Special Report on Earned Income Tax Credit to Improve Participation

A special report was recently released by National Taxpayer Advocate (NTA) Nina E. Olson on the Earned Income Tax Credit (EITC), which makes recommendations designed to increase the participation rate of eligible taxpayers and reduce overclaims by ineligible taxpayers [IR 2019-123, 7/10/19].

Background. The EITC is a tax credit available to low-income employees. The credit reduces taxes owed and is intended to offset living expenses and Social Security taxes paid. Eligible employees claim the credit on their personal income tax returns. An employer must notify employees about the credit if the employee worked for the employer at any time during 2019 and didn’t have any withholding deducted (see Payroll Guide ¶4045).

The EITC report presents a detailed examination of the strengths and weaknesses of the EITC as currently structured and administered, and makes legislative and administrative recommendations to improve it. “All our recommendations are actionable and supported by data and research,” said Olson.

General recommendations. Among the report’s general recommendations include: (1) acknowledging a second mission of the IRS to administer benefit programs like the EITC, which requires a different approach to tax collection that includes hiring employees with different skill sets and creating a separate set of practices and processes; (2) having Congress consider the feasible application of tax provisions, especially family and child-related provisions whose eligibility criteria may be difficult if not impossible for the IRS to verify; and (3) having Congress conduct regular oversight hearings of the IRS on a permanent basis that give the IRS an opportunity to identify successes and challenges with the laws it administers.

Specific EITC recommendations. Among the report’s more specific recommendations include: (1) Congress considering a EITC redesign to reduce fraud by separating the worker component from the family-size component of the credit and by revising the definition of a “qualifying child” to better reflect existing family relationships; (2) Congress authorizing the IRS to establish minimum standards for tax return preparers and software providers to protect taxpayers and improve the accuracy of EITC claims; and (3) Congress and the IRS taking steps to ensure EITC compliance procedures are consistent with due process norms and fundamental taxpayer rights.

Olson noted that she herself has benefited from the EITC in the past and has worked extensively on EITC issues as the NTA.