IRS has periodically measured EITC compliance. For tax year 1999, (the  most current data available), IRS estimated the EITC overclaim rates at 27  to 32 percent of EITC dollars claimed, or $8.5 billion to $9.9 billion. IRS Implemented Three Tests on Leading Sources of EITC Noncompliance and Reported Spending Most of the Funding Received on the Tests

In an effort to implement the joint IRS/Treasury task force  recommendations, IRS implemented three new tests—qualifying child  certification, filing status, and income misreporting—in 2004. This form  requires taxpayers to provide documentation as to why they did not file as  married for tax year 2003. The task force recommended that taxpayers claiming the EITC  (1) provide IRS with documentation to prove a qualifying child’s residency  prior to payment of the credit (the qualifying child test), (2) submit  additional data to establish that they are claiming the correct filing status  (the filing status test), and (3) use a new screening process to select tax  returns from an existing program to identify taxpayers likely to have the  most significant underreporting of income on their tax return and,  therefore, the highest potential EITC overclaim amount (income  misreporting test). Postal Service. As a result, this lack of documentation hindered not only  test monitoring and oversight, but also did not foster a common  understanding of the tests. IRS has some evidence that taxpayers  are willing to certify in advance of the filing season because about 800  taxpayers did so as part of the 2004 qualifying child test, even though they  were only asked to do so when filing their returns. IRS also is testing two refinements in the sample selection criteria for the  2005 filing status tests to determine whether the selection criteria can be  improved. IRS’s 2004 Evaluation Plans Lacked Sufficient Documented Detail to Allow for Oversight; Evaluation Plans for 2005 Tests Were Not Completed Before Two of the Tests Had Begun

IRS’s plans for evaluating the three 2004 tests lacked sufficient documented  detail to facilitate managerial review and stakeholders’ oversight and  thereby help ensure that the evaluation of the tests’ results would be as  sound as possible and the results would be communicated with full  recognition of their strengths and limitations. In essence, an evaluation plan is used to manage the evaluation  endeavor. Despite the importance of having detailed plans prior to  implementation, IRS had not completed its evaluation plans for the 2005  tests before two of those tests had begun. The primary goal of all three  tests was to reduce overclaim rates. Conclusions

The EITC program lifts millions of low-income taxpayers and their families  out of poverty. Recommendations for Executive Action

The Commissioner of Internal Revenue should  adopt a policy of documenting the rationale for key policy decisions and  other significant events as the 2005 tests are implemented;  develop a means of gathering information during the 2005 tests on the  use of such locations as LITCs and walk-in sites on the level and quality  of service provided by those sites, particularly in light of IRS’s plans to  draw its sample from a single community for the qualifying child test;  ensure that reports disseminating the results of the 2004 and 2005 test  evaluations clearly outline aspects of test design and evaluation  shortcomings that limit the interpretation and utility of the results; and  complete the development of comprehensive and adequately detailed  evaluation plans for the 2005 tests. To describe the status of IRS’s evaluation plan for the  fiscal year 2005 tests, we primarily relied on interviews with IRS officials.
Why GAO Did This Study

Research has shown that the Earned Income Tax Credit (EITC) has helped lift millions of individuals out of poverty. In recent years, the Internal Revenue Service (IRS) has paid approximately $30 billion annually to about 20 million EITC recipients. However, the program also has experienced a high rate of noncompliance. IRS estimated that EITC overclaim rates for tax year 1999, the most recent data available, were between 27 and 32 percent of dollars claimed or $8.5 billion and $9.9 billion, respectively. We were asked to describe the three tests IRS has begun to reduce overclaims and how the funds appropriated for them were spent; assess how well IRS implemented the tests and describe planned refinements for the 2005 tests; and assess whether IRS's evaluation plans had sufficient documented detail to facilitate managerial review and stakeholder oversight and describe the status of the 2005 evaluation plans.

What GAO Found

IRS implemented three tests in 2004 to address leading sources of EITC errors: a qualifying child test, where selected taxpayers were asked to document that their child lived with them for more than half the year in 2003; a filing status test, where selected taxpayers were asked to provide documentation to prove the accuracy of their 2003 filing status, and an income misreporting test, where a new screening process was used to select EITC returns that identify taxpayers likely to have the most significant changes in their assessments due to underreporting of income on their tax return. IRS's implementation of the tests proceeded smoothly and largely as planned. However, some information, such as a key change in the filing status test, was not well documented and the level and quality of some services provided to test participants were not measured. This lack of documentation hindered monitoring, oversight, and did not foster a common understanding of the tests. For the 2005 tests, IRS made key changes to the qualifying child test to encourage taxpayers to certify in advance of filing their return and to attempt to simulate what might happen with nationwide implementation. IRS also changed the sample selection criteria for the filing status test to better target noncompliant taxpayers. IRS's plans for evaluating the 2004 tests generally lacked documentation and detail for many key issues, which undermined their value to managers and stakeholders. For example, IRS did not specify how it planned to analyze some qualifying child survey data. In essence, an evaluation plan is the management plan or roadmap for the evaluation endeavor and well-developed plans facilitate test management and oversight. Despite the importance of having evaluation plans prior to implementation, IRS had not completed its plans for the 2005 tests before two of the tests had begun.