IRS’ Efforts to Reduce EIC Noncompliance in 1995: Some Positive Results, Some Problems

IRS took several steps in 1995 to combat a growing problem with refund fraud in general and, more specifically, EIC noncompliance. Most significantly, IRS (1) expanded the up-front controls in its Electronic Filing System, (2) placed increased emphasis on its efforts to verify SSNs on paper returns, and (3) held up the refunds on millions of EIC returns with valid SSNs to allow IRS time to check for duplicate SSN usage. IRS expanded its SSN validation efforts in 1995 to include dependents with a problem SSN and identified 3.3 million paper returns with 1 or more missing or invalid SSNs for EIC-qualifying children and/or dependents.About 3 million of those returns involved requests for refunds. Examination had enough resources to review only about 1 million of the questionable returns. IRS Did Not Follow Through on Plans to Check for Duplicate SSN Use

Because IRS studies have shown a high risk of noncompliance with returns claiming the EIC, IRS decided to delay about 4 million EIC refunds in 1995 even though IRS had identified no missing or invalid SSNs on those returns.The 4 million returns included returns filed electronically and on paper with EIC claims above a certain dollar amount. After holding the refunds for several weeks, IRS released almost all of them without checking for duplicate SSNs. Comments From the Internal Revenue Service

The first copy of each GAO report and testimony is free.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) efforts to reduce Earned Income Credit (EIC) noncompliance in calendar year 1995.

What GAO Found

GAO found that: (1) the up-front controls used by IRS in its Electronic Filing System helped IRS reduce some EIC noncompliance and identify about 1.3 million social security number (SSN) problems on electronically filed tax returns in 1995; (2) IRS placed increased emphasis on validating SSN on paper returns, since it identified about 3.3 million returns with missing or invalid SSN for EIC-qualifying children; (3) although IRS identified 3.3 million returns with problems, IRS only had the resources to follow up on 1 million cases; (4) IRS delayed refunds on about 4 million EIC returns that did not have any SSN problems to check for the use of duplicate SSN, but released almost all of those refunds without checking for duplicate SSN; (5) IRS has taken steps to better utilize its resources in 1996, such as attempting to identify more productive cases and limiting the number of delayed refunds; and (6) the overall impact on IRS efforts to reduce EIC noncompliance cannot be assessed because IRS commingled 1995 data with data from previous years.