AEITC Use Low and May Be Difficult to Increase

About 3 percent of the EITC recipients potentially eligible for the advance,  about 514,000 individuals on average, elected it in each year, tax years  2002 through 2004, according to data employers reported on the Form W-2. As table 2  indicates, about half of all individuals who got AEITC received $100 or less  each year and about 75 percent received $500 or less. There have been several federal efforts  targeted to increase AEITC use over the last approximately 15 years,  including both legislative and administrative changes. Interviews with IRS officials, other experts, and our prior  AEITC work suggest that those eligible for the AEITC prefer receiving the  EITC in a lump sum after they file their federal tax return instead of  receiving relatively small portions spread throughout the year. High Noncompliance Exists with AEITC Requirements

Overall, as many as 80 percent of all AEITC recipients did not comply with  or made errors involving one of the three AEITC requirements that we  reviewed, and they received about $282 million when the 3 years, 2002  through 2004, are aggregated. Some taxpayers were noncompliant with  more than one requirement. As table 4 illustrates, about 20 percent (more than  100,000) of AEITC recipients each year may not have been eligible for the  advance because they did not have a valid SSN on their Form W-2. Collectively, these individuals received between $37 million and $39  million in AEITC each year. Some of these individuals were likely eligible for the AEITC. Collectively, these individuals  received between $42 million and $50 million of AEITC benefits. Of the approximately 60 percent (about 300,000) AEITC recipients who  filed a federal tax return, two-thirds misreported the amount they received  in tax year 2002 through 2004, as shown in table 7. IRS’s Procedures to Verify SSNs Have Limited Effectiveness for AEITC Recipients Due to Taxpayer Noncompliance in Reporting and Filing

Submission Processing’s procedures have limited effectiveness in verifying  that AEITC recipients have a valid SSN because, as previously noted, many  individuals do not file the required tax return and, for those who do, most  do not report receipt of the advance. AUR has the resources to only work on a fraction of these cases  each year and uses criteria, such as revenue collection potential, for case  selection. The  program was therefore discontinued. Several advantages and disadvantages exist  if IRS creates a Form W-5 database to use in monitoring AEITC  noncompliance issues. If IRS were to test sending  soft notices for AEITC and it cost IRS about the same amount to send  notices to 300,000 noncompliant AEITC recipients, IRS would only need to  reduce AEITC noncompliance by about 11 percent (about $10 million) to  achieve a $19 to $1 return on investment. Appendix II: Scope and Methodology

To answer the first and second objectives:    how many individuals received the Advance Earned Income Tax Credit  (AEITC) compared with the Earned Income Tax Credit (EITC) and  how much did they receive in tax years 2002 through 2004; what  actions, if any, have been taken to increase use since 1992; and what is  the potential for significant increases in the future; and    what is the extent of noncompliance, if any, associated with the AEITC; we obtained a data file of all Forms W-2, “Wage and Tax Statement,” for  tax years 1999-2004 indicating AEITC payments as shown by an amount  greater than $0 in box 9 of the Form W-2 from the Internal Revenue  Service (IRS). 3. This involved  conducting literature searches and interviews with IRS and SSA officials. More than half of these individuals filed a tax return.
Why GAO Did This Study

The Advance Earned Income Tax Credit (AEITC) allows individuals to receive a portion of the Earned Income Tax Credit (EITC) in their paychecks, instead of receiving all of it when filing their year-end tax return. Limited research has been conducted on the AEITC since GAO last examined it in the early 1990s. GAO was asked to determine (1) how many individuals received the AEITC compared with the EITC in tax years 2002 through 2004, what actions, if any, have been taken to increase use, and the potential for increases in use in the future; (2) the extent of noncompliance, if any, associated with the AEITC; and (3) how well the Internal Revenue Service's (IRS) procedures address the areas of noncompliance. To address these questions, GAO analyzed Forms W-2 and tax return data and interviewed IRS and Social Security Administration (SSA) officials.

What GAO Found

AEITC use was low--only about 3 percent of EITC recipients potentially eligible for the advance received it in tax years 2002 through 2004, or about 514,000 of the 17 million potentially eligible individuals each year. About half of all recipients received $100 or less in AEITC and 75 percent received $500 or less for the year, with a total benefit paid of about $146 million each year. Several efforts have been aimed at increasing use over the last approximately 15 years, such as sending notices to individuals informing them that they were potentially eligible for the AEITC and making changes to IRS forms. Despite these efforts, use did not substantially increase and, for several reasons, it may be difficult to increase it in the future. For example, IRS officials, other experts, and prior GAO work suggests that individuals often do not elect the AEITC because they prefer receiving the entire EITC as a lump sum after filing their tax return. As many as 80 percent of AEITC recipients did not comply with at least one of the program requirements GAO reviewed, and some were noncompliant with more than one during the 3 years we reviewed. In tax years 2002 through 2004, about 20 percent, or more than 100,000 AEITC recipients, may not have been eligible for the AEITC because they had an invalid Social Security number (SSN). These individuals received a total of $37 million to $39 million each year. Almost 40 percent (about 200,000 recipients) did not file the required tax return; these individuals received $42 million to $50 million each year. Of the about 60 percent (more than 300,000) AEITC recipients who did file a return, about two-thirds misreported the amount received. IRS's procedures have limited effectiveness in addressing AEITC noncompliance. For example, Automated Underreporter (AUR) staff worked on only a fraction of AEITC cases because of resource constraints and criteria limiting case selection. IRS could address AEITC noncompliance by sending "soft notices" to recipients, requiring employers to verify employee SSNs before providing the AEITC, or creating a Forms W-5, "EITC Advance Payment Certificate," database. Each of these options have advantages, however, they also have potential disadvantages that could limit their effectiveness.