC) in their
paychecks, instead of receiving all of it when filing their year-end
tax return. Limited research has been conducted on the AEITC since GAO
last examined it in the early 1990s.
GAO was asked to determine:
(1) how many individuals received the AEITC compared with the EITC in
tax years 2002 through 2004, what actions, if any, have been taken to
increase use, and the potential for increases in use in the future; (2)
the extent of noncompliance, if any, associated with the AEITC; and (3)
how well the Internal Revenue Service‘s (IRS) procedures address the
areas of noncompliance. To address these questions, GAO analyzed Forms
W-2 and tax return data and interviewed IRS and Social Security
Administration (SSA) officials
What GAO Found:
AEITC use was low”only about 3 percent of EITC recipients potentially
eligible for the advance received it in tax years 2002 through 2004, or
about 514,000 of the 17 million potentially eligible individuals each
year. About half of all recipients received $100 or less in AEITC and
75 percent received $500 or less for the year, with a total benefit
paid of about $146 million each year. Several efforts have been aimed
at increasing use over the last approximately15 years, such as sending
notices to individuals informing them that they were potentially
eligible for the AEITC and making changes to IRS forms. Despite these
efforts, use did not substantially increase and, for several reasons,
it may be difficult to increase it in the future. For example, IRS
officials, other experts, and prior GAO work suggests that individuals
often do not elect the AEITC because they prefer receiving the entire
EITC as a lump sum after filing their tax return.
As many as 80 percent of AEITC recipients did not comply with at least
one of the program requirements GAO reviewed, and some were
noncompliant with more than one during the 3 years we reviewed. In tax
years 2002 through 2004, about 20 percent, or more than 100,000 AEITC
recipients, may not have been eligible for the AEITC because they had
an invalid Social Security number (SSN). These individuals received a
total of $37 million to $39 million each year. Almost 40 percent (about
200,000 recipients) did not file the required tax return; these
individuals received $42 million to $50 million each year. Of the about
60 percent (more than 300,000) AEITC recipients who did file a return,
about two-thirds misreported the amount received.
Figure: AEITC Use, Dollars and Compliance In Tax Years 2002-2004.
[See PDF for image]
Source: GAO analysis of IRS data.
[End of figure]
IRS‘s procedures have limited effectiveness in addressing AEITC
noncompliance. For example, Automated Underreporter (AUR) staff worked
on only a fraction of AEITC cases because of resource constraints and
criteria limiting case selection. IRS could address AEITC noncompliance
by sending ’soft notices“ to recipients, requiring employers to verify
employee SSNs before providing the AEITC, or creating a Forms W-5,
’EITC Advance Payment Certificate,“ database. Each of these options
have advantages, however, they also have potential disadvantages that
could limit their effectiveness.
What GAO Recommends:
GAO recommends that the Acting Commissioner of Internal Revenue analyze
options to reduce AEITC noncompliance such as implementing a ’soft
notice“ test. If these options are deemed ineffective, and no other
options are viable, the Treasury Secretary should provide an opinion to
the Congress as to whether the AEITC should be retained. IRS agreed
with our recommendation and outlined the actions IRS plans to take.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-1110].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Michael Brostek at (202)
512-9110 or brostekm@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
AEITC Use Low and May Be Difficult to Increase:
High Noncompliance Exists with AEITC Requirements:
IRS's AEITC Compliance Procedures Have Limited Effectiveness and
Options to Better Address Noncompliance Have Advantages and
Disadvantages:
Conclusions:
Recommendations for Executive Action:
Agency Comments:
Appendix II: RS's Implementation of Recommendations from GAO's 1992
Report on the Advance Earned Income Tax Credit:
Appendix II: Scope and Methodology:
Appendix III: Demographic Characteristics of Advance Earned Income Tax
Credit Recipients and Their Employers:
Appendix IV: Administrative and Legislative Changes to the Advance
Earned Income Tax Credit Since 1990:
Appendix V: Additional Analyses of Advance Earned Income Tax Credit
Noncompliance:
Appendix VI: Comments from the Internal Revenue Service:
Appendix VII: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: EITC Requirements for 2006 That All AEITC Recipients Must Also
Expect to Meet:
Table 2: Percentage of AEITC Recipients Receiving an Amount of AEITC,
Tax Years 2002 through 2004:
Table 3: Frequency of Individuals Electing the EITC and AEITC, Tax
Years 2002 through 2004:
Table 4: AEITC Recipients and Recipients with Invalid SSN on Form W-2,
Individuals and Dollars, Tax Years 2002 through 2004:
Table 5: AEITC Recipients and Recipients Who Did Not File a Tax Return,
Individuals and Dollars, Tax Years 2002 through 2004:
Table 6: AEITC Recipients, Recipients Who Did Not File a Federal Tax
Return, and Recipients Who Did Not File a Tax Return and Had an Invalid
SSN on the Form W-2, Individuals and Dollars, Tax Years 2002 through
2004:
Table 7: AEITC Matches and Mismatches between Form(s) W-2 and Filed Tax
Returns, Tax Years 2002 through 2004:
Table 8: IRS Implementation of Recommendations from GAO's 1992 Report
on the Advance Earned Income Tax Credit:
Table 9: Number of Forms W-2, Number of Individuals, and the Dollars
for Each Subpopulation, Tax Years 2002 through 2004:
Table 10: Number of Forms W-2 Received by Subpopulation, Tax Years 2002
through 2004:
Table 11: AGI for AEITC and EITC Recipients, Number, Average, and Sum,
for Tax Year 2002:
Table 12: AGI for AEITC and EITC Recipients, Number, Average, and Sum,
for Tax Year 2003:
Table 13: AGI for AEITC and EITC Recipients, Number, Average, and Sum,
for Tax Year 2004:
Table 14: Wages Reported for AEITC and EITC Recipients, Number, Wage
Amount, and Average Dollars Received for Tax Years 2002 through 2004:
Table 15: Filing Status of AEITC and EITC Recipients, Number and
Percentage, Tax Years 2002 through 2004:
Table 16: Age of AEITC and EITC Recipients, Tax Years 2002 through
2004:
Table 17: Gender of AEITC and EITC Recipients, Number and Percentage,
Tax Years 2002 through 2004:
Table 18: Number of Qualifying Children for AEITC and EITC Recipients,
Number and Percentage, Tax Years 2002 through 2004:
Table 19: Filing Method of AEITC and EITC Recipients, Number and
Percentage, Tax Years 2002 through 2004:
Table 20: Employer Size, Number of Employers, Number of Forms W-2
Employers Issued to AEITC Recipients and Total Dollars Reported on
Forms W-2, Tax Years 2002 through 2004:
Table 21: Administrative Changes to the AEITC since 1990:
Table 22: Number of Individuals and AEITC Dollars Received by AEITC
Recipients and Individuals Who Elected the AEITC Consecutively Using an
Invalid SSN and an Invalid SSN and Not Filing, Tax Years 2002 through
2004:
Table 23: Number of AEITC Consecutive Recipients with Matches and
Mismatches between Forms W-2 and Filed Tax Returns, Tax Years 2002
through 2004:
Table 24: Amount of AEITC Received Per Invalid Form W-2, Number and
Percentage, Tax Years 2002 through 2004:
Table 25: Number of Individuals Receiving a Form(s) W-2, Total Number
of Form(s) W-2 Reporting AEITC, Total Associated and Average Dollars
Received Relative to Number of Form(s) W-2 Reporting AEITC for AEITC
Recipients with an Invalid SSN on the Form(s) W-2, Tax Year 2002:
Table 26: Number of Individuals Receiving a Form(s) W-2, Total Number
of Form(s) W-2 Reporting AEITC, Total Associated and Average Dollars
Received, Relative to Number of Form(s) W-2 Reporting AEITC for AEITC
Recipients with an Invalid SSN on the Form(s) W-2, Tax Year 2003:
Table 27: Number of Individuals Receiving a Form(s) W-2, Total Number
of Form(s) W-2 Reporting AEITC, Total Associated and Average Dollars
Received, Relative to Number of Form(s) W-2 Reporting AEITC for AEITC
Recipients with an Invalid SSN on the Form(s) W-2, Tax Year 2004:
Figures:
Figure 1: AEITC Process for Employees and Employers:
Figure 2: Number of EITC Recipients, EITC Recipients Potentially
Eligible for the AEITC, AEITC Recipients, and Total Dollars They
Received, Tax Years 2002 through 2004:
Figure 3: Percentage of AEITC Recipients Compliant and Noncompliant
with at Least One AEITC Requirement, Tax Years 2002 through 2004:
Figure 4: Submission Processing Procedures for Paper and Electronic Tax
Returns Reporting AEITC:
Figure 5: AUR Program Procedures to Resolve Discrepancies between AEITC
Amounts on Forms W-2 and Tax Returns:
Figure 6: Average Amount of AEITC Received by Consecutive and AEITC
Recipients, Tax Years 2002 through 2004:
Figure 7: Geographic Location of AEITC Recipients in the Valid
Subpopulation, Tax Years 2002 through 2004:
Figure 8: Geographic Location of AEITC Recipients in the Invalid Name
Subpopulation, Tax Years 2002 through 2004:
Figure 9: Geographic Location of AEITC Recipients in the Invalid Number
Subpopulation, Tax Years 2002 through 2004:
Figure 10: Number of Forms W-2 Received with Amounts above the Yearly
AEITC Maximum, Tax Years 2002 through 2004:
Figure 11: AEITC Dollars Reported on Form W-2s above the Yearly AEITC
Maximum, Tax Years 2002-2004:
Abbreviations:
AEITC: Advance Earned Income Tax Credit AGI Adjusted Gross Income:
AUR: Automated Underreporter:
DM-1: Data Master File:
EITC: Earned Income Tax Credit:
ERS: Error Resolution System:
IRS: Internal Revenue Service:
OBRA: '93Omnibus Budget Reconciliation Act of 1993:
SSA: Social Security Administration:
SSN: Social Security number:
SSNVS: Social Security Number Verification System:
TIN: Taxpayer Identification Number:
United States Government Accountability Office:
Washington, DC 20548:
August 10, 2007:
The Honorable Charles B. Rangel:
Chairman:
The Honorable Max Baucus:
Vice Chairman:
Joint Committee on Taxation:
Beginning in 1979, eligible taxpayers could elect to receive the Earned
Income Tax Credit (EITC), a refundable credit available to low income
workers, as an advance payment--an option currently found in only one
other federal tax credit.[Footnote 1] Individuals who elect this option
receive a portion of the EITC from their employer throughout the year
with their regular pay, instead of receiving only a lump sum refund or
tax credit when filing their year end federal income tax
returns.[Footnote 2] The Advance Earned Income Tax Credit (AEITC)
provides employees an immediate benefit from the credit, which may help
them meet their daily expenses by increasing their take-home pay.
Little has been known about the individuals who receive the AEITC, the
employers who pay it, and compliance with its requirements. Neither the
Internal Revenue Service (IRS) nor the employer is required to confirm
the eligibility of those who elect the AEITC before they receive it.
Thus, the extent of compliance problems related to the AEITC may depend
on factors such as how knowledgeable individuals applying for the AEITC
are about eligibility requirements and how well the IRS addresses
various kinds of noncompliance that the agency may identify only after
AEITC payments have been made.
Limited research has been conducted on the AEITC since we last examined
it in the early 1990s. In 1992, we reported that the percentage of
individuals receiving the EITC in 1989 who also received the AEITC was
low and that many eligible workers were not aware of it.[Footnote 3] We
estimated that almost half of those who received the AEITC in 1989 and
filed a tax return did not report receiving it and that 45 percent of
people whom IRS records show may have received the AEITC never filed a
tax return, meaning that IRS would have no way of determining their
eligibility. We made six recommendations to the Commissioner of
Internal Revenue designed to increase awareness of the AEITC among
eligible individuals and improve compliance among those who receive it.
Appendix I discusses IRS's implementation of the recommendations from
our 1992 AEITC report.
To provide current information on the AEITC, the Committee asked us to
answer the following questions: (1) How many individuals received the
AEITC compared with the EITC and how much did they receive in tax years
2002 through 2004? What actions, if any, have been taken to increase
use since 1992 and what is the potential for significant increases in
the future? (2) What is the extent of noncompliance, if any, associated
with the AEITC? (3) How well do IRS's procedures address any areas of
noncompliance? In addition, the Committee asked us to provide basic
demographic characteristics of AEITC recipients and their employers and
to identify legislative and administrative changes made since our 1992
report, some of which were discussed by IRS in its response to that
report's recommendations. The information is presented in appendixes I
and III through V.
To answer these questions, we obtained a data file from IRS containing
all Form W-2 "Wage and Tax Statements" that reported AEITC in tax years
1999 through 2004. We performed data reliability tests on this file to
determine whether the data were sufficiently reliable for our intended
purposes and determined that they were. This process involved, among
other things, checking the validity of the Social Security number (SSN)
on the Form W-2, determining whether the AEITC amount was above the
yearly maximum limit, and creating subpopulations in which to conduct
our analyses. Using the Form W-2 data and data from other sources, such
as IRS's Individual Return Transaction File that contains tax return
information, we compiled relevant demographic characteristics data and
compared AEITC data with EITC data when possible. We also reviewed
administrative and legislative changes as well as relevant reports and
considered these along with our data analyses. To examine actions
intended to increase use and determine the potential for increases in
future AEITC use, we reviewed various reports and literature and
interviewed IRS officials and individuals we determined to be experts.
We also used the Form W-2 and other data to identify areas of
noncompliance by comparing the data to the AEITC requirements. In
addition, we examined IRS's procedures for processing individual income
tax returns with AEITC and interviewed IRS officials to determine how
IRS addressed noncompliance. Finally, we explored possible remedies for
the noncompliance we identified through literature searches and
interviews with various Department of the Treasury, IRS, and Social
Security Administration (SSA) officials. It was not within the scope of
our work to fully evaluate the potential cost and benefits of these
options for reducing noncompliance. We conducted our work in accordance
with generally accepted government auditing standards from December
2005 through July 2007. Appendix II provides more detail on the scope
and methodology we used to conduct our work.
Results in Brief:
AEITC use and the amount paid out by employers was low in tax years
2002 through 2004--only about 3 percent of the EITC recipients
potentially eligible for the advance received it and about half of the
recipients received $100 or less per year. In total, approximately
514,000 individuals received about $146 million of AEITC in each of the
3 years. Several federal efforts, including two legislative and several
administrative changes, have been aimed at increasing AEITC use in the
last approximately 15 years. For example, the Omnibus Budget
Reconciliation Act of 1993 (OBRA '93), directed IRS to send notices to
taxpayers during 2 tax years informing them that they were potentially
eligible for the advance. Similarly, IRS made changes to its forms and
increased speaker seminars to inform the public about the AEITC.
Despite these efforts, use has not substantially increased and, for
several reasons, it may be difficult to significantly increase it in
the future. For example, IRS officials, other experts, and our prior
work suggest that individuals often do not elect the AEITC because they
prefer receiving the entire EITC as a lump sum when filing their tax
return. An IRS-funded study revealed that low use is also attributed to
concerns that prospective recipients would receive more in advance than
they would ultimately be entitled to, thus owing the difference when
filing their tax return.
As many as 80 percent of recipients did not comply with at least one
AEITC requirement, while some individuals were noncompliant with more
than one requirement. Approximately 20 percent (more than 100,000) of
all AEITC recipients each year may not have been eligible for the
advance because they did not have a valid SSN, that is, a SSN that has
been assigned by the SSA or a SSN/name combination that could be
matched to SSA records. These individuals received $37 million to $39
million in each tax year from 2002 through 2004. Almost 40 percent
(about 200,000 recipients) did not file the required tax return; they
received between $42 million and $50 million of AEITC for each of these
years. When individuals do not file a return, IRS cannot readily
identify whether they were eligible for AEITC and whether they owed IRS
any of the amounts they received. Conversely, by not filing a tax
return, some individuals did not receive additional EITC monies that
they could only receive had they filed. Of the 60 percent of AEITC
recipients who did file a return, about 300,000 individuals in each of
the 3 years, two-thirds misreported the amount they received--the
majority did not report receiving any AEITC. As a result, these AEITC
recipients who claimed the EITC when filing their return collectively
received an excess amount of EITC of about $64 million for the 3 years.
Although IRS has processing and enforcement procedures in place to
monitor the AEITC, the agency has limited effectiveness in addressing
AEITC noncompliance, in large part because it targets most of its
enforcement efforts at more widely used programs that involve larger
amounts of money. For example, Automated Underreporter (AUR) staff
worked only a fraction of the AEITC underreporting cases because
resource constraints and criteria limited case selection. Moreover, AUR
and other IRS enforcement programs use revenue collection potential as
a primary criterion in identifying cases on which to work, and AEITC
cases generally have low revenue potential. Although all AEITC nonfiler
cases are eligible to be worked on by various enforcement programs, IRS
officials said they work on only a limited number for similar reasons.
One means to improve AEITC compliance might be to send "soft notices."
Recent IRS tests have shown that the agency has successfully reduced
subsequent noncompliance in situations that involve relatively small
amounts of money by sending soft notices that ask taxpayers to
voluntarily fix their misreporting by filing an amended return or not
repeating the action in the next year. However, high annual turnover in
the AEITC population could undermine this approach. Another means to
improve AEITC compliance would be to partially verify individuals'
eligibility before they receive the advance by verifying their SSNs.
IRS operates the Taxpayer Identification Number (TIN) Matching service
and SSA maintains the Social Security Number Verification System
(SSNVS), both of which are open to registered public users for the
purpose of determining the validity of an SSN. Both have unique
advantages and disadvantages that would come into play if employers
were required to use them to verify the SSNs of individuals seeking
AEITC. SSA emphasized that verifying eligibility for the AEITC is most
appropriate for IRS because it is a tax administration issue and
therefore outside the scope of SSA's mission. Separately, IRS could
verify individuals' SSNs and take other enforcement steps if it had a
database of AEITC applicants. However, IRS cannot create such as
database because it does not require employers to send copies of the
Form W-5, "Earned Income Credit Advance Payment Certificate," to them
when an employee requests receipt of the AEITC. Despite some benefits,
IRS officials questioned the effectiveness of such a requirement due to
(1) the low anticipated return on investment of AEITC compared with
other areas with noncompliance problems and (2) their experience with
the prior Questionable W-4 program, which required employers to submit
information to IRS on taxpayers claiming more than 10 withholding
allowances or exemptions, that showed employers did not adhere to
similar requirements imposed by the agency.
We recommend that the Acting Commissioner of Internal Revenue analyze
whether it could cost effectively and significantly reduce AEITC
noncompliance by sending soft notices to potentially noncompliant AEITC
recipients, requiring employers to verify the SSN of employees seeking
the AEITC, or requiring employers to submit Forms W-5 to IRS to create
an AEITC database. To better identify the costs and implementation
issues as well as the likelihood for these or other options to reduce
AEITC noncompliance, where practical, the Acting Commissioner of
Internal Revenue should test these options to make a more fully
informed judgment about whether any would be worthwhile. If the Acting
Commissioner of Internal Revenue determines that none of these options
would be cost effective and that no other remedies are viable, then the
Treasury Secretary should inform the Congress of this and provide
Treasury's opinion about whether the AEITC should be retained.
In providing written comments on a draft of this report (see app. VI),
the Acting Commissioner of Internal Revenue agreed with our
recommendation and outlined the actions IRS would take to address that
recommendation, including conducting further analyses and possible
testing of proposed options for reducing AEITC noncompliance. He also
stated that IRS will conduct its cost-benefit analyses in conjunction
with a congressional requirement to study the impact of expanding
eligibility of the AEITC to all EITC recipients.[Footnote 4] We also
provided a draft of this report to the Department of the Treasury and
SSA and incorporated technical comments where appropriate. SSA
emphasized that verifying eligibility for the AEITC is most appropriate
for IRS because it is a tax administration issue and outside the scope
of SSA's mission.
Background:
The EITC was enacted in 1975 and was originally intended to offset the
burden of Social Security taxes and provide a work incentive for low-
income taxpayers.[Footnote 5] It is a refundable federal income tax
credit, meaning that qualifying working taxpayers may receive a refund
greater than the amount of income tax they paid for the year. For tax
year 2006, the maximum amount of EITC a taxpayer could receive was
$4,536.
Beginning in 1979, individuals could elect to receive the EITC in
advance payments from their employer during the year along with their
regular pay.[Footnote 6] One purpose of the advance payment is to
provide employees with an immediate reward for their work effort rather
than forcing them to postpone receiving the credit until they file
their tax returns. To get the credit, at any time during the year, an
employee would complete the Form W-5 and provide it to his or her
employer.[Footnote 7]
Upon receiving a completed Form W-5, the employer calculates the amount
of the AEITC payment to include with the employee's pay by considering
(1) the employee's wages, (2) whether the employee is married or
single, and (3) if married, whether the employee's spouse has a Form W-
5 in effect with an employer. The AEITC payment to the employee is
considered to be equivalent to the employer making a payment to IRS for
employee income tax withholding and employee and employer Social
Security and Medicare tax. When employers file their quarterly tax
returns, they show the total payments made to employees on the AEITC
payment line on Form 941, "Employer's Quarterly Federal Tax Return."
This amount is then subtracted from the total amount of tax the
employer owes.
At the end of the calendar year, the employer indicates the total AEITC
payments the employee received on the employee's Form W-2. Employees
are then required to report this amount either on their Form 1040 or
Form 1040A tax return. Assuming the employee qualified for the EITC,
the AEITC amount received should be reported on the tax return as other
taxes, which, in effect, subtracts the amount received from the total
amount of any EITC. If the employee did not qualify for the EITC, he or
she is still required to file a tax return, regardless of income level,
and the AEITC amount paid is added to any taxes owed. Figure 1
illustrates this process and notes the major forms involved.
Figure 1: AEITC Process for Employees and Employers:
[See PDF for image]
Source: GAO analysis of IRS data; IRS and PhotoDisc (images).
[End of figure]
An individual must meet certain requirements to qualify for the AEITC.
Specifically, an individual must expect to (1) be able to claim the
EITC for the current year (EITC requirements for 2006 are shown in
table 1), (2) have at least one qualifying child, and (3) have earned
income and adjusted gross income below a certain amount for that year.
There are additional requirements that an individual may only have one
Form W-5 in effect at a time and that he or she informs their employer
if their spouse also has a Form W-5 in effect.[Footnote 8] AEITC
recipients can receive up to 60 percent of the EITC benefits for one
qualifying child. The maximum AEITC amount for 2006 was $1,648.
Table 1: EITC Requirements for 2006 That All AEITC Recipients Must Also
Expect to Meet:
First, an individual must meet all the rules in this column; Second, an
individual must meet all the rules in one of these columns, whichever
applies; Third, an individual must meet the rules in this column.
Rules for everyone:
1. Adjusted gross income (AGI) must be less than:
* $36,348 ($38,348 for married filing jointly) if more than one
qualifying child.
* $32,001 ($34,001 for married filing jointly) if one qualifying child,
or:
* $12,120 ($14,120 for married filing jointly) if no qualifying child;
First, an individual must meet all the rules in this column;
Rules for everyone:
2. Must have a valid Social Security number;
Rules for everyone:
3. Filing status cannot be "Married filing separately.";
Rules for everyone:
4. Must be a U.S. citizen or resident alien all year;
Rules for everyone:
5. Cannot file Form 2555 or Form 2555-EZ (relating to foreign earned
income);
Rules for everyone:
6. Investment income must be $2,800 or less;
Rules for everyone:
7. Must have earned income;
Second, an individual must meet all the rules in one of these columns,
whichever applies.
Rules if have a qualifying child:
8. Child must meet the relationship, age, and residency tests;
Rules if have a qualifying child:
9. Qualifying child cannot be used by more than one person to claim the
EIC;
Rules if have a qualifying child:
10. Cannot be a qualifying child of another person;
Rules if do not have a qualifying child:
11. Must be at least age 25 but under age 65;
Rules if do not have a qualifying child:
12. Cannot be the dependent of another person;
Rules if do not have a qualifying child:
13. Cannot be a qualifying child of another person;
Rules if do not have a qualifying child:
14. Must have lived in the United States more than half of the year;
Third, an individual must meet the rules in this column.
Figuring and claiming the EITC:
15. Earned income must be less than:
* $36,348 ($38,348 for married filing jointly) if more than one
qualifying child;
* $32,001 ($34,001 for married filing jointly) if one qualifying child,
or;
* $12,120 ($14,120 for married filing jointly) if no qualifying child.
Source: Excerpt of IRS Publication 596, Earned Income Credit.
[End of table]
A change in an individual's personal circumstances after submitting the
Form W-5 could affect their eligibility for both the EITC and the
AEITC. For example, an individual who received the AEITC, separated
from his or her spouse during the year, and used the married filing
separately filing status would not be eligible for the AEITC (or EITC).
In such cases, when the individual files their tax return and reports
the AEITC amount received, the amount would be added to any taxes due
or subtracted from any refund.
AEITC Use Low and May Be Difficult to Increase:
About 3 percent of the EITC recipients potentially eligible for the
advance, about 514,000 individuals on average, elected it in each year,
tax years 2002 through 2004, according to data employers reported on
the Form W-2. As shown in figure 2, about 21 million taxpayers received
the EITC each year and of these recipients, about 17 million were
eligible for the AEITC.[Footnote 9]
Figure 2: Number of EITC Recipients, EITC Recipients Potentially
Eligible for the AEITC, AEITC Recipients, and Total Dollars They
Received, Tax Years 2002 through 2004:
[See PDF for image]
Source: GAO analysis of IRS data.
Note: This figure includes the valid, invalid name, and invalid number
subpopulations. (see app. II).
[End of figure]
In total, AEITC recipients received an average of about $146 million in
AEITC for each tax year from 2002 through 2004. Yet, those who elected
it often received relatively few dollars from their employers. As table
2 indicates, about half of all individuals who got AEITC received $100
or less each year and about 75 percent received $500 or less. Even at
$100 per year, this equates to about $8 a month, or $4 every 2 weeks,
and even at $500 per year, this equates to about $42 a month or $19
every 2 weeks. The amounts most individuals received were significantly
less than the yearly maximum, and were consistent for the 3 years we
reviewed.
Table 2: Percentage of AEITC Recipients Receiving an Amount of AEITC,
Tax Years 2002 through 2004:
Amount of AEITC received: $1--$100;
Percentage of AEITC recipients: 2002: 50;
Percentage of AEITC recipients: 2003: 50;
Percentage of AEITC recipients: 2004: 48.
Amount of AEITC received: $101--$250;
Percentage of AEITC recipients: 2002: 17;
Percentage of AEITC recipients: 2003: 17;
Percentage of AEITC recipients: 2004: 17.
Amount of AEITC received: $251--$500;
Percentage of AEITC recipients: 2002: 13;
Percentage of AEITC recipients: 2003: 13;
Percentage of AEITC recipients: 2004: 13.
Amount of AEITC received: $501--$750;
Percentage of AEITC recipients: 2002: 7;
Percentage of AEITC recipients: 2003: 7;
Percentage of AEITC recipients: 2004: 8.
Amount of AEITC received: $751--$1,000;
Percentage of AEITC recipients: 2002: 5;
Percentage of AEITC recipients: 2003: 5;
Percentage of AEITC recipients: 2004: 5.
Amount of AEITC received: $1,001--yearly maximum;
Percentage of AEITC recipients: 2002: 7;
Percentage of AEITC recipients: 2003: 8;
Percentage of AEITC recipients: 2004: 8.
Source: GAO analysis of IRS data.
Note: The AEITC yearly maximum was $1,503, $1,528, and $1,563 for tax
years 2002, 2003, and 2004, respectively. This table includes the
valid, invalid name, and invalid number subpopulations.
[End of table]
The number of individuals who have elected the AEITC has remained low
for many years. For example, between 1990 and 1997, AEITC use never
exceeded 2 percent of qualifying EITC recipients. IRS calculated use
based on tax returns showing receipt of the AEITC divided by the EITC
population that reported at least one qualifying child. Using this same
methodology, use for tax years 2002 through 2004 was relatively the
same at an average of 0.8 percent. Our figures for 2002 through 2004
are higher than these prior AEITC figures because our figures are based
upon the Forms W-2 that reported AEITC (see fig. 2). Historically,
AEITC use has been based upon the number of individual federal tax
returns that reported an amount on the AEITC line. The historic method
excludes individuals who did not file a federal tax return and
individuals who filed a federal tax return but did not report the
AEITC.
Additional demographic data about individuals who elected the AEITC are
included in appendix III. These additional data represent new analysis
that has not been previously available, including each recipient's
filing method, age, and gender, and each employer's size.
AEITC Use Has Not Increased Significantly Despite Several Targeted
Efforts:
Use of the AEITC has remained low for many years despite several
targeted efforts to increase it. There have been several federal
efforts targeted to increase AEITC use over the last approximately 15
years, including both legislative and administrative changes. (A full
description of these changes is included in app. IV.) One significant
piece of legislation was OBRA '93, which involved the AEITC in two
ways: it (1) reduced the maximum amount of EITC an individual could
receive in advance and (2) required IRS to conduct outreach directly to
potentially eligible AEITC recipients. First, OBRA '93 reduced the
AEITC maximum from 100 percent to 60 percent of the maximum credit
available to a taxpayer with one qualifying child. This change was made
to improve compliance and lessen concerns that recipients would owe the
difference when filing their federal tax return, which was thought to
discourage AEITC use.
Second, OBRA '93 directed IRS to send notices to taxpayers who were
likely to be eligible for the AEITC for 2 years and directed the
Secretary of the Treasury to study the effect of the notice program on
AEITC use. Only some information is available about the first notice
mailing, which occurred in 1994.[Footnote 10] For the first notice
mailing, IRS mailed Publication 1235, "Advance Earned Income Tax Credit
Brochure," and the Form W-5 to about 13.5 million taxpayers who were
potential AEITC candidates during tax year 1993 informing them about
the AEITC. AEITC use increased about 1 percent following this effort;
however, because other outreach efforts were ongoing during this time,
IRS could not conclude that the increase was attributable to the notice
or any other effort specifically.
In 1997, IRS mailed the notice to about 6 million taxpayers who claimed
the EITC in tax year 1996, but did not report receiving AEITC on their
federal tax return. With this second mailing, IRS created two groups, a
test group of about 60,000 taxpayers that received the notice and a
control group of about 60,000 taxpayers with similar characteristics
who did not. Results from the IRS report indicated that about 1.27
percent (771 taxpayers) of the tax returns in the test group reported
the AEITC compared to 0.51 percent (309 taxpayers) of returns in the
control group. The summary report concluded that further efforts to
increase AEITC use substantially are unlikely to succeed.[Footnote 11]
Further, the study recommended that notification of EITC recipients
about the advance not be repeated.
Some of IRS's administrative changes include outreach to specific
groups and changes to publications. For example, after our 1992 report,
the White House, the Treasury Department, and IRS conducted extensive
EITC and AEITC outreach efforts, including a 1993 announcement of the
AEITC by President Clinton. Other outreach efforts included IRS
contacts with charitable, social welfare, and minority groups to
encourage awareness of the EITC and AEITC among their memberships. IRS
also contacted a number of employer organizations to encourage them to
publicize the AEITC with their memberships. IRS also made changes to
its forms, developed print and video products, and increased speaker
seminars to inform the public about the AEITC. For example, IRS
developed publicity materials, such as grocery bag and milk carton art,
brochures, and posters; provided information in the Small Business
Taxpayer Education Program guide; and increased outreach speaker
seminar efforts.[Footnote 12]
Presently, IRS continues to conduct outreach about the AEITC as part of
its EITC outreach efforts. IRS focuses its outreach to large employer
organizations or to specific large employers, which then promote the
AEITC to employers or employees.
Future AEITC Growth Is Unlikely:
Increasing AEITC use in the future is unlikely for several reasons, but
perhaps primarily because of potential recipients' preferences and high
AEITC turnover. Interviews with IRS officials, other experts, and our
prior AEITC work suggest that those eligible for the AEITC prefer
receiving the EITC in a lump sum after they file their federal tax
return instead of receiving relatively small portions spread throughout
the year.[Footnote 13] Another reason is that, despite the reduction in
the yearly AEITC maximum to 60 percent of the maximum credit available
to a taxpayer with one qualifying child, results from an IRS-funded
study using focus groups of EITC participants and interviews we
conducted with experts indicated that potential recipients continue to
have concerns that they would receive more AEITC than they were
ultimately entitled to and that they would owe the difference when
filing their federal tax return.
In addition, AEITC growth is adversely affected by individuals who
elect the AEITC and fail to elect it again, i.e., turnover. As table 3
indicates, more than half of the individuals who elected the AEITC did
so for the first time since 1999 in either tax year 2002, 2003, or
2004. With the overall AEITC use remaining relatively constant over the
3 years, this indicates the large number of yearly first-time
recipients was almost equally offset by existing recipients forgoing
the AEITC in a following year.[Footnote 14] The percentage of AEITC
first-time recipients is much higher than the percentage of first-time
EITC recipients, which is slightly less than one-third. Also, of the
individuals who elected the AEITC for the first time in 2002 or 2003,
about 28 percent elected it again in the following year, 2003 or 2004,
respectively, while the remainder did not elect it again in the
subsequent year. Conversely, only about 98,000 (9 percent) individuals
elected the AEITC consecutively in all 3 years, 2002 through 2004.
Table 3: Frequency of Individuals Electing the EITC and AEITC, Tax
Years 2002 through 2004:
EITC recipients;
Tax year 2002: 20,918,823;
Tax year 2003: 21,431,377;
Tax year 2004: 21,721,218.
First-time EITC recipients (percentage) [A, B];
Tax year 2002: 6,077,104: (29%);
Tax year 2003: 5,313,089: (25%);
Tax year 2004: 4,842,922: (22%).
AEITC recipients;
Tax year 2002: 531,799;
Tax year 2003: 503,382;
Tax year 2004: 507,957.
First-time AEITC recipients (percentage) [A, C];
Tax year 2002: 271,600: (51%);
Tax year 2003: 259,579: (52%);
Tax year 2004: 259,282: (51%).
First-time AEITC recipients who did not elect the advance in the
subsequent year (percentage) [D];
Tax year 2002: 198,096: (73%);
Tax year 2003: 187,871: (72%);
Tax year 2004: N/A.
First-time AEITC recipients who elected the advance in the subsequent
year (percentage) [D];
Tax year 2002: 73,504: (27%);
Tax year 2003: 71,708: (28%);
Tax year 2004: N/A.
Number of individuals who consecutively received the AEITC (percentage)
[E];
Tax year 2002: 97,998: (9%).
Source: GAO analysis of IRS data.
Note: N/A means not applicable. Tax year 2004 data are not applicable
because we did not look at any subsequent years. All AEITC figures
include the valid, invalid name, and invalid number subpopulations.
[A] First-time EITC recipients are based upon how often a primary or
secondary taxpayer filed a federal tax return receiving EITC for the
first year since 1999. First-time AEITC recipients are based upon the
first year an individual (defined by unique SSN) received AEITC since
1999. IRS officials agreed this approach is a reasonable method to
compare AEITC and EITC first-time use.
[B] Percentage is out of EITC recipients.
[C] Percentage is out of AEITC recipients.
[D] Percentage is out of first-time AEITC recipients.
[E] Number of individuals who consecutively received the AEITC are
individuals who received the advance each year in tax years 2002
through 2004. Percentage is of individuals who received the AEITC each
year in tax years 2002 through 2004 out of all recipients who received
it at least once during these same years (1,133,908 individuals). The
percentage who received it twice during these years is 19 percent
(213,234) and once is 73 percent (822,676). Percentages may not add due
to rounding.
[End of table]
High Noncompliance Exists with AEITC Requirements:
Overall, as many as 80 percent of all AEITC recipients did not comply
with or made errors involving one of the three AEITC requirements that
we reviewed, and they received about $282 million when the 3 years,
2002 through 2004, are aggregated. Some taxpayers were noncompliant
with more than one requirement. Those requirements are having a valid
SSN, filing a federal tax return, and reporting the proper amount of
AEITC received on the tax return (see fig. 3).
Figure 3: Percentage of AEITC Recipients Compliant and Noncompliant
with at Least One AEITC Requirement, Tax Years 2002 through 2004:
[See PDF for image]
Source: GAO analysis of IRS data.
Note: The pie chart includes the valid, invalid name, and invalid
number subpopulations.
[A] This includes the invalid name and invalid number subpopulations.
[B] This includes the valid, invalid name, and invalid number
subpopulations.
[C] This is of individuals who filed a federal tax return in the valid,
invalid name, and invalid number subpopulations.
[End of figure]
Specifically, in tax year 2002, we found that individuals were
noncompliant with at least one of three requirements we reviewed 79
percent of the time and they received about $93 million of AEITC. For
tax year 2003 and 2004, individuals were noncompliant with at least one
requirement 78 percent (about $91 million) and 79 percent (about $98
million) of the time, respectively.
Some of the noncompliance we identified could have resulted from IRS or
employer clerical errors or improper reporting by the taxpayer.
Therefore, some of the errors may be correctible or were corrected by
filing an amended return. IRS cannot readily identify the number of
amended returns specifically associated with the AEITC because such
returns combine several credits onto one line. The explanation attached
to the amended return would provide details on the change and any
analysis of the explanation would be a manual process.
About 20 Percent of AEITC Recipients Had an Invalid SSN:
AEITC recipients are required to provide their employer with a valid
SSN for the Form W-2.[Footnote 15] As table 4 illustrates, about 20
percent (more than 100,000) of AEITC recipients each year may not have
been eligible for the advance because they did not have a valid SSN on
their Form W-2. Collectively, these individuals received between $37
million and $39 million in AEITC each year. The data are consistent
over the 3 years reviewed.[Footnote 16]
Table 4: AEITC Recipients and Recipients with Invalid SSN on Form W-2,
Individuals and Dollars, Tax Years 2002 through 2004:
AEITC recipients;
Tax year 2002: Individuals: 531,799;
Tax year 2002: Dollars: $145 million;
Tax year 2003: Individuals: 503,382;
Tax year 2003: Dollars: $143 million;
Tax Year 2004: Individuals: 507,957;
Tax Year 2004: Dollars: $150 million.
AEITC recipients with an invalid SSN on Form W-2 (percentage)[A];
Tax year 2002: Individuals: 113,025: (21%);
Tax year 2002: Dollars: $37 million: (26%);
Tax year 2003: Individuals: 104,856: (21%);
Tax year 2003: Dollars: $37 million: (26%);
Tax year 2004: Individuals: 109,622: (22%);
Tax year 2005: Dollars: $39 million: (26%).
Source: GAO analysis of IRS data.
[A] Percentage is out of AEITC recipients. This analysis includes the
invalid name and invalid number subpopulations.
[End of table]
For purposes of this report, invalid SSNs include instances where the
SSN did not match SSA's records (i.e., the number was never assigned by
SSA) and the SSN/name combinations reported on the Form W-2 did not
match SSA records.[Footnote 17] Some of these individuals were likely
eligible for the AEITC. For example, a name/SSN mismatch could include
instances when a woman who receives the AEITC marries and changes her
name with her employer but not with SSA. This could result in the
employer issuing a Form W-2 in the new name, but IRS and SSA only
identifying her by the former name.[Footnote 18]
Individuals who file a federal tax return are required to include a
valid SSN on their return.[Footnote 19] An individual who provides an
invalid SSN on the tax return is not compliant in meeting AEITC
requirements and may also violate the Social Security Act.[Footnote 20]
Such an individual is also required to provide a valid SSN to their
employer for income tax withholding purposes and for purposes of
certifying eligibility for the AEITC and could be subject to a penalty
for failure to do so.[Footnote 21] Further, if the individual does not
file a valid SSN, IRS is unable to assess the recipient's federal tax
liability and SSA cannot credit the recipient for money withheld for
Social Security purposes.[Footnote 22] Also, because taxpayers often do
not report receipt of the advance on their tax return, IRS cannot
determine whether the taxpayer owes money or deserves a refund.
Almost 40 Percent of AEITC Recipients Did Not File the Required Federal
Tax Return:
All AEITC recipients are required to file a federal tax return,
regardless of the amount of their income, which is generally the
primary basis for determining whether a return is required to be filed.
Table 5 shows that between 36 and 40 percent, about 200,000 AEITC
recipients, did not file a required federal tax return each year.
Collectively, these individuals received between $42 million and $50
million of AEITC benefits.[Footnote 23]
Table 5: AEITC Recipients and Recipients Who Did Not File a Tax Return,
Individuals and Dollars, Tax Years 2002 through 2004:
AEITC recipients;
Tax year 2002: Individuals: 531,799;
Tax year 2002: Dollars: $145 million;
Tax year 2003: Individuals: 503,382;
Tax year 2003: Dollars: $143 million;
Tax year 2004: Individuals: 507,957;
Tax year 2004: Dollars: $150 million.
AEITC recipients who did not file a federal tax return (percentage)[A];
Tax year 2002: Individuals: 192,857: (36%);
Tax year 2002: Dollars: $42 million: (29%);
Tax year 2003: Individuals: 186,423: (37%);
Tax year 2003: Dollars: $44 million: (31%);
Tax year 2004: Individuals: 200,706: (40%);
Tax year 2004: Dollars: $50 million: (33%).
Source: GAO analysis of IRS data.
[A] Percentage is of AEITC recipients. This analysis includes the
valid, invalid name, and invalid number subpopulations.
[End of table]
About 56,000 to 60,000 of the about 200,000 individuals who did not
file the required tax return (about 30 percent) had an invalid SSN on
the Form W-2 each year, as shown in table 6. Having a valid SSN is
another AEITC requirement, discussed previously, which means these
individuals were noncompliant or made an error with at least two AEITC
requirements.
Table 6: AEITC Recipients, Recipients Who Did Not File a Federal Tax
Return, and Recipients Who Did Not File a Tax Return and Had an Invalid
SSN on the Form W-2, Individuals and Dollars, Tax Years 2002 through
2004:
(Continued From Previous Page)
AEITC recipients;
Tax year 2002: Individuals: 531,799;
Tax year 2002: Dollars: $145 million;
Tax year 2003: Individuals: 503,382;
Tax year 2003: Dollars: $143 million;
Tax year 2004: Individuals: 507,957;
Tax year 2004: Dollars: $150 million.
AEITC recipients who did not file a federal tax return (percentage)
[A];
Tax year 2002: Individuals: 192,857: (36%);
Tax year 2002: Dollars: $42 million: (29%);
Tax year 2003: Individuals: 186,423: (37%);
Tax year 2003: Dollars: $44 million: (31%);
Tax year 2004: Individuals: 200,706: (40%);
Tax year 2004: Dollars: $50 million: (33%).
AEITC recipients who did not file a federal tax return and had an
invalid SSN on Form W-2 (percentage) [B];
Tax year 2002: Individuals: 59,607: (31%);
Tax year 2002: Dollars: $20 million: (48%);
Tax year 2003: Individuals: 55,601: (30%);
Tax year 2003: Dollars: $20 million: (45%);
Tax year 2004: Individuals: 58,370: (29%);
Tax year 2004: Dollars: $21 million: (42%).
Source: GAO analysis of IRS data.
[A] Percentage is of AEITC recipients. This analysis includes the
valid, invalid name, and invalid number subpopulations.
[B] Percentage is of AEITC recipients who did not file a federal tax
return. An unknown portion of these recipients may have corrected the
SSN error and subsequently filed a tax return. This analysis includes
the invalid name and invalid number subpopulations.
[End of table]
There are several reasons why a significant number of AEITC recipients
might not have filed a federal tax return. For example, depending on
their filing status, age, and type of income they receive, recipients
may not have had a filing responsibility other than for the AEITC and
they may not have remembered or understood they must file a return. In
addition, AEITC recipients may not have filed because they were not
initially eligible or they became ineligible for the AEITC because of a
change in their personal circumstances, and filing would require them
to pay back the AEITC they received.
When individuals are required to file a federal tax return and do not,
IRS cannot readily identify whether the individual was eligible for the
advance or whether they owed IRS any of the amounts they received.
Conversely, by not filing a federal tax return, some individuals did
not receive additional EITC monies that they could only receive had
they filed.
About Two-Thirds of AEITC Recipients Who Filed a Federal Tax Return
Misreported the Amount of AEITC They Received:
All AEITC recipients are required to report on their federal tax return
the amount of AEITC they received according to the Form(s) W-2.
Reporting this amount allows the IRS to determine whether the taxpayer
received too much AEITC, and owes money back to the IRS, or whether the
taxpayer is entitled to additional amounts of the EITC.
Of the approximately 60 percent (about 300,000) AEITC recipients who
filed a federal tax return, two-thirds misreported the amount they
received in tax year 2002 through 2004, as shown in table 7.
Misreported means that the total amount of AEITC reported on the Form W-
2 does not match the AEITC amount reported on the federal tax return.
Approximately one-third of the federal tax returns correctly matched to
the Form(s) W-2 AEITC amount. Of those that misreported, the vast
majority did not report receiving any AEITC.
Table 7: AEITC Matches and Mismatches between Form(s) W-2 and Filed Tax
Returns, Tax Years 2002 through 2004:
(Continued From Previous Page)
Number of individuals who filed federal tax returns[A];
Tax year 2002: Number: 342,841;
Tax year 2002: Dollars: $108,189,196;
Tax year 2003: Number: 320,588;
Tax year 2003: Dollars: $101,078,453;
Tax year 2004: Number: 309,724;
Tax year 2004: Dollars: $102,512,732.
Number of returns that matched the Form(s) W-2 AEITC amount
(percentage)[B];
Tax year 2002: Number: 112,421: (33%);
Tax year 2002: Dollars: $51,457,254; (48%);
Tax year 2003: Number: 111,266: (35%);
Tax year 2003: Dollars: $52,246,111: (52%);
Tax year 2004: Number: 106,980: (35%);
Tax year 2004: Dollars: $52,338,650: (51%).
Number of mismatches between Form(s) W-2 and filed federal tax return
(percentage)[B];
Tax year 2002: Number: 230,420: (67%);
Tax year 2002: Dollars: $56,731,942: (52%):
Tax year 2003: Number: 209,322: (65%);
Tax year 2003: Dollars: $48,832,342: (48%);
Tax year 2004: Number: 202,744: (65%);
Tax year 2004: Dollars: $50,174,082: (49%).
Number of mismatches due to nonreporting of AEITC (percentage)[C];
Tax year 2002: Number: 222,691: (97%);
Tax year 2002: Dollars: $53,343,102: (94%);
Tax year 2003: Number: 202,152: (97%);
Tax year 2003: Dollars: $45,487,033: (93%);
Tax year 2004: Number: 195,571: (96%);
Tax year 2004: Dollars: $46,806,223: (93%).
Number of mismatches due to underreporting of AEITC (percentage)[C];
Tax year 2002: Number: 4,996: (2%);
Tax year 2002: Dollars: $2,349,197: (4%);
Tax year 2003: Number: 4,779: (2%);
Tax year 2003: Dollars: $2,389,854: (5%);
Tax year 2004: Number: 4,881: (2%);
Tax year 2004: Dollars: $2,337,603: (5%).
Number of mismatches due to overreporting AEITC (percentage)[C];
Tax year 2002: Number: 2,733: (1%);
Tax year 2002: Dollars: $1,039,643: (2%);
Tax year 2003: Number: 2,391: (1%);
Tax year 2003: Dollars: $955,455: (2%);
Tax year 2004: Number: 2,292: (1%);
Tax year 2004: Dollars: $1,030,256: (2%).
Source: GAO analysis of IRS data.
Note: Percentages may not add due to rounding. This table includes
individuals who filed a tax return in the valid and invalid name
subpopulations.
[A] The total number of filed federal tax returns is greater than the
total number of AEITC recipients who filed a return because there were
some dependents who received AEITC and were listed on more than one
federal tax return. The total number of AEITC recipients who filed a
federal tax return can be calculated using table 5 by subtracting the
number of AEITC recipients who did not file a federal tax return from
the number of AEITC recipients.
[B] We considered a match to be anything plus or minus a dollar on the
Form W-2 in order to allow for taxpayer rounding. We tested the
sensitivity of this result by using a difference between the AEITC
reported on the Form W-2 and the tax return of up to $100 and the
results were similar. Percentage is of number of individuals who filed
federal tax returns.
[C] Percentage is of number of mismatches between Form(s) W-2 and filed
federal tax returns.
[End of table]
Taxpayers may not report the amount of AEITC they received because they
either forget or do not know they are required to do so. Underreporting
can occur when there is a computation error involving multiple Forms W-
2, a taxpayer disagrees with the amount reported on the Forms W-2, or
there is willful noncompliance. IRS officials in the AUR program pursue
some AEITC cases where taxpayers either underreport or do not report
receipt of the AEITC. These procedures are discussed in detail in a
following section.
Due to the high number of mismatches, many of the AEITC recipients who
also claimed the EITC likely received excess benefits. For example, of
the 222,691 taxpayers who did not report receipt of the AEITC on their
tax return in tax year 2002, almost half went on to claim the EITC. We
determined that those taxpayers received nearly $22 million in excess
AEITC benefits. For the 3 years, 2002 through 2004, taxpayers received
a total of about $64 million in excess AEITC benefits.
AEITC Recipients Were Noncompliant with Other Program Requirements:
Additional noncompliance or errors existed with other program
requirements, such as receiving excess AEITC. Details and demographic
information on the noncompliant individuals are in appendix V.
IRS's AEITC Compliance Procedures Have Limited Effectiveness and
Options to Better Address Noncompliance Have Advantages and
Disadvantages:
IRS's Submission Processing is responsible for receiving, processing,
and archiving the nation's federal tax returns, payments, and
information returns. In the context of AEITC, Submission Processing
attempts to catch mismatches between both paper and electronic tax
returns and Forms W-2 (see fig. 4).
Figure 4: Submission Processing Procedures for Paper and Electronic Tax
Returns Reporting AEITC:
[See PDF for image]
Source: GAO analysis of IRS procedures.
[A] After some initials checks, such as comparing the EITC/AEITC line
of a tax return to the Form W-2(s), all paper returns go to Submission
Processing staff, who enter select data from the Form 1040 into an
electronic database.
[B] Effective January 2, 2007, at our suggestion, Submission Processing
changed its selection criteria to include filing status.
[End of figure]
Between 32 percent and 22 percent of tax returns reporting an AEITC
amount were filed on paper between tax years 2002 and 2004,
respectively. If a paper tax return has an entry on either the AEITC or
EITC lines on the Form 1040, Submission Processing tax examiners are
required to ensure that the AEITC amount reported on the return matches
the amount in box 9 of the Form(s) W-2, which records the amount of
AEITC paid by the employer to the employee.[Footnote 24]
If the amounts on the AEITC line of the tax return and Form W-2(s)
match, the tax examiner takes no further action. If the amounts differ
(e.g., the tax return reports a lesser amount than is reflected on the
Form(s) W-2) the examiner is required to adjust the entry on the return
to equal the total AEITC amount from the Form(s) W-2. All paper returns
then go to staff who enter data from the Form 1040 into an electronic
database.
After an examiner makes an adjustment, IRS sends a letter to the
taxpayer explaining that an adjustment was made and it was based on the
mismatch between the tax return and the Form(s) W-2. IRS sent 282 and
220 such letters in tax years 2003 and 2004, respectively.[Footnote 25]
Submission Processing's role is to ensure that the return amount is
consistent with the Form W-2, not to determine which of the differing
numbers accurately reflects the amount of AEITC actually paid to the
employee. If the taxpayer disagrees with the adjustment, e.g., believes
that the amount on the Form(s) W-2 is incorrect, the taxpayer can
dispute it.
Between 68 percent and 78 percent of returns reporting an AEITC amount
were filed electronically between tax years 2002 and 2004. Submission
Processing runs a computer check to find any mismatches between the
amounts on the electronic tax returns and the electronic Form(s) W-2.
When mismatches are found, Submission Processing rejects the return and
sends it to the taxpayer or preparer to correct and retransmit to IRS.
In most tax preparation software, once a user enters an amount from the
Form(s) W-2, the amount is automatically transferred to the appropriate
line of the tax return. Thus, if the user errs in entering the proper
amount from the Form W-2, the software would enter this erroneous
number on the tax return. As a result, Submission Processing rarely
identifies AEITC tax return/Form(s) W-2 mismatches because the original
Form(s) W-2 from the employer(s) is rarely included in electronic
filings.[Footnote 26] IRS rejected 172 electronically filed returns
reporting AEITC in tax year 2004 and 147 in tax year 2003. Adding these
mismatches to the paper return mismatches, Submission Processing found
392 mismatches in tax year 2004 and 429 in tax year 2003.
Next, Submission Processing sends the return through its Error
Resolution System (ERS) when the AEITC amount on the Form 1040 meets
certain selection criteria.[Footnote 27] If ERS finds that AEITC
exceeds this amount, a tax examiner matches the Form 1040 AEITC amount
to the Form W-2(s). If they match, no action is taken, and the return
is posted in IRS's Masterfile, the agency's central repository for
taxpayer information. If there is a mismatch, IRS adjusts the return to
match the Form(s) W-2, and IRS sends a letter to the taxpayer
describing the error and the ERS correction. Taxpayers who disagree
with the change can dispute it. The ERS process thus serves as a back-
up check in case the earlier physical or electronic processes missed
these AEITC mismatches. ERS examined 3,380 tax returns with AEITC in
tax year 2004. IRS was not able to tell us how many of these returns
involved mismatches.
Prior ERS selection criteria would not have identified some returns for
individuals when the Form(s) W-2 had AEITC amounts that were above the
legal maximums, but below the ERS selection criteria. While
interviewing Submission Processing officials, we suggested that the
criteria be modified and associated with filing status. IRS made such
changes to the criteria, effective January 2, 2007.
IRS's Procedures to Verify SSNs Have Limited Effectiveness for AEITC
Recipients Due to Taxpayer Noncompliance in Reporting and Filing:
Submission Processing's procedures have limited effectiveness in
verifying that AEITC recipients have a valid SSN because, as previously
noted, many individuals do not file the required tax return and, for
those who do, most do not report receipt of the advance.
For both paper and electronically filed returns, Submission Processing
checks IRS's Data Master (DM-1) file, which is a database that
includes, among other things, all validly issued SSNs and the
individual's name associated with each SSN. Submission Processing
rejects electronically filed tax returns with an invalid SSN on the
Form 1040, including those from taxpayers who received the AEITC, and
sends back the tax return to the taxpayer for correction before
processing. For returns filed on paper with an invalid SSN on the Form
1040, Submission Processing processes the return, but disallows certain
credits and exemptions, such as the EITC. If the taxpayer's SSN is
invalid and the AEITC is claimed on a paper return, Submission
Processing processes any AEITC reported. Since the AEITC is reported as
tax, it will either offset all or part of any refund due or, if no
refund is due, require the taxpayer to pay back the full AEITC amount.
Thus, of the approximately 514,000 individuals who received the AEITC
each year between tax years 2002 through 2004, Submission Processing's
procedures would apply to about 118,000 taxpayers--those who filed and
reported receipt of the advance. For nonfilers, Submission Processing
cannot verify SSNs because there are no tax returns---the basis of its
examination. While Submission Processing performs a SSN verification
for those who file and do not report receipt of the AEITC, it is not
effective for the advance since the advance is not reported on the
return.
Many Taxpayers Underreported AEITC and IRS Worked on a Limited Number
of These Cases, Some of Which Submission Processing Did Not Find:
After a return has been processed, the next point when IRS might
identify and correct AEITC noncompliance is when it matches tax returns
to other documents it receives. Overall, each year AUR identifies about
14 million discrepancies between taxpayer income and deduction
information submitted by third parties and amounts reported on
individual income tax returns. AUR has the resources to only work on a
fraction of these cases each year and uses criteria, such as revenue
collection potential, for case selection.
For AEITC, AUR compares the amount of AEITC that employers report on a
taxpayer's Form W-2 to the amount reported on an individual's tax
return (see fig. 5). AUR receives this information in separate
databases from SSA and undertakes these comparisons in August and
December of each year--well after Submission Processing has completed
its review of the returns and associated Forms W-2.
Figure 5: AUR Program Procedures to Resolve Discrepancies between AEITC
Amounts on Forms W-2 and Tax Returns:
[See PDF for image]
Source: GAO analysis of IRS data.
[End of figure]
Generally, AUR does not take action when the AEITC amounts match the
amounts reported on the return or when the discrepancy does not meet
IRS case selection criteria. For example, for tax year 2003, our data
show that there were about 209,000 tax returns where the AEITC amount
did not match the amount on taxpayers' Forms W-2, primarily because the
returns failed to report any AEITC or underreported the amount. AUR
identified about 25,000 of those cases in tax year 2003 as potential
cases on which to work.
In tax year 2003, Submission Processing identified 429 instances where
the amount of AEITC reported on the tax return was less than the amount
on the Forms W-2, which was much fewer than the about 25,000 mismatches
detected by AUR that year. The mismatches involving individuals who
filed paper returns and reported receiving the AEITC should have been
caught by Submission Processing because its examiners are supposed to
match the amount reported on the return with the Form(s) W-2. However,
Submission Processing examiners review huge volumes of returns and it
can be a challenge to identify the relatively few with AEITC.
Because AUR does not break down its AEITC cases by filers who
underreport and filers who fail to report any AEITC amount or by filers
of paper versus electronic returns, it is not possible to determine
exactly how many AUR cases should have been caught by Submission
Processing. AUR officials told us that it would be difficult for them
to routinely break out this information in this way because this would
require new computer programming and the budget for new programming
requests was reduced for fiscal year 2007.
In accordance with return processing procedures, if Submission
Processing identifies an underreporter, it reduces the size of the
refund that will be sent to the taxpayer. Thus, using Submission
Processing, rather than AUR, better protects revenue because the
erroneous EITC amounts are never paid to the taxpayer. If AUR works on
the case, it assesses the tax owed, but further IRS action is required
to collect the actual overpayment--through a future refund offset or a
current effort to collect the refund paid erroneously.
Although catching AEITC underreporting in Submission Processing would
better protect revenue than do AUR processes, the benefits to improving
Submission Processing to catch AEITC errors may already be small and
could get smaller. This is because the number of EITC returns filed
electronically is more than 68 percent and has been growing and, as
previously noted, Submission Processing identifies few mismatches for
returns that are filed electronically because the electronic Form W-2
is an iteration of the user's entries. In its July 2006 report, the
Treasury Inspector General for Tax Administration recommended that IRS
reemphasize the use of the current AEITC review procedures for paper
returns, but agreed with IRS that it could not implement additional
procedures for electronic returns because IRS is unable to fully verify
the accuracy of the Form(s) W-2 during electronic processing of
returns.
AUR worked on about twice as many AEITC cases in tax year 2003 as in
the previous year. The total amount of tax assessed in these cases in
tax year 2003 was more than three times the amount in the previous
year, and the amount assessed per case increased about 71 percent, from
$555 to $947, which is near the average AUR assessment of about
$1,000.[Footnote 28] These trends were either holding steady or
improving for the 84 percent of tax year 2004 cases for which we had
data when we completed our review. The number of cases in which the
taxpayer fully agreed with the assessment rose from about 29 percent in
tax year 2002 to about 41 percent in tax year 2003. The number of cases
in which IRS withdrew the assessment, generally after the taxpayer
provided documentation that it was erroneous, dropped from about 15
percent in tax year 2002 to about 4 percent in tax year 2003.
IRS Works on a Limited Number of AEITC Nonfiler Cases:
As previously noted, from tax years 2002 through 2004, about 40 percent
of the individuals who had a Form W-2 reporting that they received
AEITC did not file a tax return as required by law.
All nonfiler cases, including AEITC nonfiler and other lower dollar
nonfiler cases, are eligible to be worked on by IRS's Wage and
Investment and Small Business/Self Employed divisions. IRS's policy
dictates that some lower dollar cases and even some cases in which
nonfilers are due a refund may be worked on to ensure that all kinds of
cases have the possibility of being worked on. Still, a key criterion
that IRS uses to determine cases on which to work is potential revenue
or the anticipated net balance due. The higher this amount, the more
likely the case will be worked on. IRS does not track the total number
of nonfiler cases worked on or the kinds of income or credits taken by
the nonfilers whose cases were worked on. Because IRS selects cases
based on these criteria, IRS officials said they worked on few AEITC
nonfiler cases.
Beyond AEITC nonfiler cases potentially being worked on by Wage and
Investment and the Small Business/Self Employed divisions, these cases
are also eligible to be worked on by other IRS programs. For example,
the automated collection system involves calls from IRS staff to
taxpayers asking them to file a return or explain why they believe
filing is not required.[Footnote 29] IRS's automated substitute for
return program involves collection staff preparing a tax return on
behalf of a nonfiler based on third-party and other information that
IRS has available. Once a return has been created, IRS can act to
collect any taxes due.
During 2005 through 2006, IRS conducted a test to determine whether
receipt of AEITC should be a criterion to determine nonfiler cases on
which to work. The test involved working on cases from tax years 2000
through 2003 for 433 taxpayers drawn from a sample of taxpayers who did
not file a return in tax year 2002, but did receive the AEITC that
year, and whose income was between $35,000 and $50,000 for that
year.[Footnote 30] The cases were worked on in the same way that IRS
works on other nonfiler cases.
In interviews with IRS officials about the AEITC nonfiler test, we
found that the agency's test plan lacked documentation and detail, such
as test justification, likely costs and benefits, and implementation
details. It also lacked a rationale for some important decisions
underlying the test and some changes implemented after the test began
were also not well documented. In our report on three tests conducted
by IRS in 2004 to address leading sources of EITC errors, we noted that
the lack of such documentation hindered monitoring and oversight and
did not foster a common understanding of the tests among management and
staff.[Footnote 31] One of our recommendations was that the rationale
for key decisions on such tests be documented, and the Commissioner of
Internal Revenue agreed with that recommendation.
Because IRS had not completed its evaluation of the test as of June
2007, the agency has not decided whether AEITC should be a criterion to
determine nonfiler cases on which to work. Regardless of the agency's
decision, however, it is unlikely to significantly reduce the number of
AEITC nonfilers because any increase in cases worked on would likely
represent only a small number of such nonfilers, relative to both the
total number of AEITC nonfilers and all nonfiler cases worked on by
IRS.
Collection Handles Few AEITC Cases:
All AEITC cases are eligible to be worked on in IRS's collection
program; however, it generally does not work on cases involving AEITC
because the amounts involved are below selection criteria that
determine which cases to pursue.
Collection does not keep track of the specific types of income and
credits claimed by the individuals whose cases they handle. Still,
collection officials stated that they worked on few, if any, cases
involving the AEITC. Instead, these cases go into "deferral status,"
which means any refund the taxpayer is due will be reduced until the
balance due has been paid off. Like other taxpayers with an outstanding
tax liability, these taxpayers would also get a notice stating how much
they owe.
Collection had an effort under way to work on cases under its selection
criteria by setting up automatic monthly installment arrangements and
notifying taxpayers that they were expected to begin paying what they
owed. Officials said that too many taxpayers ignored the arrangements,
and as a result, the program was determined to be cost prohibitive. The
program was therefore discontinued.
IRS Audits and Criminal Investigation Identified a Small Number of
AEITC Cases:
IRS annually audits about 500,000 of the more than 21 million tax
returns that claim the EITC. With only about 3 percent of EITC
recipients potentially eligible for the advance receiving it, only a
small number of the audited returns are likely to involve the
AEITC.[Footnote 32] When IRS audits tax returns claiming the EITC, an
examiner is required to determine if the taxpayer was eligible for it,
whether the taxpayer took the AEITC and, if so, whether the taxpayer
reported the correct amount. If the examiner determines that the
taxpayer was not eligible for the EITC, then the AEITC is disallowed.
In addition, Criminal Investigation, which investigates potential
criminal violations of the tax code and related financial crimes, has
identified six cases associated with the AEITC since 2001. Five of the
six cases involved refund fraud based on individuals creating fake
businesses in order to obtain the AEITC. The other case involved a
business owner attempting to evade employment tax by falsely signing up
employees for the AEITC, but not including the credit in their
paychecks.
Soft Notices Have Increased Compliance in Situations Similar to AEITC,
but Turnover and Difficulty Locating Recipients May Limit Effectiveness
for AEITC:
Because IRS's enforcement resources cannot fully cover all areas of
noncompliance, including AEITC noncompliance, the agency has tried to
cost effectively increase voluntary compliance in some areas that
involve relatively small amounts of money by mailing taxpayers soft
notices. Soft notices are letters that ask taxpayers to comply with a
certain requirement in the future or, if the notice informs them that
they are not entitled to a benefit that they received, to file an
amended return.
While IRS officials said there have not been any soft notices
specifically targeting AEITC noncompliance, we reviewed the results of
three tests that involved taxpayers who were not filing accurately--
many of whom would not otherwise be subject to an enforcement action.
Additionally, IRS has modified one soft notice test that includes cost
estimates. Each of the completed soft notice efforts show some benefits
in improving compliance, however, they may be less effective for AEITC
recipients.
The First Soft Notice Test: The first soft notice--called the
"Duplicate TINs" test--involved different taxpayers claiming the same,
or a duplicate, TIN for a dependent or qualifying child in order to
obtain an exemption, the EITC, or child tax credit benefits. In tax
year 2002, IRS identified a total of about 2.4 million taxpayers who
used a duplicate TIN. IRS sent soft notices to about 820,000 taxpayers.
In November 2005, IRS reported that after receiving the soft notice,
11.4 percent of the population amended their tax year 2002
returns.[Footnote 33] Other results focused on taxpayers who received
the notice for tax year 2002 and whether they repeated the use of a
duplicate TIN on their tax years 2003 and 2004 tax returns. The results
were as follows:
* 84.9 percent did not repeat their behavior in either of the ensuing
years;
* 7.7 percent repeated the behavior in 2003, but not again in 2004;
* 4.0 percent did not repeat the behavior in 2003, but did so in 2004;
and:
* 3.4 percent repeated the behavior for both ensuing years.
Although IRS did not report the costs associated with this test, it did
estimate the revenue that would have been lost without the soft
notices. IRS reported that it protected a total of $218.3 million using
the Duplicate TINs test. Due to limitations in the research design,
such as not using a control group, IRS reported that it was uncertain
whether these results were solely influenced by the receipt of a soft
notice or if other factors may have contributed to the change in
taxpayer behavior and subsequent revenue protected. IRS no longer
considers this a test and continues to send out soft notices for
Duplicate TINs issued each year.
The Second Soft Notice Test: The second soft notice test--called the
"AUR Soft Notice" test--involved filers who underreported small amounts
of certain categories of income, such as wages, unemployment insurance,
or sales of securities. In December and January 2004 and 2005,
respectively, IRS sent 500 soft notices to randomly selected taxpayers
who underreported income on their tax year 2003 returns. IRS also
randomly selected a control group of 500 taxpayers who underreported
small amounts, but did not send notices to this group.
An outside consultant that IRS hired to determine the effectiveness of
the test reported in October 2005 that (1) soft notices appeared to
have a beneficial result in reducing repeat behavior and (2) IRS
resources were not overburdened by the notices.[Footnote 34] Their
conclusion was based on several results. First, after receiving the
soft notice, 71 out of the 500 taxpayers (14.2 percent) filed an
amended return. Second, only 33 taxpayers (6.6 percent) who received
the notice repeated the underreporting the following year. In contrast,
174 taxpayers in the control group (34.8 percent) repeated their
underreporting. Third, the consultants did not consider IRS resources
to be burdened because only 45 of 500 taxpayers (9 percent) called IRS
with questions. Similarly, the study found there was limited
undeliverable mail--only for 3 taxpayers (0.6 percent). An additional
test was conducted for fiscal year 2006 and had similar positive
results. IRS is in the process of determining whether it will send out
soft notices for AUR in the future.
The Third Soft Notice Test: The third soft notice test--called the
"Dependent Database" test--involved cases selected for three EITC
related issues, including qualifying child, filing status, and Schedule
C, "Profit or Loss from Business," errors. IRS found that 2.4 million
taxpayers appeared to have had errors on their tax returns. In November
2005, IRS selected about 12,500 taxpayers to determine the impact of
soft notices on taxpayers' behavior when filing their tax year 2005
return. About another 12,500 taxpayers were selected as a control group
not to receive the notice.
In its October 2006 report, IRS found that, although there was a
difference between the test group of taxpayers who received the soft
notice and the control group that did not, the direct relationship
between receiving a soft notice and taxpayers' subsequent filing
behavior was weak.[Footnote 35] Specifically, the report cited that 88
percent of the test group and 86 percent of the control group changed
their subsequent tax year filing behavior, including not breaking the
same rule, amending the prior year return, or not filing a 2005 return.
Specific noteworthy results were:
* 84 percent of the test group and 83 percent of the control group
filed a return in the subsequent year;
* 46 percent of the test group and 44 percent of the control group
broke no rules at all;
* 26 percent of the test group and 25 percent of the control group
broke a different rule;
* 12 percent of the test group and 14 percent of the control group
repeated their behavior the next year by breaking the same rule; and:
* 1 percent of the test group and 0.4 percent of the control group
amended their prior-year return.
Also in October 2006, IRS modified the Dependent Database test in both
the Wage and Investment and Small Business/Self Employed divisions to
target notices to another population, i.e., noncustodian person(s)
claiming a child. IRS prepared a preliminary cost analysis for this
soft notice test based on a sample of 300,000 taxpayers. It estimated
the total costs of sending out 300,000 soft notices to be about
$533,000, which included $449,000 for the labor to process amended
returns and answer telephone calls and $84,000 for mailing. Additional
information, including the results of this test, was not available as
of mid-June 2007.
Although IRS did not develop criteria for these soft notice tests about
what would constitute a success, such as a self-correction percentage,
an IRS official knowledgeable about the tests said the agency considers
the three completed tests a success, despite the few shortcomings. The
first and second tests were considered successes because they led to
noteworthy changes in taxpayer behavior. The third test was considered
a success because, although taxpayer behavior did not change
significantly, officials considered it a cost-effective way to have an
enforcement presence among these taxpayers. Officials thought that a
soft notice test could be beneficial for reducing AEITC noncompliance
as well, particularly since the amount of money involved with AEITC is
low and the noncompliance might not otherwise be addressed by IRS.
Although soft notices may have some potential to address certain AEITC
noncompliance, characteristics of the AEITC population might make such
notices less effective or more costly than for the test populations for
two reasons. First, AEITC turnover is high. In each tax year 2002
through 2004, more than half of the individuals were first time
recipients. Moreover, about 73 percent of first-time AEITC recipients
in tax years 2002 and 2003 did not elect the AEITC the following year
and, thus, would not repeat noncompliance related to the
AEITC.[Footnote 36] Second, almost 40 percent of AEITC recipients do
not file a tax return, which means that IRS may not have a current
address for those taxpayers. If IRS were to send soft notices to AEITC
nonfilers using the last known address, a significant number of
individuals may no longer reside there. This means IRS might not be
able to locate them or it might spend additional resources trying.
Federal On-Line SSN Verification Services Could Be Used to Determine
AEITC Eligibility, but IRS and SSA Have Raised Concerns:
More than 100,000 AEITC recipients had invalid SSNs and reported
receiving millions of dollars in total benefits for each tax year 2002
through 2004 without any substantial check of their eligibility.
Because of the low-dollar amounts involved per taxpayer, IRS worked on
only a small number of these cases. IRS does not have an up-front
control or procedure in place to require employers to verify that an
employee seeking the AEITC has a valid SSN, which could address this
noncompliance. Two federal on-line services have the potential to be
used to implement such controls. Although the services could be used
for this purpose, IRS and SSA officials raised several concerns about
implementing such a requirement.
The TIN Matching service and SSNVS are federal on-line services that
some private organizations may use voluntarily to verify whether
federal records show that the name and SSN provided by an individual
match.[Footnote 37] TIN Matching is a pre-return filing service offered
by IRS that allows those payers whose income is subject to backup
withholding, who submit any of six Form 1099 information returns (e.g.,
financial institutions), to match the TIN of the 1099 payee against IRS
records.[Footnote 38] It is one of several e-service products offered
by IRS. The goal of TIN Matching is to improve the accuracy of Form
1099 data and reduce subsequent inappropriate penalties and error
notices. SSNVS is a service offered by SSA that allows registered users
(i.e., employers or, in certain instances, their third-party
representatives) to verify the names and SSNs of employees against SSA
records.[Footnote 39] The AEITC is outside the scope of SSA's
responsibilities, and SSNVS is a voluntary service that is currently
used only to increase the accuracy of wage reporting on Forms W-2.
IRS and SSA officials identified a number of challenges that the
agencies and employers may face if the TIN Matching service or SSNVS
were used to verify AEITC eligibility.
Accuracy: Both the TIN Matching service and SSNVS are based on SSA
records and have high rates of accuracy in terms of determining whether
submitted names and SSNs match. Still, IRS and SSA officials had
concerns about whether these rates were high enough for purposes of
verifying AEITC eligibility. IRS officials told us that the TIN
Matching service is about 98 percent accurate. A December 2006 report
by the SSA Office of Inspector General sampled more than 2,000
determinations by SSA's Numident file--the database upon which SSNVS is
based--and found a name and SSN match accuracy rate of more than 99
percent.[Footnote 40] Still, SSA officials said that if SSA records
were used to verify AEITC eligibility, they might want to subject an
employee's name and SSN to more "routines"--procedures such as
correcting for transposed numbers that SSA uses to increase the
likelihood of a match--than is currently done by SSNVS. IRS officials
told us that when the agency was informally considering a proposal to
charge a fee for using the TIN Matching service, several IRS officials
knowledgeable about the database opposed the idea because they did not
believe it was accurate enough that users should have to pay for it.
Accuracy concerns, however, do not preclude IRS or SSA from using SSA
records to make an initial determination about whether individuals who
may claim credits or benefits have demonstrated that they are entitled
to them. For example, as previously noted, IRS rejects electronically
filed tax returns with a name/SSN mismatch and returns them to the
taxpayer for correction. For paper returns reporting AEITC receipt that
have a name/SSN mismatch, IRS processes the returns, but since the
AEITC is reported as tax, it will either offset all or part of any
refund due or, if no refund is due, require the taxpayer to pay back
the full AEITC amount.
Similarly, SSA instructs its claims representatives that if the
identity of a claimant for Social Security benefits or Supplemental
Security Income benefits remains questionable because the individual
has not provided sufficient proof to establish his or her identity, the
claim will be denied even if other factors of eligibility are
met.[Footnote 41]
Additional employer responsibilities: IRS and SSA officials said a
major concern about employers using either service was whether a name/
SSN mismatch would create new responsibilities for employers beyond
informing the employee and denying the AEITC. IRS officials also
expressed concern that requiring employers to use the services for
AEITC would discourage them from promoting the AEITC and perhaps
encourage them to dissuade employees from seeking it. Under current
procedures for using the TIN Matching service and SSNVS, employers are
not required to take any action based on the results they receive.
IRS officials expressed concern that a June 2006 regulation proposed by
the Department of Homeland Security could expressly list employer
receipt of a "no match" letter from SSA as possible evidence that the
employer knew or should have known that it was employing an individual
not authorized to work in the United States.[Footnote 42] Under the
proposed regulation, if the employer fails to take reasonable steps to
resolve the discrepancy after receiving the letter, the Department of
Homeland Security may find that the employer had such knowledge and
assess civil monetary penalties against the employer.
The proposed Department of Homeland Security regulation describes "safe
harbor" procedures that the employer can follow in response to the
letter. Those steps include the employer promptly checking its records
for clerical errors and obtaining required documentation by working
with the employee, SSA, and the Department of Homeland Security. If the
name/SSN mismatch cannot be resolved, the employer would have to choose
between terminating the employee or facing the risk that the Department
of Homeland Security may find that the employer knew that the employee
was not authorized to work and, by continuing to employ the individual,
violated the law.
While the proposed Department of Homeland Security regulation covers
only no match letters, IRS and SSA officials expressed concern that the
regulation could be expanded to include name/SSN mismatches disclosed
by the TIN Matching service or SSNVS. Under current law, existing and
prospective users who are concerned that matching could be used for
purposes beyond improving the accuracy of Form 1099 data or wage
reporting can voluntarily cease using, or not start using, the systems.
IRS and SSA officials noted, however, that employers would no longer
have this choice if they were required to use one of these services to
verify an AEITC applicant's SSN.
In addition, existing Department of Homeland Security guidance for
employers on the interaction between antidiscrimination laws and legal
requirements for verifying employment eligibility states that employers
must treat all employees in the same manner. Employers cannot set
different employment eligibility verification standards or require that
different documents be presented by different groups of employees. If
mandatory verification of AEITC applicants' SSNs created additional
employer responsibilities under employment eligibility verification
requirements, this result could be inconsistent with efforts to ensure
that verification procedures apply to all employees.
SSA's position on SSNVS is that a name/SSN mismatch does not make any
statement about an employee's immigration status and should not be a
basis for taking any adverse action against the employee. SSA officials
also expressed reservations about SSNVS results being used to terminate
employees.
Capacity and User Access: IRS and SSA officials said changes to the
capacity and user access of the TIN Matching service or SSNVS would
either be unnecessary or minor if employers used them to verify SSNs of
employees seeking AEITC, although the officials said their agencies
might favor creating a new service for this purpose instead. They told
us that their systems have the capacity to handle the increased volume
of requests that would result from this expanded use. Because both
services already are used to verify SSNs, IRS and SSA said any changes
to how the services are accessed and used would also probably not be
extensive.
Both SSNVS and TIN Matching are Web-only services.[Footnote 43] To use
one of the services, the employer designates one or more employees or
third-party representatives to register on behalf of the employer. The
initial registration for both the TIN Matching service and SSNVS is
handled in a similar way and may take as long as 4 weeks:
* Registrants go to the agency's Web site and provide information about
themselves and their employers on a form, which they send
electronically to the agency.
* The agency sends the employer of the registrant a unique code. The
letter directs the employer to provide that code to the registrant.
* After receiving the code, the registrant can go back to the agency
Web site and input the code to activate use of the service.
TIN Matching registrants who do not use it for 6 months must
reregister, primarily to receive a new password and update any of the
information provided during the registration. SSNVS requires
registrants to change their password once a year to keep it from
expiring, which also requires reregistration.
IRS and SSA officials told us that the great majority of users of their
respective services generally report that they are not difficult to use
for either the registration process or ongoing use. IRS officials said
users access TIN Matching voluntarily and that some, particularly from
smaller organizations, appear more likely to find it burdensome than
users from larger organizations. We found that more than half the
employers that provided the AEITC in tax years 2002 through 2004 were
small businesses or self-employed and about one-quarter were tax exempt
and government entities. In addition, despite IRS's efforts to outreach
to large employers, fewer than one-fifth were large and midsize
employers (see table 20 in app. III). IRS officials said TIN Matching
service users who found the registration process burdensome were
generally those who reported to IRS that they were not use to filling
out forms on-line and creating and using passwords. The officials also
said that some TIN Matching users reported being uncomfortable having
to provide personal information to register.
SSA officials said SSNVS is used mostly by larger employers, and a
relatively small number of them reported that they found the service
burdensome. SSA officials did say, however, that SSA received about
89,000 calls through June 2007 from individuals about registration.
And, an SSA official said that small business representatives with whom
he has recently spoken expressed frustration with the overall number of
tasks that the federal government was already requiring them to perform
and, therefore, might be reluctant to verify SSNs.
IRS officials also told us that the TIN Matching service is not
programmed to track users, which likely would be useful to IRS for
enforcement purposes. Still, IRS officials added, that the service
could be modified to track employers that used the services for AEITC
purposes and report on the results. SSNVS tracks its users to determine
whether the service is being properly used.
Additional resources: IRS and SSA officials said that if employers were
required to begin using their respective services to verify the SSNs of
employees seeking the AEITC, the agencies would need additional
resources. For example, officials from both agencies cited the need to
handle questions from new users, particularly in the first year when
all individuals seeking the AEITC would be required to have their names
and SSN's matched.[Footnote 44]
When we told IRS officials that our data showed that about 50,000
employers had at least one AEITC recipient, they said such an increase
in the number of registrants could require IRS to increase the number
of staff available to answer user questions. But they said they could
not estimate how many more staff would be necessary.
IRS officials also said they were trying to make the reregistration
process easier because they received a substantial number of calls from
users who needed to reregister. This would be important for AEITC-
related use of TIN Matching because employers with only one or two
employees seeking the AEITC would only need to use the service once or
twice a year, making it likely that they would have to reregister.
SSA officials told us that if the agency was considering or was
directed to make its SSN records available for the purpose of verifying
AEITC eligibility, SSA would have to devote additional resources to
conduct a comprehensive assessment to determine the changes necessary
to SSNVS to properly achieve this goal, including possibly creating a
different service for assessing AEITC eligibility and buying a new
database server to handle the increased volume of users. Again, SSA
officials could not estimate how many more staff would be necessary.
New federal legislation: Enactment of federal legislation would be
needed for employers to begin using the TIN Matching service to verify
the SSNs of their employees seeking the AEITC.[Footnote 45] In 2000,
the Department of the Treasury recommended to the Congress that TIN
verification be expanded to include other payers subject to an IRS
reporting requirement, such as employers who file Forms W-2.[Footnote
46]
It is uncertain whether IRS could require employers to use SSNVS to
verify the SSNs of employees seeking the AEITC. SSA officials said they
would need to determine whether SSA's disclosure of SSN data is
compatible with the reason it collected the information and, if so,
whether verifying SSNs via SSNVS for purposes of AEITC eligibility is
consistent with SSA's legal obligations. Both Treasury and SSA
officials said their agencies would strongly prefer enactment of
legislation before requiring employer or any verification of SSNs of
employees seeking the AEITC.
Employee appeal of mismatch: One difference between using the TIN
Matching service or SSNVS would occur when an employee claimed that a
name and SSN mismatch was inaccurate. IRS and SSA officials said
employees who questioned a SSN mismatch would presumably contact IRS,
which would send them to SSA to resolve the issue because the TIN
Matching service is based on SSA records. IRS officials said that, in
contrast, employees questioning a name and SSN mismatch generated by
SSNVS would presumably go directly to SSA.
Agency mission: SSA officials also said that verifying eligibility for
the AEITC is most appropriate for IRS because it is a tax
administration issue and is therefore outside the scope of SSA's
mission. However, it is not unusual for agencies to assist other
federal agencies in carrying out their mission. SSA officials also said
that, regardless of which service was used, IRS would have full
administrative responsibility for overseeing a program for employers to
verify AEITC applicants' SSNs.
IRS Does Not Require Submission of Forms W-5 from Employers for
Employees Seeking the AEITC:
IRS does not require employers to submit a Form W-5 when an employee
requests receipt of the AEITC. Several advantages and disadvantages
exist if IRS creates a Form W-5 database to use in monitoring AEITC
noncompliance issues.
IRS could require employers to submit a Form W-5 when an employee
requests receipt of the AEITC. In turn, IRS could use the Forms W-5 to
create a database to monitor the AEITC. The database could be used to
ensure that the SSN provided on the Form W-5 is valid and that it
matches the individual's name. Doing such a check could have prevented
more than 100,000 individuals from receiving as much as between $37
million and $39 million each year in AEITC to which they were
potentially not entitled because of not meeting the valid SSN
requirement. Such a database could also allow IRS to know which
individuals received the AEITC and provide the agency with an
opportunity to send recipients a notice at the start of the next filing
season reminding them to file a federal tax return. A reminder to file
notice could likely reduce noncompliance for up to about 200,000
individuals who received between $42 million and $50 million each year
in AEITC without filing a federal tax return. Similarly, IRS officials
could use a W-5 database to verify other AEITC requirements, such as
ensuring that each recipient has only one Form W-5 in effect at a time.
This check could reduce the probability that individuals would receive
more than the yearly AEITC maximum.
While acknowledging that potential advantages exist to developing and
maintaining a Form W-5 database, IRS officials said that the
disadvantages could outweigh these and any other advantages. Although
IRS officials said it was too early in the proposal process to
calculate the database's potential costs and subsequent return on
investment, they said it very likely would be substantially lower than
the return on investment for either existing or anticipated future
noncompliance programs. For example, IRS estimates the current return
on investment for EITC Examination noncompliance is between $17 to $1
and $19 to $1. Although these amounts only include labor and do not
include overhead such as facilities, equipment, and supplies, officials
felt confident that the EITC return on investment would far exceed that
for the AEITC. Their opinion was largely based on the few dollars
involved with the AEITC, especially compared to other noncompliance
programs.
In addition, IRS officials expressed concerns that employers would not
submit Forms W-5 to IRS. Officials raised an analogy between this
proposal and the prior Questionable W-4 program.[Footnote 47] As we
reported in 2003, about 75 percent of the large employers with 1,000 or
more employees in IRS's Large and Medium-Size Business and Small
Business/Self Employed divisions who filed tax returns in tax year 2001
did not send IRS any questionable Forms W-4.[Footnote 48] After our
report, IRS discontinued the Questionable W-4 program. Additionally,
officials noted that requiring employers to submit Forms W-5 may
discourage them from participating because if the employer was notified
that the SSN on a Form W-5 was invalid or that it did not match the
employee's name, employers would likely have a responsibility to
discuss the matter with the employee, creating yet another new burden
employers would not want to accept. Finally, employers may not
participate because if the employee left the employer during the year,
the employer would again have to contact IRS so the Form W-5 database
could be updated.
Options to Reduce AEITC Noncompliance May Be Cost Effective:
Although we do not know how successful the various options we have
identified for improving AEITC compliance may be if implemented or what
the full cost of implementation would be, IRS may be able to achieve a
return on investment somewhat comparable to that for EITC examinations.
We found an average of about $94 million a year in AEITC noncompliance
for recipients in tax years 2002 through 2004.[Footnote 49] If a
compliance effort could reduce AEITC noncompliance by one-quarter, that
is, $24 million per year, IRS could spend about $1.3 million each year
to do so and achieve a $19 to $1 return on investment.[Footnote 50]
Alternatively, IRS estimated that it would cost about $533,000 to send
soft notices to 300,000 taxpayers during the Dependent Database test.
If IRS were to test sending soft notices for AEITC and it cost IRS
about the same amount to send notices to 300,000 noncompliant AEITC
recipients, IRS would only need to reduce AEITC noncompliance by about
11 percent (about $10 million) to achieve a $19 to $1 return on
investment.
Eligible Taxpayers Could Receive Full EITC Benefits If the Advance
Option Were Discontinued:
If the advance option were discontinued, eligible AEITC recipients
could still receive the full benefits of the EITC as a lump sum after
filing their tax return. In addition, improper AEITC payments to
ineligible or noncompliant individuals would be eliminated. The exact
amount of revenue that could be saved is not known. However, in
determining an amount, IRS officials said they would consider the
following: the amount of AEITC disbursed compared with the amount shown
on filed tax returns, the cost of administering the AEITC (e.g., forms
and publications, processing, compliance activities), and any amount
currently recovered through compliance activities.
Conclusions:
The AEITC has never achieved a significant participation rate, the
amount recipients received in the period we reviewed was quite low, and
noncompliance was high. However, policymakers may judge that the goal
of providing funds to low-income workers during the year, as opposed to
a lump sum that they could get as part of the EITC when filing their
taxes, remains important and should continue to be allowed. If so, IRS
needs to pursue potentially cost-effective measures to address AEITC
noncompliance.
Each of the three options we identified for improving AEITC compliance-
-using soft notices, having up-front verification of AEITC applicants'
SSNs by employers, or requiring employers to submit copies of the
Form(s) W-5 and creating a database to monitor AEITC--appears to have
potential to improve compliance, but their full benefits and costs need
to be evaluated and, if possible, tested. Soft notices have improved
compliance in other tax programs but they could be somewhat less
effective in improving AEITC compliance, in part, due to its high
turnover rate. The TIN Matching service and SSNVS have the potential to
reduce AEITC noncompliance by enabling employers to verify workers'
SSNs before providing them the AEITC. Differences exist between the two
services, but either could likely be used for AEITC SSN verification.
Both services are based on SSA records that are already deemed accurate
enough such that SSA and IRS make decisions based on them to disallow
certain exemptions and credits until eligibility has been properly
demonstrated. Significant concerns exist, however, such as the need for
legislation authorizing either the use of TIN Matching or SSNVS for
AEITC. This and other issues would need to be further explored as the
costs and benefits of employers verifying employees' SSNs are fully
identified. If IRS required employers to submit copies of the Form W-5
when an employee requests the AEITC, IRS could create a database to
better monitor and address all three of the noncompliance problems we
analyzed. However, imposing additional responsibilities on employers
for both the SSN verification option and the Form W-5 database option
have the potential to adversely affect the AEITC's already low
participation rate if employers avoid providing the AEITC due to
increased responsibilities on their part.
Due to the relatively small size of the AEITC overall, combined with
the low dollar amounts per taxpayer, IRS officials are concerned that
addressing AEITC noncompliance may provide less return on IRS's
enforcement efforts than would addressing other noncompliance issues.
However, IRS may be able to achieve returns on AEITC enforcement that
would not be significantly out of line with returns on other
enforcement work. For example, it cost IRS about $533,000 to send soft
notices to 300,000 taxpayers in the Dependent Database test. If IRS
were to test sending soft notices for AEITC and it cost IRS about the
same amount to send notices to 300,000 noncompliant AEITC recipients,
IRS would need to reduce noncompliance by about 11 percent (about $10
million) to achieve a $19 to $1 return on investment.
Recommendations for Executive Action:
The Acting Commissioner of Internal Revenue should analyze whether any
of the following options could cost effectively and significantly
reduce AEITC noncompliance:
* sending potentially noncompliant AEITC recipients soft notices, such
as to nonfilers whose Forms W-2 show that they received AEITC and
filers who misreported the amount they received or whose SSN and name
do not match;
* requiring employers to verify the SSN of employees seeking AEITC; or:
* requiring employers to submit Form W-5 to IRS and IRS creating and
maintaining a database for these forms.
To better identify the costs and implementation issues as well as the
likelihood for these or other options to reduce AEITC noncompliance,
where practical, the Acting Commissioner of Internal Revenue should
test these options to make a more fully informed judgment about whether
any would be worthwhile.
If the Acting Commissioner of Internal Revenue determines that none of
these options would be cost effective and no other remedies are viable,
then the Treasury Secretary should inform the Congress of this and
provide Treasury's opinion about whether the AEITC should be retained.
Agency Comments:
The Acting Commissioner of Internal Revenue provided written comments
in a July 18, 2007 letter. He agreed with our recommendation and
outlined the actions IRS would take to address that recommendation,
including conducting further analyses and possible testing of proposed
options for reducing AEITC noncompliance. He also stated that IRS will
conduct its cost-benefit analyses in conjunction with a congressional
requirement to study the impact of expanding eligibility of the AEITC
to all EITC recipients. We also provided a draft of this report to the
Department of the Treasury and SSA and incorporated technical comments
where appropriate. SSA emphasized that verifying eligibility for the
AEITC is most appropriate for IRS because it is a tax administration
issue and therefore outside the scope of SSA's mission.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its date. At that time, we will send copies of this report to the
Secretary of the Treasury, the Commissioner of the Social Security
Administration, the Acting Commissioner of Internal Revenue,
appropriate Congressional committees, and other interested parties.
This report is available at no charge on GAO's web site at [hyperlink,
http://www.gao.gov].
If you or your staffs have any questions, please contact me at (202)
512-9110 or brostekm@gao.gov.
Signed by:
Michael Brostek:
Director, Tax Issues:
Strategic Issues Team:
[End of section]
Appendix I: IRS's Implementation of Recommendations from GAO's 1992
Report on the Advance Earned Income Tax Credit:
After analyzing IRS's responses to our recommendations in our 1992
Advance Earned Income Tax Credit (AEITC) report, we determined that IRS
has implemented five of the six recommendations to the Commissioner of
Internal Revenue from our 1992 report on the AEITC and partially
implemented the remaining one (see table 8).
Table 8: IRS Implementation of Recommendations from GAO's 1992 Report
on the Advance Earned Income Tax Credit:
Number: 1;
Recommendation: Include information on AEITC in employee outreach
materials and programs;
Status: Implemented;
IRS implementation: Developed publicity materials.
Number: 2;
Recommendation: Notify taxpayers who receive the Earned Income Tax
Credit (EITC) about the advance option;
Status: Implemented;
IRS implementation: Revised Form W-2 and Notice 797 to contain
information on how to apply for the AEITC and developed radio and
television announcements on the AEITC.
Number: 3;
Recommendation: Encourage employers to notify employees who have no
income tax withheld of the advance option;
Status: Implemented;
IRS implementation: Added text to the face of the Form W- 4
instructions advising employees to consider the AEITC.
Number: 4;
Recommendation: Clarify instructions on AEITC in "Circular E,
Employer's Tax Guide.";
Status: Implemented;
IRS implementation: Clarified employers' responsibilities and
liabilities in advancing the EITC in the 1993 "Circular E, Employer's
Tax Guide.".
Number: 5;
Recommendation: Send, to individuals who do not file tax returns, a
notice explaining their requirements to file;
Status: Partially Implemented;
IRS implementation: Included information on the AEITC in a reminder to
file notice until 1997 and added a separate AEITC box on Form W-2.
Number: 6;
Recommendation: Explore ways to identify those individuals who receive
the credit advance, but do not report it, so as to prevent them from
receiving the credit a second time;
Status: Implemented;
IRS implementation: Added a line on the Form 1040 for taxpayers to
report AEITC received and redesigned the Form W-2.
Source: GAO analysis of IRS data.
[End of table]
Our first recommendation was for the Commissioner of Internal Revenue
to include information on AEITC in employee outreach materials and
programs. IRS implemented this recommendation primarily by developing
publicity materials (i.e., grocery bags, milk carton art, brochures,
posters) and distributing them to the public.
For the second recommendation, IRS stated that it did not have the
approximately $2 million in funding that the agency said would have
been required to notify all taxpayers who receive the EITC, but did not
elect the advance option. Instead, IRS took other actions including
revising the Form W-2 in 1992 to contain information on how to apply
for the AEITC and IRS Notice 797, "Possible Federal Tax Refund Due to
the Earned Income Credit," to include information on how to apply for
the AEITC.
For our third recommendation, IRS noted that it could encourage
employers to make such notifications, but that there are no statutory
sanctions on employers who fail to do so. Beginning in 1992, IRS placed
text on the face of the Form W-4 instructions advising employees to
consider filing a Form W-5 with their employer to obtain the advance
through lower withholding.
For our fourth recommendation to clarify instructions on the AEITC in
"Circular E, Employer's Tax Guide" IRS did so through the inclusion of
new examples explaining to employers how they should make advance
payments to employees and how employers can report these amounts.
Our fifth recommendation was for the IRS Commissioner to send
individuals who received the AEITC and do not file tax returns a notice
explaining the requirement to file. IRS partially implemented this
recommendation by including information on advance payment in a
reminder to file notice and adding a separate AEITC box on Form W-2.
IRS did not track the number of AEITC nonfilers who received the
notice. The reminder to file notice was only sent until 1997 and IRS
officials were uncertain why that notice was discontinued.
The last recommendation was for exploring ways to identify those
individuals who receive the credit in advance but do not report it. IRS
pointed out that its systems were not geared to detecting unreported
AEITC payments at the time the returns are processed and the best
approach to preventing noncompliance by AEITC payment recipients is a
proactive one that recognizes the filing of correct returns. IRS
implemented this recommendation by providing a separate line on Form
1040 on which to report AEITC payments and redesigning the Form W-2,
for tax year 1993, which it believed would increase the accuracy of the
AEITC payment information reported on Form W-2. Our work in this report
demonstrates a continuing need to explore additional compliance
initiatives aimed at those who receive the AEITC, but do not report it
on their tax return.
[End of section]
Appendix II: Scope and Methodology:
To answer the first and second objectives:
* how many individuals received the Advance Earned Income Tax Credit
(AEITC) compared with the Earned Income Tax Credit (EITC) and how much
did they receive in tax years 2002 through 2004; what actions, if any,
have been taken to increase use since 1992; and what is the potential
for significant increases in the future; and:
* what is the extent of noncompliance, if any, associated with the
AEITC;
we obtained a data file of all Forms W-2, "Wage and Tax Statement," for
tax years 1999-2004 indicating AEITC payments as shown by an amount
greater than $0 in box 9 of the Form W-2 from the Internal Revenue
Service (IRS).[Footnote 51] We used these tax years because they were
the most current available at the time we started our review. The Form
W-2 identified key information, including the AEITC recipient's name,
address, Social Security number (SSN), and amount of AEITC dollars
paid, as well as the employer's name and address.
To determine the number of individuals who received the AEITC, we used
Forms W-2 instead of tax returns, which IRS has historically used to
estimate AEITC use. We used this alternate approach because we believe
the Forms W-2 provide results that are more accurate and
complete.[Footnote 52] For example, using Forms W-2 would include in
the population of AEITC recipients those who received AEITC, but did
not file a return, and those who filed a return, but did not report any
AEITC. Using tax returns would not capture these individuals or related
noncompliance issues. In addition, using tax returns counts instances
where both spouses receive the AEITC and file jointly on one return as
opposed to two individuals. IRS's Research, Analysis, and Statistics
and EITC program office officials agreed with our methodology.
We performed data reliability tests on the data file to determine
whether the data were sufficiently reliable for our intended purposes.
We did this testing, in part, by conducting preliminary analyses, which
identified certain data irregularities or anomalies. We identified two
noteworthy anomalies in the data file: (1) excessive AEITC dollar
amounts and (2) invalid AEITC recipient SSNs. First, many Forms W-2
showed that employees received amounts over the allowable limits. A few
even showed individuals each receiving about $1 million in AEITC--
amounts clearly above AEITC legal limits and which IRS officials said
would be improbable, potentially resulting from transcription errors.
Second, we also found some instances where the SSN and/or name on the
Form W-2 were invalid, which means that the number was never issued by
SSA or that the name and number on the Form W-2 did not match the
listed name for that same SSN in official records maintained by IRS. We
compared the number and name information on the Form W-2 to the
National Account Profile to evaluate the validity of that information
and to identify any possible subsequent corrections.[Footnote 53]
To address these data anomalies, we separated the Form W-2 file into
four subpopulations using the following three criteria: whether (1) the
SSN on the Form W-2 was valid, according to Data Master File (DM-1);
(2) the SSN and the recipient's name on the Form W-2 matched, according
to DM-1; and (3) the amount of AEITC received was in excess of the
yearly maximum.[Footnote 54] Each of the subpopulations had a unique
profile, as follows:[Footnote 55]
1. Valid subpopulation: This group of Forms W-2 represents all
individuals (1) that had a valid SSN, meaning that it was a number
issued by SSA, (2) whose name matches the SSN, and (3) that had an
AEITC amount within the yearly maximum. More than 75 percent of the
Forms W-2 on average during tax years 2002 through 2004 were in this
subpopulation.
2. Invalid name subpopulation: This group of Forms W-2 represents all
individuals that had (1) a valid SSN (2) a SSN that did not match the
individual's name and (3) the AEITC amount was within the yearly
maximum. About 17 percent of the Forms W-2 fell in this subpopulation
for each of the 3 years we reviewed.
3. Invalid number subpopulation: This group of Forms W-2 represents all
Forms W-2 that had an invalid SSN and an AEITC amount that was within
the yearly maximum. About 7 percent of the Forms W-2 during tax years
2002 through 2004 were in this population.[Footnote 56]
4. Dollar limit subpopulation: This group of Forms W-2 represents all
instances where the AEITC amount was above the yearly maximum,
regardless of whether the SSN was invalid or if the individual's name
matched the SSN. This represented less than 1 percent on average of all
Forms W-2 in each of the 3 years we reviewed. Because IRS officials
told us these data were likely erroneous, we excluded it from most of
our analyses, and IRS officials agreed.
Table 9: Number of Forms W-2, Number of Individuals, and the Dollars
for Each Subpopulation, Tax Years 2002 through 2004:
Valid subpopulation; (percentage);
Tax year 2002: Number of Forms W-2: 488,007: (74%);
Tax year 2002: Number of individuals: 418,774: (78%);
Tax year 2002: Dollars: $107,230,369: (57%);
Tax year 2003: Number of Forms W-2: 463,285: (76%);
Tax year 2003: Number of individuals: 398,526: (79%);
Tax year 2003: Dollars: $106,075,016:(70%);
Tax year 2004: Number of Forms W-2: 469,234:( 76%);
Tax year 2004: Number of individuals: 398,335: (78%);
Tax year 2004: Dollars: $111,098,330: (68%).
Invalid name subpopulation:(percentage);
Tax year 2002: Number of Forms W-2: 114,819: (17%);
Tax year 2002: Number of individuals: 80,524: (15%);
Tax year 2002: Dollars: $25,734,033: (14%);
Tax year 2003: Number of Forms W-2: 101,646: (17%);
Tax year 2003: Number of individuals: 74,234:(15%);
Tax year 2003: Dollars: $25,480,158: (17%);
Tax year 2004: Number of Forms W-2: 101,140: (16%);
Tax year 2004: Number of individuals: 77,747: (15%);
Tax year 2004: Dollars: $26,819,235:(16%).
Invalid number subpopulation:(percentage);
Tax year 2002: Number of Forms W-2: 49,432: (8%);
Tax year 2002: Number of individuals: 32,501: (6%);
Tax year 2002: Dollars: $11,582,604: (6%);
Tax year 2003: Number of Forms W-2: 44,244: (7%);
Tax year 2003: Number of individuals: 30,622: (6%);
Tax year 2003: Dollars: $11,650,727: (8%);
Tax year 2004: Number of Forms W-2: 43,696: (7%);
Tax year 2004: Number of individuals: 31,875: (6%);
Tax year 2004: Dollars: 12,166,702: (7%).
Dollar limit subpopulation:(percentage);
Tax year 2002: Number of Forms W-2: 6,408:(1%);
Tax year 2002: Number of individuals: 6,360:(2%);
Tax year 2002: Dollars: $43,703,747:(23%);
Tax year 2003: Number of Forms W-2: 2,692:(less than 1%);
Tax year 2003: Number of individuals: 2,677:(1%);
Tax year 2003: Dollars: $7,486,726:(5%);
Tax year 2004: Number of Forms W-2: 2,768:(less than 1%);
Tax year 2004: Number of individuals: 2,757:(1%);
Tax year 2004: Dollars: $12,917,134:(8%).
Total;
Tax year 2002: Number of Forms W-2: 658,666;
Tax year 2002: Number of individuals: 538,159;
Tax year 2002: Dollars: $188,250,753;
Tax year 2003: Number of Forms W-2: 611,867;
Tax year 2003: Number of individuals: 506,059;
Tax year 2003: Dollars: $150,692,627;
Tax year 2004: Number of Forms W-2: 616,838;
Tax year 2004: Number of individuals: 510,714;
Tax year 2004: Dollars: $163,001,401.
Source: GAO analysis of IRS data.
Note: Percentages may not add due to rounding.
[End of table]
We conducted additional data reliability tests for each of the
databases we used to obtain information about the AEITC, including
IRS's Individual Returns Transaction File, for return and filing
information, which came from the Compliance Data Warehouse; National
Account Profile/DM-1, for IRS's SSN and name reference information,
which also came from the Compliance Data Warehouse; Automated
Underreporter (AUR), for IRS's third-party information return data; and
Taxpayer Identification Number (TIN) Matching and SSA's Social Security
Number Verification System (SSNVS), for alternative SSN and name
reference information used by employers.[Footnote 57] After completing
our data reliability assessments, we determined the AEITC data to be
sufficiently reliable for analysis and our reporting objectives.
We also developed a comprehensive analysis plan that included our
researchable issues, planned analysis, data sources, and limitations.
We shared our plan with IRS and others and incorporated their feedback.
Because IRS's workload precluded them from providing information
related to employers/AEITC payers within our time frames, we were able
to conduct only limited analyses of employers who paid AEITC.
Using the analysis plan for each subpopulation, we conducted multiple
analyses to develop relevant demographic, characteristic, and
compliance data. Because each population had different criteria,
certain characteristics or compliance data could not be developed or
compared across the subpopulations. For example, the only
characteristics data that could be developed for the invalid SSN
subpopulation came from the Form W-2 (e.g., amount of AEITC, geographic
location) because it is the only available source. Similarly, tax
return data, such as filing status, was not available for those who did
not file a tax return.
All data pertaining to filed tax returns came either from returns that
reported receipt of the AEITC on the appropriate line or from a
"constructed tax return," which IRS officials created using the SSN on
the Form W-2 and matching it to an SSN in the primary, secondary, or
dependent position on a filed return. The location of the SSN in one of
these positions is relevant due to the way IRS manages its data files.
There could be instances when a tax return was filed but it was not
detected using our methodology. For example, a taxpayer's SSN on the
Form W-2 might have been incorrect and the taxpayer reported the
correct number on the tax return (Form 1040).
To report on data pertaining to the EITC, we relied on published EITC
data provided by IRS research and program office officials, including
the EITC database, the EITC Database Year to Year Comparison Report,
and EITC Fact Sheet.[Footnote 58] When possible, our analysis compares
individuals who received the AEITC with individuals who received the
EITC. IRS defines EITC recipients by the number of federal tax returns
that received EITC. In addition, EITC data are based upon the primary
TIN of all taxpayers who received an amount of EITC. We determined the
number of individuals who receive the AEITC based on the number of
Forms W-2 reporting AEITC per unique SSN. IRS officials agreed that
even though these populations are not identical, it is reasonable to
make a comparison between them.
We frequently consulted with IRS officials on the data and our
analyses; they generally agreed with both the approach and the accuracy
of the results. For the analyses that IRS conducted, we agreed with
both the approach and the accuracy of the results.
In addition, we reviewed legislative and IRS administrative changes to
the AEITC since 1992 and discussed them with IRS and other officials,
including Department of the Treasury officials. We reviewed reports on
IRS's implementation of some of our prior recommendations pertaining to
the EITC and discussed them with IRS officials, including the National
EITC Director. We also coordinated this work with the Treasury
Inspector General for Tax Administration.
Finally, we also identified and interviewed 11 individuals we
determined to be experts to provide us a fuller understanding on the
potential for significant increases or improvement to AEITC use and
noncompliance and included academics, researchers, practitioners, and
individuals representing the areas of tax policy, low-income individual
issues, and compliance issues.[Footnote 59] We chose these individuals
based on our knowledge of their areas of expertise and our research
that indicated they were knowledgeable about the EITC.
To address the third objective, how well do IRS's procedures address
any areas of noncompliance, we examined portions of IRS's Internal
Revenue Manual and interviewed IRS Wage and Investment and Small
Business/Self-Employed division officials to determine procedures for
processing returns that reported receipt of the AEITC. We examined how
IRS's enforcement procedures and operations, including Submission
Processing, AUR, Nonfiler, Collection, Examination, Criminal
Investigation, and Taxpayer Advocate, address certain kinds of
potential noncompliance.
We explored various options to improve AEITC compliance. This involved
conducting literature searches and interviews with IRS and SSA
officials. We reviewed and discussed the results of soft notice tests
with IRS officials, including the National EITC Director, and discussed
the applicability of soft notices for addressing AEITC noncompliance.
We also reviewed and analyzed documents and reports about IRS, SSA, and
Department of Homeland Security databases about whether they could be
used by employers to verify the SSN of an employee seeking the AEITC
before the employer begins paying it. We also interviewed knowledgeable
officials at IRS and SSA about the advantages and disadvantages of such
systems when considering the AEITC. Further, we interviewed IRS
officials from various offices, such as EITC Program, Modernization and
Information Technology Services, and Stakeholders, Partnership,
Education and Communication, about the advantages and disadvantages of
creating a database for the Forms W-5. It was not within the scope of
our work to fully evaluate the potential cost and benefits of these
options for reducing noncompliance.
We also reviewed prior GAO, IRS, Treasury Inspector General for Tax
Administration, and other reports on the AEITC and EITC.
We conducted our work primarily in Washington, D.C., and Atlanta, Ga.,
from December 2005 through July 2007 in accordance with generally
accepted government auditing standards.
[End of section]
Appendix III: Demographic Characteristics of Advance Earned Income Tax
Credit Recipients and Their Employers:
We identified basic demographic characteristics of Advance Earned
Income Tax Credit (AEITC) recipients and their employers in tax years
2002 through 2004. Specifically, we identified the following 11
characteristics: (1) number of Forms W-2 received; (2) average amount
of AEITC received by consecutive recipients; (3) average adjusted gross
income (AGI) for AEITC recipients; (4) average wages; (5) filing
status; (6) age; (7) gender; (8) number of qualifying children; (9)
filing method; (10) geographic location of AEITC recipients; and (11)
employer size, number of employees, and number of Forms W-2 with AEITC
issued to employees. Each of the characteristics represents an analysis
and provides additional objective information about AEITC recipients
not previously discussed. Where possible, we compared AEITC recipients
to Earned Income Tax Credit (EITC) recipients. Further analyses may
provide information to better target IRS enforcement efforts. For
example, IRS's information on EITC associated with gender differs from
our AEITC results in table 17 on gender.
The characteristics are organized by a declining AEITC population size.
For example, table 10, "Number of Forms W-2 Received by Subpopulation,
Tax Years 2002 through 2004," includes the valid, the invalid name, and
invalid number subpopulations, as described in the scope and
methodology (see app. II), while table 15, "Filing Status of AEITC and
EITC Recipients, Number and Percentage, Tax Years 2002 through 2004,"
includes only the valid and invalid name subpopulations. The invalid
number subpopulation was not included in the table about filing status
because that subpopulation contains only Form W-2 data and not tax
return data. Thus, information such as filing status, which comes from
the tax return, is not available.
Number of Forms W-2 with AEITC that each individual received: Most
individuals who received the AEITC only had one Form W-2 reporting its
receipt (see table 10). Having more than one Form W-2 does not
necessarily indicate noncompliance because an individual may have more
than one job during the year and receive the AEITC from more than one
employer. The data did not enable us to analyze whether any of these
individuals had more than one Form W-5 in effect at one time.
Presently, IRS's administrative procedures do not enable it to identify
whether the taxpayer has more than one Form W-5 in effect at one time.
Table 10: Number of Forms W-2 Received by Subpopulation, Tax Years 2002
through 2004:
[See PDF for image]
Source: GAO analysis of IRS data.
Note: This table includes the valid, invalid name, and invalid number
subpopulations. About 20 percent of the combined invalid name and
invalid number subpopulations were noncompliant (see table 4).
[End of table]
Average amount of AEITC received by consecutive recipients: About
98,000 individuals received the AEITC consecutively during tax years
2002 through 2004. These 98,000 individuals received a higher average
amount of AEITC than the entire AEITC population (see fig. 6).
Figure 6: Average Amount of AEITC Received by Consecutive and AEITC
Recipients, Tax Years 2002 through 2004:
[See PDF for image]
Source: GAO analysis of IRS data.
Note: This figure includes the valid, invalid name, and invalid number
subpopulations.
[End of figure]
Adjusted gross income (AGI) for AEITC and EITC recipients: The maximum
amount of AGI a taxpayer could have in tax years 2002 through 2004 and
receive the AEITC and/or EITC was $34,178, $34,692 and $35,458,
respectively. As noted in tables 11, 12, and 13, most individuals who
received the AEITC and filed a tax return reported an AGI of $1--
$20,000. Some taxpayers had an AGI above the allowable limits. However,
because an individual's personal circumstance may have changed during
the year, for example the individual may have gotten a higher paying
job, as long as the same amount of AEITC received as shown on the Form
W-2 was reported on the tax return, AGI outside the limit for AEITC
recipients is permissible and the taxpayer is considered compliant. By
reporting the correct amount on the tax return, the AEITC would
increase the tax due or reduce any refund.
Table 11: AGI for AEITC and EITC Recipients, Number, Average, and Sum,
for Tax Year 2002:
[See PDF for image]
Source: GAO analysis of IRS data.
[A] Negative dollar amounts are possible with an AGI less than or equal
to $0 because these returns likely have eligible deductions (such as
alimony payments) that exceed the AGI amount, thus resulting in a
negative AGI. This table includes the valid and invalid name
subpopulations.
[End of figure]
Table 12: AGI for AEITC and EITC Recipients, Number, Average, and Sum,
for Tax Year 2003:
[See PDF for image]
Source: GAO analysis of IRS data.
[A] Negative dollar amounts are possible with an AGI less than or equal
to $0 because these returns likely have eligible deductions (such as
alimony payments) that exceed the AGI amount, thus resulting in a
negative AGI. This table includes the valid and invalid name
subpopulations.
[End of table]
Table 13: AGI for AEITC and EITC Recipients, Number, Average, and Sum,
for Tax Year 2004:
[See PDF for image]
Source: GAO analysis of IRS data.
[A] Negative dollar amounts are possible with an AGI less than or equal
to $0 because these returns likely have eligible deductions (such as
alimony payments) that exceed the AGI amount, thus resulting in a
negative AGI. This table includes the valid and invalid name
subpopulations.
[End of table]
Wages for AEITC and EITC recipients: The yearly wage limits for AEITC
and EITC recipients were $34,178 for tax year 2002, $34,692 for tax
year 2003, and $35,458 for tax year 2004. The average wages for AEITC
recipients in the valid subpopulation were about $18,000, while they
were about $47,000 for the invalid name subpopulation.[Footnote 60]
This compares with about $13,000 for EITC recipients (see table 14).
Some wages are outside the allowable limits. However, because an
individual's personal circumstance may have changed during the year,
for example, the individual may have gotten a higher paying job, as
long as the same amount of AEITC received as shown on the Form W-2 was
reported on the tax return, wages outside the limit are permissible and
the taxpayer is considered compliant. By reporting the correct amount
on the tax return, the AEITC would increase the tax due or reduce any
refund.
Table 14: Wages Reported for AEITC and EITC Recipients, Number, Wage
Amount, and Average Dollars Received for Tax:
Tax year: 2002;
AEITC: Valid subpopulation: Number: 283,316;
AEITC: Valid subpopulation: Wage amount: $4,926,169,548;
AEITC: Valid subpopulation: Average: $17,388;
AEITC: Invalid name subpopulation: Number: 59,525;
AEITC: Invalid name subpopulation: Wage amount: $2,696,220,392;
AEITC: Invalid name subpopulation: Average: $45,296;
EITC: Number: 20,918,823;
EITC: Wage amount: $273,167,081,421;
EITC: Average: $13,058.
Tax year: 2003;
AEITC: Valid subpopulation: Number: 265,966;
AEITC: Valid : Wage amount: $4,829,307,231;
AEITC: Valid subpopulation: Average: $18,158;
AEITC: Invalid name subpopulation: Number: 54,622;
AEITC: Invalid name subpopulation: Wage amount: $2,545,765,228;
AEITC: Invalid name subpopulation: Average: $46,607;
EITC: Number: 21,431,377;
EITC: Wage amount: $280,828,962,882;
EITC: Average: $13,104.
Tax year: 2004;
AEITC: Valid subpopulation: Number: 254,003;
AEITC: Valid subpopulation: Wage amount: $4,409,967,145;
AEITC: Valid subpopulation: Average: $17,362;
AEITC: Invalid name subpopulation: Number: 55,721;
AEITC: Invalid name subpopulation: Wage amount: $2,759,417,493;
AEITC: Invalid name subpopulation: Average: $49,522;
EITC: Number: 21,721,218;
EITC: Wage amount: $290,119,218,681;
EITC: Average: $13,356.
Source: GAO analysis of IRS data.
Notes: This table includes the valid and invalid name subpopulations.
[End of table]
Filing status of AEITC and EITC recipients: As shown in table 15, about
half of AEITC recipients in the valid subpopulation and most
individuals who received the EITC used the Head of Household filing
status. This compares to AEITC recipients in the invalid name
subpopulation who most frequently used the Married Filing Jointly
filing status. About 2 percent of the tax returns that reported
receiving AEITC used the Married Filing Separate filing status, which
is not allowed. However, an individual's personal circumstance may have
changed during the year, for example the individual may have separated
from their spouse. As long as the same amount of AEITC received as
shown on the Form W-2 was reported on the tax return, this situation is
permissible and the taxpayer is considered compliant. By reporting the
correct amount on the tax return, the AEITC would increase the tax due
or reduce any refund.
Table 15: Filing Status of AEITC and EITC Recipients, Number and
Percentage, Tax Years 2002 through 2004:
[See PDF for image]
Source: GAO analysis of IRS data.
Notes: EITC totals are the number of taxpayers who received EITC. N/A
means not applicable. This table includes the valid and invalid name
subpopulations.
[End of table]
Age of AEITC and EITC recipients: Most individuals who received the
AEITC, as well as most EITC recipients, were between the ages of 26 and
64 (see table 16). IRS officials noted that recipients whose age fell
into the 'Over 100' category are the result of a probable error, such
as a transcription error. Alternatively, an AEITC recipient in this
category may have used a SSN of a deceased individual.
Table 16: Age of AEITC and EITC Recipients, Tax Years 2002 through
2004:
[See PDF for image]
Source: GAO analysis of IRS data.
Notes: This table includes the valid and invalid name subpopulations.
IRS calculated age by subtracting the birth year from the analysis
year. Neither IRS nor GAO could identify why the tax years 2002 and
2003 AEITC valid Forms W-2 SSN total is one below the total number of
individuals who received a Form W-2 reporting AEITC.
[End of table]
Gender of AEITC and EITC recipients: More males than females received
the AEITC during tax years 2002 through 2004. In contrast, more females
than males received the EITC during this same period (see table 17).
Table 17: Gender of AEITC and EITC Recipients, Number and Percentage,
Tax Years 2002 through 2004:
[See PDF for image]
Source: GAO analysis of IRS data.
Notes: This table includes the valid and invalid name subpopulations.
We reported gender information only for individuals who filed a federal
tax return. Percentages may not add due to rounding.
[End of table]
Number of qualifying children for AEITC and EITC recipients: About half
of the individuals who reported receiving the AEITC had two qualifying
children. Results were similar for EITC recipients. However, about 8
percent of this population did not report having any qualifying
children, which is not allowed (see table 18). However, an individual's
personal circumstance may have changed during the year, for example,
the individual may have separated from their spouse or divorced. As
long as the same amount of AEITC received as shown on the Form W-2 was
reported on the tax return, the taxpayer is considered compliant. By
reporting the correct amount on the tax return, the AEITC would
increase the tax due or reduce any refund. In contrast, most
individuals who received the EITC also had two qualifying children.
There is no qualifying child requirement to receive the EITC.
Table 18: Number of Qualifying Children for AEITC and EITC Recipients,
Number and Percentage, Tax Years 2002 through 2004:
Number of taxpayers with no qualifying children (percentage);
Tax year 2002: AEITC: 7,946: (8%);
Tax year 2002: EITC: 3,765,072: (18%);
Tax year 2003: AEITC: 7,456: (7%);
Tax year 2003: EITC: 4,022,684: (19%);
Tax year 2004: AEITC: 7,786: (8%);
Tax year 2004: EITC: 4,181,382: (19%).
Number of taxpayers with 1 qualifying child (percentage);
Tax year 2002: AEITC: 43,066: (41%);
Tax year 2002: EITC: 8,198,533: (39%);
Tax year 2003: AEITC: 43,129: (41%);
Tax year 2003: EITC: 8,269,050: (39%);
Tax year 2004: AEITC: 40,379: (40%);
Tax year 2004: EITC: 8,354,539: (38%).
Number of taxpayers with 2 qualifying children (percentage);
Tax year 2002: AEITC: 53,721: (51%);
Tax year 2002: EITC: 8,955,218: (43%);
Tax year 2003: AEITC: 55,558: (52%);
Tax year 2003: EITC: 9,139,643: (43%);
Tax year 2004: AEITC: 52,448: (52%);
Tax year 2004: EITC: 9,185,297: (42%).
Total (percentage);
Tax year 2002: AEITC: 104,733: (100%);
Tax year 2002: EITC: 20,918,823: (100%);
Tax year 2003: AEITC: 106,143; (100%);
Tax year 2003: EITC: 21,431,377: (100%);
Tax year 2004: AEITC: 100,613: (100%);
Tax year 2004: EITC: 21,721,218: (100%).
Source: GAO analysis of IRS data.
Note: This table is based on the number of tax returns in the EITC
database that had AEITC greater than $0 and zero, one, or two
qualifying children.
[End of table]
Filing method of AEITC and EITC recipients: As noted in table 19, most
tax returns that showed receiving an amount of AEITC were filed
electronically, as were most tax returns which reported receipt of the
EITC. For both AEITC and EITC, about 70 percent of recipients filed
electronically for the 3 years we examined.
Table 19: Filing Method of AEITC and EITC Recipients, Number and
Percentage, Tax Years 2002 through 2004:
Electronic;
Tax year 2002: AEITC: 93,291: (68%);
Tax year 2002: EITC: 14,030,564: (67%);
Tax year 2003:AEITC: 100,085: (72%);
Tax year 2003:EITC: 15,322,251: (71%);
Tax year 2004: AEITC: 98,592: (78%);
Tax year 2004: EITC: 16,269,437: (75%).
Paper;
Tax year 2002: AEITC: 44,477: (32%);
Tax year 2002: EITC: 6,888,259: (33%);
Tax year 2003:AEITC: 38,885: (28%);
Tax year 2003:EITC: 6,109,126: (29%);
Tax year 2004: AEITC: 28,228: (22%);
Tax year 2004: EITC: 5,451,781: (25%).
Total;
Tax year 2002: AEITC: 137,768: (100%);
Tax year 2002: EITC: 20,918,823: (100%);
Tax year 2003:AEITC: 138,970: (100%);
Tax year 2003:EITC: 21,431,377: (100%);
Tax year 2004: AEITC: 126,820: (100%);
Tax year 2004: EITC: 21,721,218: (100%).
Source: GAO analysis of IRS data.
Note: Tax years 2002 and 2003 include 5 and 4 duplicate Taxpayer
Identification Numbers (TIN), respectively. The AEITC totals shown
above do not equal the total number of individuals who filed a federal
tax return for that year. This table only includes the number of tax
returns that had an AEITC amount greater than $0. IRS did not identify
the filing method used by individuals who filed a tax return but failed
to report receipt of the AEITC. The total number of individuals who
filed a federal tax return was 338,942, 316,959, and 307,251, for tax
years 2002 through 2004 respectively. The EITC total represents the
total number of taxpayers claiming EITC.
[End of table]
Geographic location of AEITC recipients in the valid subpopulation: Of
the individuals in the valid subpopulation, use of the AEITC varied
widely across the country. In all 3 tax years, Florida and Illinois had
the most AEITC recipients (see fig. 7).
Figure 7: Geographic Location of AEITC Recipients in the Valid
Subpopulation, Tax Years 2002 through 2004:
[See PDF for image]
Source: GAO analysis of IRS data.
Note: AEITC geographic location is based upon information reported on
the tax return. This figure includes the valid subpopulation.
[A] These geographic locations had at least 1 but fewer than 10
individuals who received the AEITC.
[B] U.S insular areas include the three major U.S. territories, which
are the U.S. Virgin Islands, American Samoa, Guam, and the two
Commonwealths, which are the Commonwealth of Puerto Rico and the
Commonwealth of Northern Mariana Islands.
[C] Other includes Federated States of Micronesia, Marshall Islands,
Palau, and Armed Forces mostly located outside the U.S.
[D] Missing refers to instances where the geographic location was not
available.
[End of figure]
Employer size, number of employers, number of forms W-2 employers
issued to AEITC recipients and Total AEITC Dollars Reported on Forms W-
2: Slightly more than 50,000 employers reported paying at least one
employee AEITC in each tax years 2002 through 2004. Most of these
employers were classified by IRS as small business/self employed and
they issued more than half of all the Forms W-2 with AEITC (see table
20).
Table 20: Employer Size, Number of Employers, Number of Forms W-2
Employers Issued to AEITC Recipients and Total Dollars Reported on
Forms W-2, Tax Years 2002 through 2004:
[See PDF for image]
Source: GAO analysis of IRS data.
Note: Employers are defined by unique Employer Identification Numbers
(EIN) and the classification of employer size is based on IRS criteria.
Number of employers includes the valid, invalid name, and invalid
number subpopulations. Number of Forms W-2 issued with AEITC includes
all Forms W-2 issued that year reporting an amount of AEITC.
Percentages may not add due to rounding.
[End of table]
[End of section]
Appendix IV: Administrative and Legislative Changes to the Advance
Earned Income Tax Credit Since 1990:
IRS has made several administrative changes to the Advance Earned
Income Tax Credit (AEITC) since the beginning of 1990 (see table 21).
IRS described these changes in responses to recommendations in our 1992
AEITC report and a 2003 Treasury Inspector General for Tax
Administration report.[Footnote 61]
Table 21: Administrative Changes to the AEITC since 1990:
Year: 1990;
Change: Added separate lines to the 1990 Forms 1040 and 1040A for
reporting AEITC received.
Year: 1991;
Change: Revised Form W-4 to advise employees of the availability of the
AEITC and to refer them to the Form W-5.
Year: 1991-1992;
Change: Revised Form W-2 and IRS Notice 797 to contain information on
how to apply for the AEITC.
Year: 1992;
Change: Developed publicity materials and distributed them to the
public;
provided credit information in the Small Business Taxpayer Education
Program; and increased outreach speaker seminar efforts, in cooperation
with federal, state, and local officials and private organizations.
Year: 1992;
Change: Developed print and audiovisual products to inform the public
about the AEITC.
Year: 1992;
Change: Expanded instructions on AEITC in "Circular E, Employer's Tax
Guide.".
Year: 1992; Change: Added examples to "Circular E, Employer's Tax
Guide," explaining how to advance the EITC to employees and how to
report amounts in advance.
Year: 1992;
Change: Clarified employer's responsibilities and liabilities in
advancing the Earned Income Tax Credit (EITC) in the 1993 "Circular E,
Employer's Tax Guide.".
Year: 1993;
Change: Expanded 1993 Form W-2 instructions concerning AEITC.
Specifically, revised the Form W-2 to place a bold outline around the
AEITC box of the employee's copy.
Year: 2003;
Change: Updated instructions that require tax examiners to compare the
amount of AEITC shown on the tax return to the amount listed as AEITC
on the Form W-2 and adjust the amounts when needed.
Year: 2004;
Change: Created an error condition in return processing when the amount
of AEITC reported exceeds the maximum allowed for the year.
Year: 2005;
Change: Created an error condition in return processing for whenever
AEITC is listed on the return without a corresponding entry for the
EITC.
Source: GAO analysis.
Notes: Changes made between 1990 and 1993 were a result of GAO's 1992
report and changes between 2003 and 2005 were a result of the Treasury
Inspector General for Tax Administration's 2003 report. Some of the
changes made between 1990 and 1993 occurred before our report was
issued.
[End of table]
There have been two laws enacted since our 1992 report that include
specific changes to the AEITC.[Footnote 62] First, the Omnibus Budget
Reconciliation Act of 1993 (OBRA '93), did the following.
1. Limited the amount of advance payment allowable in a taxable year to
60 percent of the maximum credit available to a taxpayer with one
qualifying child.
2. Directed the IRS to notify taxpayers with qualifying children who
receive a refund on account of the EITC that the credit may be
available on an advance basis. The conference report accompanying OBRA
'93 stated that after these notifications had been made for 2 taxable
years, the Treasury Secretary was directed to study their effect on
utilization of the advance payment mechanism and, based on the results
of the study, the Secretary may recommend modifications to the
notification program.[Footnote 63]
Second, the U.S. Troop Readiness, Veteran's Care, Katrina Recovery, and
Iraq Accountability Appropriations Act of 2007, which was enacted in
late May 2007, calls for a study of AEITC use.[Footnote 64] The study
is to be conducted by the Secretary of the Treasury for the Congress
and is to include the benefits, costs, risks, and barriers to workers
and to businesses (with a special emphasis on small businesses) if the
AEITC included all recipients of the EITC (i.e., individuals without
qualifying children). It also asks what steps would be necessary to
implement such an inclusion.
[End of section]
Appendix V: Additional Analyses of Advance Earned Income Tax Credit
Noncompliance:
We identified additional areas of noncompliance for AEITC recipients
during tax years 2002 through 2004. We also examined demographic
characteristics of our noncompliant subpopulations, including the
invalid name, invalid number, and dollar limit subpopulations. Our
analyses revealed the following: (1) some consecutive AEITC recipients
had an invalid SSN, (2) most consecutive AEITC recipients filed a tax
return, but did not report the correct AEITC amount on the tax return,
(3) AEITC recipients with an invalid SSN received little money, (4)
most AEITC recipients with an invalid SSN received one to two Forms W-
2, (5) AEITC recipients in the invalid subpopulations lived in various
geographic locations, and (6) AEITC was paid in excess of yearly
maximum limits. As with the data in Appendix III, further analyses of
this data may provide information on noncompliance characteristics
potentially useful for IRS enforcement efforts.
Each of the tables provides additional information about AEITC
recipients not previously discussed. Where possible, we compared AEITC
recipients to EITC recipients. The characteristics are organized by a
declining AEITC population size, similar to the organization in
appendix III. Most analyses include the invalid name and invalid number
subpopulations. The subpopulations are described in the scope and
methodology section (see app. II).
Some consecutive AEITC recipients had an invalid SSN: About 98,000
individuals received the AEITC consecutively in each of the 3 years,
tax years 2002 through 2004, and received an average of about $56
million. About a quarter of these individuals had an invalid SSN and
received an average of approximately $16 million in AEITC.
Additionally, nearly 15 percent of consecutive users had an invalid SSN
and did not file a federal tax return, receiving an average of about $9
million in AEITC (see table 22).
Table 22: Number of Individuals and AEITC Dollars Received by AEITC
Recipients and Individuals Who Elected the AEITC Consecutively Using an
Invalid SSN and an Invalid SSN and Not Filing, Tax Years 2002 through
2004:
AEITC recipients;
Tax year 2002: Individuals: 531,799;
Tax year 2002: Dollars: $144,547,006;
Tax Year 2003: Individuals: 503,382;
Tax Year 2003: Dollars: $143,205,901;
Tax Year 2004: Individuals: 507,957;
Tax Year 2004: Dollars: $150,084,267.
AEITC consecutive recipients[A];
Tax year 2002: Individuals: 97,998: (18%);
Tax year 2002: Dollars: $53,272,152: (37%);
Tax Year 2003: Individuals: 97,998: (19%);
Tax Year 2003: Dollars: $60,849,730: (42%);
Tax Year 2004: Individuals: 97,998: (19%);
Tax Year 2004: Dollars: $52,698,947: (35%).
AEITC consecutive recipients with invalid SSN (percentage)[B];
Tax year 2002: Individuals: 23,175: (24%);
Tax year 2002: Dollars: $14,837,041: (28%);
Tax Year 2003: Individuals: 23,175; (24%);
Tax Year 2003: Dollars: $17,217,171: (28%);
Tax Year 2004: Individuals: 23,175: (24%);
Tax Year 2004: Dollars: $14,798,025: (28%).
AEITC consecutive recipients with invalid SSN and did not file federal
tax return (percentage)[B];
Tax year 2002: Individuals: 13,181; (13%);
Tax year 2002: Dollars: $8,593,857: (16%);
Tax Year 2003: Individuals: 13,153: (13%);
Tax Year 2003: Dollars: $9,972,631: (16%);
Tax Year 2004: Individuals: 13,348: (14%);
Tax Year 2004: Dollars: $8,722,592: (17%).
Source: GAO analysis of IRS data.
Note: The number of AEITC consecutive recipients represents the total
number of individuals who received the AEITC over each of the 3 years.
The associated dollars represent the amount those individuals received
each year.
[A] Percentage is out of AEITC recipients and dollars. This analysis
includes the valid, invalid name, and invalid number subpopulations.
[B] Percentage is out of AEITC consecutive recipients and dollars. This
analysis includes the invalid name and invalid number subpopulations.
Most consecutive AEITC recipients filed a tax return, but did not
report the correct AEITC amount on the tax return: About 98,000
individuals received the AEITC consecutively in each of the 3 tax
years, 2002 through 2004. More than half of these individuals filed a
tax return. Of those who filed, about half reported the same AEITC
amount on the tax return as shown on the Form W-2 (i.e., matched). Of
the mismatches, the majority did not report receipt of the AEITC (see
table 23).
[End of table]
Table 23: Number of AEITC Consecutive Recipients with Matches and
Mismatches between Forms W-2 and Filed Tax Returns, Tax Years 2002
through 2004:
[See PDF for image]
[End of table]
Source: GAO analysis of IRS data.
Note: Percentages may not add due to rounding. This table includes
individuals who filed a tax return in the valid and invalid name
subpopulations.
[A] We considered a match to be anything plus or minus a dollar on the
Form W-2 in order to allow for taxpayer rounding. We tested the
sensitivity of this result by using a difference between the AEITC
reported on the Form W-2 and the tax return of up to $100 and the
results were similar. Percentage is of number of consecutive AEITC
recipients who filed federal tax returns.
[B] Percentage is of number of mismatches due to nonreporting of AEITC
for consecutive recipients and number of consecutive AEITC recipients
who filed federal tax returns.
AEITC recipients with an invalid Social Security number (SSN) received
little money: Most AEITC recipients who had a Form(s) W-2 with an
invalid SSN obtained $100 or less of AEITC (see table 24). These data
are consistent with the overall AEITC population, as previously noted,
where about half of all recipients received less than $100 and 80
percent received $500 or less for the year.
[End of figure]
Table 24: Amount of AEITC Received Per Invalid Form W-2, Number and
Percentage, Tax Years 2002 through 2004:
[See PDF for image]
Source: GAO analysis of IRS data.
Note: This table includes the invalid number subpopulation.
[A] Above the maximum is possible because this table presents
aggregated Forms W-2 and if an individual received more than one Form W-
2, the total received could be above the yearly maximum.
[End of table]
Most AEITC recipients with an invalid SSN received 1 to 2 Forms W-2:
Most recipients who had an invalid SSN received 1 to 2 Forms W-2
reporting AEITC. For example, in tax year 2002, 6,223 individuals
received two Forms W-2 that reported AEITC. These resulted in a total
of 12,466 Forms W-2 equaling $3,261,327 in AEITC, with an average of
$262 in AEITC per Form W-2 (see tables 25, 26, and 27).
Table 25: Number of Individuals Receiving a Form(s) W-2, Total Number
of Form(s) W-2 Reporting AEITC, Total Associated and Average Dollars
Received Relative to Number of Form(s) W-2 Reporting AEITC for AEITC
Recipients with an Invalid SSN on the Form(s) W-2, Tax Year 2002:
A: Number of Forms W-2 an individual received reporting AEITC: 1;
B: Number of individuals receiving the number of Forms W-2: 22,812;
C: Total number of Forms W-2 reporting AEITC[A]: 22,812;
D: Total associated dollars on Forms W-2: $5,588,671;
E: Average dollars per Form W-2[B]: $245.
A: Number of Forms W-2 an individual received reporting AEITC: 2;
B: Number of individuals receiving the number of Forms W-2: 6,233;
C: Total number of Forms W-2 reporting AEITC[A]: 12,466;
D: Total associated dollars on Forms W-2: $3,261,327;
E: Average dollars per Form W-2[B]: $262.
A: Number of Forms W-2 an individual received reporting AEITC: 3;
B: Number of individuals receiving the number of Forms W-2: 1,954;
C: Total number of Forms W-2 reporting AEITC[A]: 5,862;
D: Total associated dollars on Forms W-2: $1,290,955;
E: Average dollars per Form W-2[B]: $220.
A: Number of Forms W-2 an individual received reporting AEITC: 4;
B: Number of individuals receiving the number of Forms W-2: 874;
C: Total number of Forms W-2 reporting AEITC[A]: 3,496;
D: Total associated dollars on Forms W-2: $689,595;
E: Average dollars per Form W-2[B]: $197.
A: Number of Forms W-2 an individual received reporting AEITC: 5;
B: Number of individuals receiving the number of Forms W-2: 332;
C: Total number of Forms W-2 reporting AEITC[A]: 1,660;
D: Total associated dollars on Forms W-2: $287,912;
E: Average dollars per Form W-2[B]: $173.
A: Number of Forms W-2 an individual received reporting AEITC: 6;
B: Number of individuals receiving the number of Forms W-2: 142;
C: Total number of Forms W-2 reporting AEITC[A]: 852;
D: Total associated dollars on Forms W-2: $138,384;
E: Average dollars per Form W-2[B]: $162.
A: Number of Forms W-2 an individual received reporting AEITC: 7;
B: Number of individuals receiving the number of Forms W-2: 74;
C: Total number of Forms W-2 reporting AEITC[A]: 518;
D: Total associated dollars on Forms W-2: $84,688;
E: Average dollars per Form W-2[B]: $163.
A: Number of Forms W-2 an individual received reporting AEITC: 8;
B: Number of individuals receiving the number of Forms W-2: 37;
C: Total number of Forms W-2 reporting AEITC[A]: 296;
D: Total associated dollars on Forms W-2: $46,962;
E: Average dollars per Form W-2[B]: $159.
A: Number of Forms W-2 an individual received reporting AEITC: 9;
B: Number of individuals receiving the number of Forms W-2: 10;
C: Total number of Forms W-2 reporting AEITC[A]: 90;
D: Total associated dollars on Forms W-2: $15,429;
E: Average dollars per Form W-2[B]: $171.
A: Number of Forms W-2 an individual received reporting AEITC: 10;
B: Number of individuals receiving the number of Forms W-2: 7;
C: Total number of Forms W-2 reporting AEITC[A]: 70;
D: Total associated dollars on Forms W-2: $9,601;
E: Average dollars per Form W-2[B]: $137.
A: Number of Forms W-2 an individual received reporting AEITC: 11;
B: Number of individuals receiving the number of Forms W-2: 7;
C: Total number of Forms W-2 reporting AEITC[A]: 77;
D: Total associated dollars on Forms W-2: $12,577;
E: Average dollars per Form W-2[B]: $163.
A: Number of Forms W-2 an individual received reporting AEITC: 12;
B: Number of individuals receiving the number of Forms W-2: 3;
C: Total number of Forms W-2 reporting AEITC[A]: 36;
D: Total associated dollars on Forms W-2: $6,073;
E: Average dollars per Form W-2[B]: $169.
A: Number of Forms W-2 an individual received reporting AEITC: 13;
B: Number of individuals receiving the number of Forms W-2: 4;
C: Total number of Forms W-2 reporting AEITC[A]: 52;
D: Total associated dollars on Forms W-2: $11,805;
E: Average dollars per Form W-2[B]: $227.
A: Number of Forms W-2 an individual received reporting AEITC: 14;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 14;
D: Total associated dollars on Forms W-2: $6,246;
E: Average dollars per Form W-2[B]: $446.
A: Number of Forms W-2 an individual received reporting AEITC: 15;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 15;
D: Total associated dollars on Forms W-2: $5,156;
E: Average dollars per Form W-2[B]: $344.
A: Number of Forms W-2 an individual received reporting AEITC: 16;
B: Number of individuals receiving the number of Forms W-2: 2;
C: Total number of Forms W-2 reporting AEITC[A]: 32;
D: Total associated dollars on Forms W-2: $8,271;
E: Average dollars per Form W-2[B]: $258.
A: Number of Forms W-2 an individual received reporting AEITC: 17;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 17;
D: Total associated dollars on Forms W-2: $3,893;
E: Average dollars per Form W-2[B]: $229.
A: Number of Forms W-2 an individual received reporting AEITC: 19;
B: Number of individuals receiving the number of Forms W-2: 2;
C: Total number of Forms W-2 reporting AEITC[A]: 38;
D: Total associated dollars on Forms W-2: $10,695;
E: Average dollars per Form W-2[B]: $281.
A: Number of Forms W-2 an individual received reporting AEITC: 20;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 20;
D: Total associated dollars on Forms W-2: $6,978;
E: Average dollars per Form W-2[B]: $349.
A: Number of Forms W-2 an individual received reporting AEITC: 23;
B: Number of individuals receiving the number of Forms W-2: 2;
C: Total number of Forms W-2 reporting AEITC[A]: 46;
D: Total associated dollars on Forms W-2: $8,101;
E: Average dollars per Form W-2[B]: $176.
A: Number of Forms W-2 an individual received reporting AEITC: 28;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 28;
D: Total associated dollars on Forms W-2: $6,074;
E: Average dollars per Form W-2[B]: $217.
A: Number of Forms W-2 an individual received reporting AEITC: 935;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 935;
D: Total associated dollars on Forms W-2: $83,211;
E: Average dollars per Form W-2[B]: $89.
A: Number of Forms W-2 an individual received reporting AEITC: Total
Forms W-2 with invalid SSNs;
B: Number of individuals receiving the number of Forms W-2: 32,501;
C: Total number of Forms W-2 reporting AEITC[A]: 49,432;
D: Total associated dollars on Forms W-2: $11,582,604;
E: Average dollars per Form W-2[B]: $234.
Source: GAO analysis of IRS data.
Note: This table includes the invalid number subpopulation.
[A] This number is derived by multiplying column A by column B.
[B] This amount is derived by dividing column D by column C.
[End of table]
Table 26: Number of Individuals Receiving a Form(s) W-2, Total Number
of Form(s) W-2 Reporting AEITC, Total Associated and Average Dollars
Received, Relative to Number of Form(s) W-2 Reporting AEITC for AEITC
Recipients with an Invalid SSN on the Form(s) W-2, Tax Year 2003:
A: Number of Forms W-2 an individual received reporting AEITC: 1;
B: Number of individuals receiving the number of Forms W-2: 22,474;
C: Total number of Forms W-2 reporting AEITC[A]: 22,474;
D: Total associated dollars on Forms W-2: $6,787,458;
E: Average dollars per Forms W-2[B]: $302.
A: Number of Forms W-2 an individual received reporting AEITC: 2;
B: Number of individuals receiving the number of Forms W-2: 5,424;
C: Total number of Forms W-2 reporting AEITC[A]: 10,848;
D: Total associated dollars on Forms W-2: $2,689,186;
E: Average dollars per Forms W-2[B]: $248.
A: Number of Forms W-2 an individual received reporting AEITC: 3;
B: Number of individuals receiving the number of Forms W-2: 1,660;
C: Total number of Forms W-2 reporting AEITC[A]: 4,980;
D: Total associated dollars on Forms W-2: $1,076,219;
E: Average dollars per Forms W-2[B]: $216.
A: Number of Forms W-2 an individual received reporting AEITC: 4;
B: Number of individuals receiving the number of Forms W-2: 600;
C: Total number of Forms W-2 reporting AEITC[A]: 2,400;
D: Total associated dollars on Forms W-2: $478,420;
E: Average dollars per Forms W-2[B]: $199.
A: Number of Forms W-2 an individual received reporting AEITC: 5;
B: Number of individuals receiving the number of Forms W-2: 259;
C: Total number of Forms W-2 reporting AEITC[A]: 1,295;
D: Total associated dollars on Forms W-2: $222,288;
E: Average dollars per Forms W-2[B]: $172.
A: Number of Forms W-2 an individual received reporting AEITC: 6;
B: Number of individuals receiving the number of Forms W-2: 94;
C: Total number of Forms W-2 reporting AEITC[A]: 564;
D: Total associated dollars on Forms W-2: $107,704;
E: Average dollars per Forms W-2[B]: $191.
A: Number of Forms W-2 an individual received reporting AEITC: 7;
B: Number of individuals receiving the number of Forms W-2: 41;
C: Total number of Forms W-2 reporting AEITC[A]: 287;
D: Total associated dollars on Forms W-2: $46,869;
E: Average dollars per Forms W-2[B]: $163.
A: Number of Forms W-2 an individual received reporting AEITC: 8;
B: Number of individuals receiving the number of Forms W-2: 22;
C: Total number of Forms W-2 reporting AEITC[A]: 176;
D: Total associated dollars on Forms W-2: $32,510;
E: Average dollars per Forms W-2[B]: $185.
A: Number of Forms W-2 an individual received reporting AEITC: 9;
B: Number of individuals receiving the number of Forms W-2: 17;
C: Total number of Forms W-2 reporting AEITC[A]: 153;
D: Total associated dollars on Forms W-2: $30,123;
E: Average dollars per Forms W-2[B]: $197.
A: Number of Forms W-2 an individual received reporting AEITC: 10;
B: Number of individuals receiving the number of Forms W-2: 6;
C: Total number of Forms W-2 reporting AEITC[A]: 60;
D: Total associated dollars on Forms W-2: $14,293;
E: Average dollars per Forms W-2[B]: $238.
A: Number of Forms W-2 an individual received reporting AEITC: 11;
B: Number of individuals receiving the number of Forms W-2: 4;
C: Total number of Forms W-2 reporting AEITC[A]: 44;
D: Total associated dollars on Forms W-2: $9,769;
E: Average dollars per Forms W-2[B]: $222.
A: Number of Forms W-2 an individual received reporting AEITC: 12;
B: Number of individuals receiving the number of Forms W-2: 5;
C: Total number of Forms W-2 reporting AEITC[A]: 60;
D: Total associated dollars on Forms W-2: $14,794;
E: Average dollars per Forms W-2[B]: $247.
A: Number of Forms W-2 an individual received reporting AEITC: 13;
B: Number of individuals receiving the number of Forms W-2: 5;
C: Total number of Forms W-2 reporting AEITC[A]: 65;
D: Total associated dollars on Forms W-2: $20,860;
E: Average dollars per Forms W-2[B]: $321.
A: Number of Forms W-2 an individual received reporting AEITC: 14;
B: Number of individuals receiving the number of Forms W-2: 3;
C: Total number of Forms W-2 reporting AEITC[A]: 42;
D: Total associated dollars on Forms W-2: $10,857;
E: Average dollars per Forms W-2[B]: $259.
A: Number of Forms W-2 an individual received reporting AEITC: 15;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 15;
D: Total associated dollars on Forms W-2: $1,798;
E: Average dollars per Forms W-2[B]: $120.
A: Number of Forms W-2 an individual received reporting AEITC: 16;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 16;
D: Total associated dollars on Forms W-2: $4,378;
E: Average dollars per Forms W-2[B]: $274.
A: Number of Forms W-2 an individual received reporting AEITC: 17;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 17;
D: Total associated dollars on Forms W-2: $10,284;
E: Average dollars per Forms W-2[B]: $605.
A: Number of Forms W-2 an individual received reporting AEITC: 19;
B: Number of individuals receiving the number of Forms W-2: 0;
C: Total number of Forms W-2 reporting AEITC[A]: 0;
D: Total associated dollars on Forms W-2: $0;
E: Average dollars per Forms W-2[B]: $0.
A: Number of Forms W-2 an individual received reporting AEITC: 20;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 20;
D: Total associated dollars on Forms W-2: $4,468;
E: Average dollars per Forms W-2[B]: $223.
A: Number of Forms W-2 an individual received reporting AEITC: 22;
B: Number of individuals receiving the number of Forms W-2: 0;
C: Total number of Forms W-2 reporting AEITC[A]: 0;
D: Total associated dollars on Forms W-2: $0;
E: Average dollars per Forms W-2[B]: $0.
A: Number of Forms W-2 an individual received reporting AEITC: 23;
B: Number of individuals receiving the number of Forms W-2: 0;
C: Total number of Forms W-2 reporting AEITC[A]: 0;
D: Total associated dollars on Forms W-2: $0;
E: Average dollars per Forms W-2[B]: $0.
A: Number of Forms W-2 an individual received reporting AEITC: 26;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 26;
D: Total associated dollars on Forms W-2: $8,584;
E: Average dollars per Forms W-2[B]: $330.
A: Number of Forms W-2 an individual received reporting AEITC: 28;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 28;
D: Total associated dollars on Forms W-2: $9,513;
E: Average dollars per Forms W-2[B]: $340.
A: Number of Forms W-2 an individual received reporting AEITC: 31;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 31;
D: Total associated dollars on Forms W-2: $9,404;
E: Average dollars per Forms W-2[B]: $303.
A: Number of Forms W-2 an individual received reporting AEITC: 38;
B: Number of individuals receiving the number of Forms W-2: 0;
C: Total number of Forms W-2 reporting AEITC[A]: 0;
D: Total associated dollars on Forms W-2: $0;
E: Average dollars per Forms W-2[B]: $0.
A: Number of Forms W-2 an individual received reporting AEITC: 643;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 643;
D: Total associated dollars on Forms W-2: $60,948;
E: Average dollars per Forms W-2[B]: $95.
A: Number of Forms W-2 an individual received reporting AEITC: 935;
B: Number of individuals receiving the number of Forms W-2: 0;
C: Total number of Forms W-2 reporting AEITC[A]: 0;
D: Total associated dollars on Forms W-2: $0;
E: Average dollars per Forms W-2[B]: 0.
A: Number of Forms W-2 an individual received reporting AEITC: 1,088;
B: Number of individuals receiving the number of Forms W-2: 0;
C: Total number of Forms W-2 reporting AEITC[A]: 0;
D: Total associated dollars on Forms W-2: $0;
E: Average dollars per Forms W-2[B]: 0.
A: Number of Forms W-2 an individual received reporting AEITC: Total;
B: Number of individuals receiving the number of Forms W-2: 30,622;
C: Total number of Forms W-2 reporting AEITC[A]: 44,244;
D: Total associated dollars on Forms W-2: 11,650,727;
E: Average dollars per Forms W-2[B]: $263.
Source: GAO analysis of IRS data.
Note: This table includes the invalid number subpopulation.
[A] This number is derived by multiplying column A by column B.
[B] This amount is derived by dividing column D by column C.
[End of table]
Table 27: Number of Individuals Receiving a Form(s) W-2, Total Number
of Form(s) W-2 Reporting AEITC, Total Associated and Average Dollars
Received, Relative to Number of Form(s) W-2 Reporting AEITC for AEITC
Recipients with an Invalid SSN on the Form(s) W-2, Tax Year 2004:
A: Number of Forms W-2 an individual received reporting AEITC: 1;
B: Number of individuals receiving the number of Forms W-2: 24,853;
C: Total number of Forms W-2 reporting AEITC[A]: 24,853;
D: Total associated dollars on Forms W-2: $7,602,238;
E: Average dollars per Form W-2[B]: $306.
A: Number of Forms W-2 an individual received reporting AEITC: 2;
B: Number of individuals receiving the number of Forms W-2: 4,776;
C: Total number of Forms W-2 reporting AEITC[A]: 9,552;
D: Total associated dollars on Forms W-2: $2,663,173;
E: Average dollars per Form W-2[B]: $279.
A: Number of Forms W-2 an individual received reporting AEITC: 3;
B: Number of individuals receiving the number of Forms W-2: 1,452;
C: Total number of Forms W-2 reporting AEITC[A]: 4,356;
D: Total associated dollars on Forms W-2: $1,022,262;
E: Average dollars per Form W-2[B]: $235.
A: Number of Forms W-2 an individual received reporting AEITC: 4;
B: Number of individuals receiving the number of Forms W-2: 483;
C: Total number of Forms W-2 reporting AEITC[A]: 1,932;
D: Total associated dollars on Forms W-2: $385,252;
E: Average dollars per Form W-2[B]: $199.
A: Number of Forms W-2 an individual received reporting AEITC: 5;
B: Number of individuals receiving the number of Forms W-2: 187;
C: Total number of Forms W-2 reporting AEITC[A]: 935;
D: Total associated dollars on Forms W-2: $178,214;
E: Average dollars per Form W-2[B]: $191.
A: Number of Forms W-2 an individual received reporting AEITC: 6;
B: Number of individuals receiving the number of Forms W-2: 57;
C: Total number of Forms W-2 reporting AEITC[A]: 342;
D: Total associated dollars on Forms W-2: $72,679;
E: Average dollars per Form W-2[B]: $213.
A: Number of Forms W-2 an individual received reporting AEITC: 7;
B: Number of individuals receiving the number of Forms W-2: 27;
C: Total number of Forms W-2 reporting AEITC[A]: 189;
D: Total associated dollars on Forms W-2: $47,036;
E: Average dollars per Form W-2[B]: $249.
A: Number of Forms W-2 an individual received reporting AEITC: 8;
B: Number of individuals receiving the number of Forms W-2: 13;
C: Total number of Forms W-2 reporting AEITC[A]: 104;
D: Total associated dollars on Forms W-2: $30,029;
E: Average dollars per Form W-2[B]: $289.
A: Number of Forms W-2 an individual received reporting AEITC: 9;
B: Number of individuals receiving the number of Forms W-2: 8;
C: Total number of Forms W-2 reporting AEITC[A]: 72;
D: Total associated dollars on Forms W-2: $15,628;
E: Average dollars per Form W-2[B]: $217.
A: Number of Forms W-2 an individual received reporting AEITC: 10;
B: Number of individuals receiving the number of Forms W-2: 4;
C: Total number of Forms W-2 reporting AEITC[A]: 40;
D: Total associated dollars on Forms W-2: $9,060;
E: Average dollars per Form W-2[B]: $227.
A: Number of Forms W-2 an individual received reporting AEITC: 11;
B: Number of individuals receiving the number of Forms W-2: 5;
C: Total number of Forms W-2 reporting AEITC[A]: 55;
D: Total associated dollars on Forms W-2: $9,027;
E: Average dollars per Form W-2[B]: $164.
A: Number of Forms W-2 an individual received reporting AEITC: 12;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 12;
D: Total associated dollars on Forms W-2: $3,178;
E: Average dollars per Form W-2[B]: $265.
A: Number of Forms W-2 an individual received reporting AEITC: 13;
B: Number of individuals receiving the number of Forms W-2: 2;
C: Total number of Forms W-2 reporting AEITC[A]: 26;
D: Total associated dollars on Forms W-2: $9,049;
E: Average dollars per Form W-2[B]: $348.
A: Number of Forms W-2 an individual received reporting AEITC: 14;
B: Number of individuals receiving the number of Forms W-2: 0;
C: Total number of Forms W-2 reporting AEITC[A]: 0;
D: Total associated dollars on Forms W-2: $0;
E: Average dollars per Form W-2[B]: $0.
A: Number of Forms W-2 an individual received reporting AEITC: 15;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 15;
D: Total associated dollars on Forms W-2: $5,077;
E: Average dollars per Form W-2[B]: $338.
A: Number of Forms W-2 an individual received reporting AEITC: 16;
B: Number of individuals receiving the number of Forms W-2: 0;
C: Total number of Forms W-2 reporting AEITC[A]: 0;
D: Total associated dollars on Forms W-2: $0;
E: Average dollars per Form W-2[B]: $0.
A: Number of Forms W-2 an individual received reporting AEITC: 17;
B: Number of individuals receiving the number of Forms W-2: 0;
C: Total number of Forms W-2 reporting AEITC[A]: 0;
D: Total associated dollars on Forms W-2: $0;
E: Average dollars per Form W-2[B]: $0.
A: Number of Forms W-2 an individual received reporting AEITC: 19;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 19;
D: Total associated dollars on Forms W-2: $5,604;
E: Average dollars per Form W-2[B]: $295.
A: Number of Forms W-2 an individual received reporting AEITC: 20;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 20;
D: Total associated dollars on Forms W-2: $9,567;
E: Average dollars per Form W-2[B]: $478.
A: Number of Forms W-2 an individual received reporting AEITC: 22;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 22;
D: Total associated dollars on Forms W-2: $5,076;
E: Average dollars per Form W-2[B]: $231.
A: Number of Forms W-2 an individual received reporting AEITC: 23;
B: Number of individuals receiving the number of Forms W-2: 0;
C: Total number of Forms W-2 reporting AEITC[A]: 0;
D: Total associated dollars on Forms W-2: $0;
E: Average dollars per Form W-2[B]: $0.
A: Number of Forms W-2 an individual received reporting AEITC: 26;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 26;
D: Total associated dollars on Forms W-2: $6,837;
E: Average dollars per Form W-2[B]: $263.
A: Number of Forms W-2 an individual received reporting AEITC: 28;
B: Number of individuals receiving the number of Forms W-2: 0;
C: Total number of Forms W-2 reporting AEITC[A]: 0;
D: Total associated dollars on Forms W-2: $0;
E: Average dollars per Form W-2[B]: $0.
A: Number of Forms W-2 an individual received reporting AEITC: 31;
B: Number of individuals receiving the number of Forms W-2: 0;
C: Total number of Forms W-2 reporting AEITC[A]: 0;
D: Total associated dollars on Forms W-2: $0;
E: Average dollars per Form W-2[B]: $0.
A: Number of Forms W-2 an individual received reporting AEITC: 38;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 38;
D: Total associated dollars on Forms W-2: $9,575;
E: Average dollars per Form W-2[B]: $252.
A: Number of Forms W-2 an individual received reporting AEITC: 643;
B: Number of individuals receiving the number of Forms W-2: 0;
C: Total number of Forms W-2 reporting AEITC[A]: 0;
D: Total associated dollars on Forms W-2: $0;
E: Average dollars per Form W-2[B]: $0.
A: Number of Forms W-2 an individual received reporting AEITC: 935;
B: Number of individuals receiving the number of Forms W-2: 0;
C: Total number of Forms W-2 reporting AEITC[A]: 0;
D: Total associated dollars on Forms W-2: $0;
E: Average dollars per Form W-2[B]: $0.
A: Number of Forms W-2 an individual received reporting AEITC: 1,088;
B: Number of individuals receiving the number of Forms W-2: 1;
C: Total number of Forms W-2 reporting AEITC[A]: 1,088;
D: Total associated dollars on Forms W-2: $78,141;
E: Average dollars per Form W-2[B]: $72.
A: Number of Forms W-2 an individual received reporting AEITC: Total;
B: Number of individuals receiving the number of Forms W-2: 31,875;
C: Total number of Forms W-2 reporting AEITC[A]: 43,696;
D: Total associated dollars on Forms W-2: $12,166,702;
E: Average dollars per Form W-2[B]: $278.
Source: GAO analysis of IRS data.
Note: This table includes the invalid number subpopulation.
[A] This number is derived by multiplying column A by column B.
[B] This amount is derived by dividing column D by column C.
[End of table]
AEITC recipients in the invalid subpopulations lived in various
geographic locations: Use of the AEITC varied widely across the country
for individuals in the invalid number and invalid name subpopulations.
For the invalid name subpopulation, in all 3 tax years, California and
Illinois had the most Forms W-2 reporting AEITC and for the invalid
number subpopulation, in all 3 tax years, Florida and Illinois had the
most (see figs. 8 and 9).
Figure 8: Geographic Location of AEITC Recipients in the Invalid Name
Subpopulation, Tax Years 2002 through 2004:
[See PDF for image]
Source: GAO analysis of IRS data.
Note: AEITC geographic location is based upon information reported on
the tax return. This figure includes the invalid name subpopulation.
[A] These geographic locations had at least one but fewer than 10
individuals who received the AEITC.
[B] U.S insular areas include the three major U.S. territories, which
are the U.S. Virgin Islands, American Samoa, Guam, and the two
Commonwealths, which are the Commonwealth of Puerto Rico and the
Commonwealth of Northern Mariana Islands.
[C] Other includes Federated States of Micronesia, Marshall Islands,
Palau, and Armed Forces mostly located outside the U.S.
[D] Missing refers to instances where the geographic location was not
available.
[End of figure]
Figure 9: Geographic Location of AEITC Recipients in the Invalid Number
Subpopulation, Tax Years 2002 through 2004:
[See PDF for image]
Source: GAO analysis of IRS data.
Note: AEITC geographic location is based upon information reported on
the tax return. This figure includes the invalid number subpopulation.
[A] These geographic locations had at least 1 but fewer than 10
individuals who received the AEITC.
[B] U.S insular areas includes the three major U.S. territories, which
are the U.S. Virgin Islands, American Samoa, Guam, and the two
Commonwealths, which are the Commonwealth of Puerto Rico and the
Commonwealth of Northern Mariana Islands.
[C] Missing refers to instances where the geographic location was not
available.
[End of figure]
AEITC was paid in excess of yearly maximum limits: A total of almost
12,000 Forms W-2, reporting about $64 million, showed AEITC paid above
the yearly maximum between tax years 2002 through 2004 (see figs. 10
and 11). Specifically, in tax year 2002 there were 6,408 Forms W-2
above the yearly maximum reporting almost $44 million;
2,690 in tax year 2003, reporting over $7 million;
and 2,768 in tax year 2004, reporting almost $13 million. As noted in
figure 10, most Forms W-2 above the yearly maximum were between $1
above the limit and $5,000. An individual receiving the AEITC was
eligible to obtain a maximum yearly amount of $1,503 in tax year 2002,
$1,528 in tax year 2003, and $1,563 in tax year 2004.
Figure 10: Number of Forms W-2 Received with Amounts above the Yearly
AEITC Maximum, Tax Years 2002 through 2004:
[See PDF for image]
Source: GAO analysis of IRS data.
Note: This excludes 2 Forms W-2 in 2003 that when totaled, reported
about $1 billion paid in AEITC. This figure includes the dollar limit
subpopulation.
[End of figure]
Figure 11: AEITC Dollars Reported on Form W-2s above the Yearly AEITC
Maximum, Tax Years 2002-2004:
[See PDF for image]
Source: GAO analysis of IRS data.
Note: This excludes 2 Forms W-2 in 2003 that when totaled, reported
about $1 billion paid in AEITC. This figure includes the dollar limit
subpopulation.
[End of figure]
[End of section]
Appendix VI: Comments from the Internal Revenue Service:
Commissioner:
Department Of The Treasury:
Internal Revenue Service:
Washington, D.C. 20224:
July 18, 2007
Mr. Michael Brostek:
Director, Tax Issues Strategic Issues Team:
U.S. Government Accountability Office:
441 G Street, N.W.:
Washington, D.C. 20548:
Dear Mr. Brostek:
I am writing in response to the draft Government Accountability Office
(GAO) audit report entitled Advance Earned Income Tax Credit, Low Use
and Dollars Impede Efforts to Reduce Noncompliance (GAO-07-1110). I
reviewed the report and generally agree with its findings and
recommendations. The report accurately reflects the difficulty the IRS
faces to increase participation in the Advance Earned Income Tax Credit
(AEITC) payment option among eligible taxpayers. Your report also
appropriately acknowledges the challenges involved in efforts to reduce
noncompliance among the small percentage that receive AEITC.
The IRS realizes the importance and potential benefits of AEITC as an
immediate reward for work effort and as a help in meeting the day-to-
day needs of low income workers. However, both your analysis and our
own experience suggest that most taxpayers prefer to receive the earned
income tax credit (EITC) as a lump sum rather than in smaller amounts
meted out over time. As a result, despite our efforts to promote AEITC
and to educate employers and taxpayers on the benefits of this option
participation remains low. Currently, 3 percent of the potentially
eligible population opt for AEITC, and this percentage has grown only
slightly since your 1992 report on the subject (EIC Advance Payment
(GAOIGGD 92-26)).
Your report also cites the high degree of noncompliance among the small
number of participants receiving AEITC. However, because the
participation rate for this program is low and half of all advance
payment workers receive $100 or less in AEITC during the year,
noncompliance in this area represents a very small fraction of the
overall tax gap. For these reasons, the IRS must carefully weigh its
efforts to address AEITC error against opportunities to address other
areas of noncompliance.
I appreciate the continued and valuable support from you and your staff
on this issue. Detailed comments on your specific recommendation are
enclosed. If you have any questions or would like to discuss this
response in more detail, please contact David R. Williams, Director,
Electronic Tax Administration and Refundable Credits, at (202) 622-
7990.
Sincerely,
Signed by:
Kevin M. Brown:
Acting Commissioner:
Enclosure:
Recommendation:
The Commissioner of Internal Revenue should analyze whether any of the
following options could cost effectively and significantly reduce AEITC
noncompliance:
* sending potentially noncompliant AEITC recipients soft notices, such
as to nonfilers whose Forms W-2 show that they received AEITC and
filers who misreported the amount they received and/or whose SSN and
name do not match;
* requiring employers to verify the SSN of employees seeking AEITC; or
* requiring employers to submit Form(s) W-5 to IRS and IRS creating and
maintaining a database for these forms.
To better identify the costs and implementation issues as well as the
likelihood for these or other options to reduce AEITC noncompliance,
where practical, the Commissioner should test these options to make a
more fully informed judgment about whether any would be worthwhile.
If the Commissioner determines that none of these options would be cost
effective and no other remedies are viable, then the Treasury Secretary
should inform the Congress of this and provide Treasury's opinion about
whether the AEITC should be retained.
Response:
IRS agrees to conduct further cost/benefits analyses of the three
proposed options. We will consider each within the context of the
number of taxpayers affected, dollars involved (average per case and in
aggregate), and the trade-offs from the return on investment realized
by addressing other areas of the tax gap.
Of the three compliance treatments recommended, we believe the soft
notice option is the most viable, despite the known limitations cited
in your report. The high AEITC turnover and nonfiler rates may make
this option less effective and more costly than other successful IRS
soft notice tests. While we agree the soft notice option may produce
first year compliance improvements, it is unclear that it will
significantly reduce overall AEITC noncompliance or substantially
increase revenue protected. Important parts of our cost-benefit
analysis of this option must also include collection potential,
taxpayer burden, and costs associated with provisions for free or low
cost alternatives for return preparation assistance.
The option to require employers to verify SSNs of employees seeking
AEITC will require legislation and new inter-agency coordination of
roles and responsibilities between IRS and the Social Security
Administration (SSA). Your report appropriately cites other concerns
raised by IRS and SSA, such as data accuracy, additional employer
responsibilities and burden, adverse effects on participation,
potential for inconsistent treatment of workers due to the disparity
between antidiscrimination laws and legal requirements for verifying
employment eligibility status, and the need for additional agency
resources. The option to require employers to submit Forms W-5 to IRS
and for the IRS to create and maintain a database for these forms will
generate new employer compliance issues, as well as concerns similar to
those for the SSN verification option. Although we will conduct further
analyses of these two options, we believe these challenges may preclude
any meaningful near-term testing or implementation.
Finally, our cost/benefits analyses of your recommended options will be
conducted in tandem with a study of AEITC use required by the U.S.
Troop Readiness, Veteran's Care, Katrina Recovery, and Iraq
Accountability Appropriations Act of 2007 (PL 110-28) enacted in late
May 2007. The study will include the benefits, costs, risks, and
barriers to workers and to businesses (with a special emphasis on small
businesses) if the AEITC included all recipients of the EITC (i.e.,
individuals without qualifying children), and the steps necessary for
implementation. This report will be reviewed and approved by the
Treasury Department and is due to the Congress in November 2007.
[End of section]
Appendix VII: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Michael Brostek, (202) 512-9110 Libby Mixon, (404) 679-1900 Joanna
Stamatiades, (404) 679-1900:
Acknowledgments:
In addition to those named above, Blake Ainsworth, Frances Cook, James
Cook, Rebecca Gambler, Evan Gilman, George Guttman, Donna Miller,
Cheryl Peterson, Michael Rose, Steve Sebastian, Daniel Schwimer,
Richard Stana, James Ungvarsky, Michael Volpe, and Paul Wright made key
contributions to this report.
Footnotes:
[1] The other credit with an advance option is the Health Coverage Tax
Credit, which pays 65 percent of qualified health plan premiums for
eligible trade-affected workers and certain Pension Benefit Guaranty
Corporation benefit recipients.
[2] In tax year 2004, about 22 million individuals received about $40
billion in EITC payments from the IRS. Any portion of the EITC that an
individual did not obtain as an advance can be obtained when he or she
files a tax return, assuming qualifications are maintained.
[3] GAO, Earned Income Tax Credit: Advance Option Is Not Widely Known
or Understood by the Public, GAO/GGD-92-26 (Washington, D.C.: Feb. 19,
1992).
[4] U.S. Troop Readiness, Veteran's Care, Katrina Recovery, and Iraq
Accountability Appropriations Act of 2007, Pub. L. No. 110-28.
[5] 26 U.S.C. Sec. 32.
[6] Pub. L. No.103-66 (1993). The Omnibus Budget Reconciliation Act of
1993 limited the amount of advance payments that eligible individuals
can receive to 60 percent of the EITC available with one qualifying
child.
[7] The Form W-5, completed by the employee, expires at the end of each
calendar year. Therefore, employees must resubmit the form each year if
they want to receive the AEITC.
[8] When both spouses have a Form W-5 in effect, the amount each person
can receive is reduced to below 60 percent of the EITC maximum.
[9] Individuals who receive the EITC without a qualifying child are not
eligible for the AEITC.
[10] For the first notice mailing, specific information on how the
population was selected, for example, is not known.
[11] IRS, National Research Office, Advance Earned Income Tax Credit
1994 and 1997 Notice Study, A Report to Congress (Washington, D.C.:
August 1999).
[12] The Small Business Taxpayer Education Program provides help to
those who are starting or already have a small business and need
information in such areas as taxes, recordkeeping, accounting
practices, and completing federal business and employment tax returns.
Much of the assistance is free.
[13] We identified other studies with limited populations that also
found taxpayers preferred receiving a lump sum instead of smaller
periodic AEITC payments;
for example, Jennifer Romich and Thomas Weisner, "How Families View and
Use the EITC: Advance Payment vs. Lump Sum Delivery," National Tax
Journal (December 2000).
[14] One reason an AEITC recipient may not elect the advance in a
subsequent year is because he or she no longer meets the eligibility
requirements.
[15] AEITC recipients must expect to be able to claim the EITC, which
requires that taxpayers and their spouses, if filing a joint return,
have valid SSNs issued by SSA to all U.S. citizens or individuals
eligible to work.
[16] If any portion of the invalid SSNs is attributable to aliens not
currently authorized to work in the United States, the number of
invalid SSNs could be affected if the Congress changes policies
regarding such aliens. See Treasury Inspector General for Tax
Administration, The Internal Revenue Service's Individual Taxpayer
Identification Number Creates Significant Challenges for Tax
Administration, 2004-30-023 (January 2004), for more information about
aliens' use of invalid SSNs.
[17] There could be some instances where the SSN reported on the Form W-
2 does not match the SSN the taxpayer used on the tax return. Even
still, IRS uses the SSN on the Form W-2 and other third party forms for
document matching to identify noncompliance such as wage
underreporting.
[18] Of the more than 100,000 AEITC recipients with an invalid SSN,
most involved a SSN that did not match the individual's name on the
Form W-2.
[19] IRC § 6109(a)(1).
[20] 42 U.S.C. § 408.
[21] IRC §6723.
[22] IRS can file a substitute return for people who do not voluntarily
file. IRS assesses a tax liability and notifies the taxpayer of any tax
due based on the substitute tax return, which is created from available
Form W-2 and other information.
[23] There could be instances where our methodology did not detect a
filed tax return;
for example, when a taxpayer's SSN on the Form W-2 might have been
incorrect. See our scope and methodology (app. II).
[24] Because AEITC is an advance payment of the EITC, filers who claim
the EITC are required to reduce the EITC by any AEITC received. By
examining the Form(s) W-2 of EITC claimants for AEITC payments, the IRS
attempts to ensure that excess amounts of EITC are not claimed.
[25] Submission Processing did not have tax year 2002 data available.
[26] The electronic Form (s)W-2, which is an iteration of a user's
entries into the tax preparation software, is generally included in the
electronic filing submission.
[27] ERS is the system for examining and correcting electronic and
paper individual income tax returns rejected due to taxpayer and
processing errors. ERS treats paper and electronic returns in the same
way.
[28] AUR categorizes a case as an AEITC case if AEITC is the primary
issue, responsible for at least 80 percent of the increased tax
liability. Thus, the total amount assessed in each AEITC case may
include other underreported amounts. The total amount assessed is not
necessarily the total amount that IRS collects from the taxpayer.
[29] The automated collection system primarily focuses on collecting
taxes from taxpayers who are delinquent in paying assessed taxes.
[30] IRS officials said they decided to work on the cases for all 4
years, even if they did not involve the taxpayer receiving the AEITC in
some of those years so as to bring taxpayers in these cases into full
compliance.
[31] GAO, Earned Income Tax Credit: Implementation of Three New Tests
Proceeded Smoothly, but Tests and Evaluation Plans Were Not Fully
Documented, GAO-05-92 (Washington, D.C.: Dec. 30, 2004).
[32] IRS does not track the number of AEITC cases that are audited.
[33] IRS, Wage and Investment Research Group, Soft Notice for Duplicate
TINS for Tax Years 2002, 2003, and 2004, 6-05-12-2-030E (Nov. 29,
2005).
[34] Booz Allen Hamilton, AUR Soft Notice Test Results (Oct. 6, 2005).
[35] IRS, Wage and Investment Research Group, Dependent Database Soft
Notice Report for Tax Year 2005, 6-06-12-2-0280E (Oct. 31, 2006).
[36] There are different ways to calculate turnover. We considered it
to be first time use within a 6-year period. To provide additional
information, we also compared the number of first-time AEITC recipients
who did not elect the advance in tax year 2003 with the total number of
first-time AEITC recipients in tax year 2002. We made the same
comparisons for the following year.
[37] The Department of Homeland Security operates a voluntary program
known as Employment Eligibility Verification, formerly known as Basic
Pilot, through which participating employers enter employee
information, such as name and SSN, into the Web site to verify newly
hired employees' work authorization status. The program then attempts
to match that information against SSA and, if necessary, Department of
Homeland Security databases. We did not examine Employment Eligibility
Verification as part of this report because we have identified several
weaknesses in the program's implementation that could adversely impact
increased use. See GAO, Immigration Enforcement: Weaknesses Hinder
Employment Verification and Worksite Enforcement Efforts, GAO-06-895T
(Washington, D.C.: June 19, 2006).
[38] Financial institutions and other businesses that make certain
payments must file a Form 1099 with IRS. Generally, these payments are
not subject to withholding unless certain conditions exist, one of
which is an invalid taxpayer identification number.
[39] For the purposes of this report, SSN validity with regard to SSNVS
includes instances where a name matches its SSN as verified by SSA
records.
[40] SSA, Office of Inspector General, Accuracy of the Social Security
Administration's Numident File A-08-06-26100 (December 2006). When SSA
assigns an SSN to an individual, the agency creates a master record in
its Numident file, which contains information about the number holder,
including the person's name. Thereafter, the Numident record for each
number holder identifies any changes to the original information
provided by the number holder, including name changes.
[41] Supplemental Security Income is a federal program administered by
SSA designed to provide cash for food, clothing, and shelter to aged,
blind, and disabled people who have little or no income.
[42] As of June 2007, this proposal was still outstanding. SSA sends
"no match" letters to employers who submit more than 10 Forms W-2 to
SSA or when more than 0.5 percent of these wage reports consist of a
name and SSN combination that do not match SSA records.
[43] Both IRS and SSA have toll-free telephone numbers listed on their
Web sites that those looking for help with the particular service can
call to speak with agency staff and get help.
[44] The higher volume of questions in the first year assumes that
employees whose name and SSN matched and who sought the AEITC from the
same employer in a subsequent year would not be required to undergo a
second match.
[45] Internal Revenue Code Section 6103 prohibits the disclosure of
information on tax returns, including SSNs, unless permitted by a
specific exception. Because there is no exception for the verification
of SSNs by employers, legislation would be needed to use the TIN
Matching database for this purpose.
[46] Office of Tax Policy, U.S. Department of the Treasury, Scope and
Use of Taxpayer Confidentiality and Disclosure Provisions October 2000.
Such a provision was included in S. 1321, 109 Cong. Sec. 509 (2006).
[47] The Questionable W-4 program required employers to submit
information to IRS on taxpayers who claimed more than 10 withholding
allowances or exemptions.
[48] GAO, IRS's Questionable Form W-4 Program, GAO-04-79R (Washington,
D.C.: Nov. 6, 2003).
[49] The number includes AEITC amounts received by nonfilers, filers
who misreported the amount received, and individuals with invalid SSNs.
[50] This estimate is illustrative only and many variables could affect
how successful any compliance effort would be and the cost of
implementing an effort.
[51] The AEITC amount on the Form W-2 is what an employer reported
paying to an employee. While this is not necessarily evidence that the
employee actually received that amount, IRS considers the Form W-2 the
official wage and tax statement and makes adjustments to the tax return
based on the Form W-2 when discrepancies exist.
[52] An individual who had more than one Form W-2 reporting AEITC for a
particular year was counted as only one individual and the amount of
AEITC paid was totaled.
[53] The National Account Profile incorporates the DM-1 from SSA, which
is the primary source file for all SSNs. The National Account Profile
also includes additional SSN change information available to IRS to
show the most current and complete taxpayer information.
[54] The AEITC maximum limits for tax years 1999-2004 were: $1,387,
$1,412, $1,457, $1,503, $1,528, $1,563, respectively. These amounts are
limited if two married individuals both elect the AEITC.
[55] While each subpopulation contains a unique set of Form W-2s,
during tax years 2002-2004 there were 856 Form W-2s that appear in both
the valid and invalid name subpopulations. This could occur due to
variations in how the name is spelled or reported by the employer and/
or due to timing differences in reporting and updating name changes to
SSA.
[56] Because the SSN was invalid, it is not possible to determine
whether the individual's name matched.
[57] The Compliance Data Warehouse houses excerpts of data from various
IRS systems for easy retrieval.
[58] The EITC Database is an extraction of EITC data from IRS's
Individual Returns Transaction File. The database is located on the
Compliance Data Warehouse. These data met our reliability standards.
[59] We spoke with Leonard Burman, Urban Institute;
Leslie Book, Villanova University School of Law;
Jonathan Forman, University of Oklahoma College of Law;
William Gale, The Brookings Institution;
Robert Greenstein, Center on Budget and Policy Priorities;
Teresa Hinze, Community Tax Aid, Inc;
Julie Kruse, Center for Economic Progress;
Diana Leyden, University of Connecticut School of Law;
David Marzahl, Center for Economic Progress;
John Karl Scholz, University of Wisconsin Department of Economics;
and Eugene Steuerle, Urban Institute.
[60] The large difference in wages between the AEITC valid and invalid
name subpopulations could be a result of women who married during the
year and changed their name with their employer, but not SSA. These
women likely reported combined wages with their spouse.
[61] GAO/GGD-92-26 and Treasury Inspector General for Tax
Administration, Taxpayers Were Assessed Additional Tax for Advance
Earned Income Credit Payments Not Received, 2003-40-126 (June 2003).
[62] We only included laws that made specific changes to the AEITC or
its administration that were independent of changes to the EITC. Thus,
we did not include laws whose only change to the AEITC occurred because
of changes to the broader EITC program, such as changes in EITC benefit
amounts or eligibility rules.
[63] H.R. Conf. Rep. No. 103-213 (1993).
[64] Pub. L. No. 110-28.
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