	Introduction

The Earned Income Tax Credit (EITC) is a refundable tax credit available to eligible workers earning relatively low wages. Because the credit is refundable, an EITC recipient need not owe taxes to receive the benefit. Hence, many working poor (especially those with children) who have little or no tax liability receive financial assistance from this tax provision. Studies indicate that EITC errors (both unintentional and intentional) result in a relatively high proportion of EITC payments being issued incorrectly. The Department of the Treasury's Agency Financial Report (AFR) for fiscal year (FY) 2017 estimates that in FY2017 between 21.9% and 25.8% of EITC payments—between $14.9 billion and $17.6 billion—were issued improperly. This study found that the majority of taxpayers who overclaim the EITC are ultimately ineligible for the credit, rather than eligible for a smaller credit. (While the study was released in 2014, it is also referred to as the 2006-2008 EITC Compliance Study in this report, because it examined tax returns between 2006 through 2008.) This report examines findings from the 2014 IRS study. Next, the report provides an overview of the major factors leading to EITC noncompliance identified in the 2014 study on this issue, as well as challenges the IRS may face in their efforts to reduce each type of error. In other words, recovered amounts of the credit are subtracted from erroneous claims of the credit to calculate improper payments. This study concluded that there were three major reasons for errors among claimants: 
EITC claimants claimed children who were not their qualifying children for the credit; EITC claimants misreported their income; and EITC claimants used an incorrect filing status when claiming the credit. Unlike previous studies (which did not examine error among paid preparers), this study also found that among paid tax preparers, unenrolled preparers were the most common type of preparers of tax returns which include the EITC. In addition, unenrolled preparers were found to be most prone to error when claiming the credit. Second, the child must share a residence with the tax filer for more than half the year in the United States. Study Results

The 2006-2008 EITC Compliance Study found that in terms of dollar amounts of overclaims, errors in claiming the qualifying child were the largest source of EITC overclaims. Of the 13% of children claimed in error, the most frequent type of qualifying child error was the failure of the tax filer's qualifying child to meet the residency requirement. Incorrectly reporting income (sometimes referred to as "income misreporting") was the most common source of error identified in the 2006-2008 EITC Compliance Study. In contrast, tax filers whose income is above the phase-out threshold amount may receive a larger credit if they underreport their income. Filing Status Errors

The EITC can be claimed by taxpayers filing their tax return as married filing jointly, head of household, or single. EITC recipients may use paid preparers for a number of reasons, including
the belief that having their tax return prepared by a paid preparer will result in a larger tax refund and fewer errors, the belief that refunds are received faster when the return is prepared by a paid preparer, language differences or taxpayer literacy problems, the IRS's close review of EITC returns or the belief that using a paid preparer will reduce the chance of audit, less effort (work) by the tax filer, and the incorrect belief that the paid preparer (and not the taxpayer) will pay any penalty associated with an error. An EITC overclaim is "the difference between the EITC amount claimed by the taxpayer on his or her return and the amount the taxpayer should have claimed." This allows the IRS to determine the factors that lead tax filers to claim the credit incorrectly.
The Earned Income Tax Credit (EITC) is a refundable tax credit available to eligible workers earning relatively low wages. Since the credit is refundable, an EITC recipient need not owe taxes to receive the benefit. Hence, many low-income workers, especially those with children, can receive significant financial assistance from this tax provision.
Studies indicate that a relatively high proportion of EITC payments are issued incorrectly. The Treasury Department estimates that in FY2017 between 21.9% and 25.8% of EITC payments—between $14.9 billion and $17.6 billion—were issued improperly. These improper payments can be overpayments or underpayments. The IRS's most recent study (released in 2014) of the factors that lead to EITC overclaims—the difference between the amount of EITC claimed by the taxpayer on his or her return and the amount the taxpayer should have claimed—concluded that there were three major reasons that tax filers claimed the wrong amount of the credit:
Qualifying child errors: Some EITC claimants claimed children who were not qualifying children for the credit. The most frequent type of qualifying child error was the failure of the tax filer's qualifying child to meet the credit's residency requirement whereby the claimed child must live with the tax filer for over half the year in the United States. This was the largest error in terms of dollars of EITC overclaims. Income reporting errors: Some EITC claimants misreported their incomes. For example, tax filers whose income was above the phase-out threshold amount would receive a larger credit if they underreported their income. This was the most common error in terms of its frequency among tax returns which included an EITC claim and also included an overclaim. Filing status errors: Some EITC claimants used the incorrect filing status when claiming the credit. Specifically, married couples were filing as unmarried (as single or head of household) to receive a larger credit.
This IRS study—also referred to as the 2006-2008 EITC Compliance Study in this report, because it examined tax returns between 2006 through 2008—found largely the same results as a previous IRS study on overclaims, released in 1999. The 2014 study also found that the majority of taxpayers who overclaim the EITC are ultimately ineligible for the credit, rather than eligible for a smaller credit. The 2014 study did not estimate the proportion of errors which were intentional (i.e., fraud) versus "honest mistakes" made while attempting to comply with EITC rules
Unlike previous studies, the 2014 study also examined different types of paid tax preparers who prepared tax returns which included EITC claims (these tax returns are sometimes referred to as "EITC returns"). The study found that among paid tax preparers, unenrolled preparers were both the most common type of tax preparers of EITC returns and among the most prone to erroneous claims of the credit. Unenrolled tax preparers generally do not pass the same testing requirements as enrolled preparers (e.g., attorneys and CPAs) and in contrast to enrolled tax preparers are limited in how they can represent their clients before the IRS.
This report summarizes findings from the 2014 IRS study detailing the factors that can lead to erroneous claims of the credit, and describes the challenges the IRS may face in their efforts to reduce each type of error. It also examines the role of paid tax preparers on EITC error.