The most current data available, for tax year 1999, show EIC  overclaim rates estimated to be between 27 and 32 percent of dollars  claimed or between $8.5 billion and $9.9 billion. Task Force Considered Much Information Related to EIC Compliance before Recommending Qualifying Child Certification Program

When IRS’s study of EIC compliance rates for 1999 was released, the  Assistant  Secretary of the Treasury and IRS Commissioner convened a  task force in February 2002 to find ways of reducing EIC overclaims while  minimizing the burden to taxpayers and maintaining the EIC’s relatively  high participation rate. Some of these  changes include (1) postponing relationship certification for an  undetermined period of time, (2) delaying program implementation, and   (3) reducing the test sample from 45,000 to 25,000. Despite these  challenges, the process for selecting taxpayers, what taxpayers will receive  from IRS, and what taxpayers will be required to provide remains basically  the same as originally planned. In addition, IRS has emphasized that program expansions, if any, will  depend on the results of this year’s test. That is, the certification proposal is based on  analyses of the leading sources of EIC errors detected in earlier studies,  thus focusing attention and burden on the subset of taxpayers making  those errors, as opposed to all EIC recipients. Officials designed the  program to include, and thus burden, only the taxpayers most likely to  make the errors that contribute most to the EIC’s overclaim rate. From its  inception, the certification program was intended to: (1) reduce the EIC’s  overclaim rate, (2) minimize burden on taxpayers and (3) maintain the  EIC’s relatively high participation rate. However, the plan proposed potential options for identifying how and  when some critical data will be obtained and analyzed, but does not  provide further details on when decisions will be made on specific data that  will be collected, how, and by whom. They have, for instance, developed preliminary drafts identifying additional  data needed and have begun considering how to use contractors to gather  the data. Although the balance IRS has struck supports proceeding with the test,  IRS’s plan for evaluating the certification program test is incomplete. Because the data are related to taxpayers’  actions that will occur later this year or next spring, IRS appears to have  some time to finalize its evaluation plan. In consultation with our requesters’ offices, we grouped these questions  into three objectives, as follows: (1) describe the design and basis for the  EIC qualifying child certification program as proposed by the EIC task  force, (2) describe the current status of the program, including significant  changes since program approval, and (3) assess whether the program is  adequately developed to (a) prevent unreasonable burdens on EIC  taxpayers and (b) improve compliance so that the test should proceed.
Why GAO Did This Study

The Earned Income Credit (EIC), a tax credit available to the working poor, has experienced high rates of noncompliance. Unlike many benefit programs, EIC recipients generally receive payments without advance, formal determinations of eligibility; the Internal Revenue Service (IRS) checks some taxpayers' eligibility later. IRS estimated that tax year 1999 EIC overclaim rates, the most recent data available, to be between 27 and 32 percent of dollars claimed or between $8.5 billion and $9.9 billion. To address overclaims, IRS plans to test a new certification program. Because IRS's plans have garnered much attention, Congress asked us to (1) describe the design and basis for the EIC qualifying child certification program, (2) describe the current status of the program, including significant changes, and (3) assess whether the program is adequately developed to prevent unreasonable burden on EIC taxpayers and improve compliance so that the test should proceed.

What GAO Found

The Assistant Treasury Secretary and IRS Commissioner convened a task force to identify ways of reducing EIC overclaims while minimizing taxpayer burden and maintaining the EIC's relatively high participation rate. In August 2002, the Secretary approved a recommendation to certify taxpayers' eligibility to claim EIC qualifying children. The proposal is based on analyses of the leading sources of EIC errors, thus focusing attention and burden on the subset of taxpayers most likely to make those errors. Since August 2002, IRS has made key changes to the certification program, including concentrating on residency certification and postponing relationship certification, delaying program implementation until later this year, and reducing the test sample from 45,000 to 25,000. Despite the changes, the process for selecting taxpayers, what taxpayers will receive from IRS, what taxpayers are required to provide, and the program's goals remain fundamentally the same as originally planned. In addition, IRS has emphasized that program expansions, if any, will depend on the results of this year's test. The process would involve three key stages. These changes, including the most recent, help achieve a better balance between preventing unreasonable taxpayer burden and addressing the EIC's high overclaim rate and support IRS's plans to test the certification program. However, IRS's plan for evaluating the test is incomplete, presenting only some information on how IRS would evaluate whether certification would reduce the EIC overclaim rate, minimize burden, and maintain a relatively high participation rate. The plan proposes potential options for identifying how and when certain critical data will be obtained, but does not provide further details on when decisions will be made or on the specific data that will be collected. Officials have developed preliminary drafts identifying data to be obtained and have begun considering how to use contractors to gather the data. Because the data relate to taxpayers' actions that will occur next spring, IRS appears to have some time to finalize its evaluation plan.