- Exploring Earned Income Tax Credit Structures: Dividing the Credit Between a Worker and Child Component and Other Considerations (2022 National Taxpayer Advocate Annual Report to Congress, TAS Research) –The National Taxpayer Advocate Fiscal Year 2020 Objectives Report to Congress recommended that the EITC be split between a worker portion and a child portion. This report explores possible options for bifurcating the EITC by discussing seven new EITC structures.
- Study of Subsequent Compliance of Taxpayers Who Received Educational Letters From the National Taxpayer Advocate (2019 National Taxpayer Advocate Annual Report to Congress)
- Study of Two-Year Bans on the Earned Income Tax Credit, Child Tax Credit, and American Opportunity Tax Credit (2019 National Taxpayer Advocate Annual Report to Congress, TAS Research)
- Study of Subsequent Filing Behavior of Taxpayers Who Claimed Earned Income Tax Credits (EITC) Apparently In Error and Were Not Audited But Were Sent an Educational Letter From the Taxpayer Advocate Service, Part 2: Validation of Prior Findings and the Effect of an Extra Help Phone Number and a Reminder of Childless-Worker EITC (2017 National Taxpayer Advocate Annual Report to Congress, TAS Research) – This study corroborates and expands upon a 2016 study of educational letters from TAS to taxpayers who appeared to have erroneously claimed the Earned Income Tax Credit (EITC). In 2017, TAS sent the same letter, but also reminded taxpayers they could be eligible for the childless-worker EITC. In addition, TAS sent a separate letter to a group of taxpayers who appeared to have erroneously claimed EITC because the residency test for claiming EITC was not met. This study explores the effect of both letters on taxpayers’ subsequent compliance.
- Study of Subsequent Filing Behavior of Taxpayers Who Claimed Earned Income Tax Credits (EITC) Apparently in Error and Were Sent an Educational Letter From the National Taxpayer Advocate (2016 National Taxpayer Advocate Annual Report to Congress, TAS Research)
- Study of Tax Court Cases In Which the IRS Conceded the Taxpayer was Entitled to Earned Income Tax Credit (EITC) (2012 ARC, TAS)
- IRS Earned Income Credit Audits – A Challenge to Taxpayers (2007 ARC, TAS Research)
- Simulating EITC Filing Behaviors – Validating Agent Based Simulation for IRS Analyses: The 2004 Hartford Case Study (2007 ARC, Kathleen M. Carley & Daniel T. Maxwell)
- Earned Income Tax Credit Audit Reconsideration Study (2004 ARC, TAS Research)
Written By National Taxpayer Advocate
Text of the Sept. 18, 2023, letter IRS Commissioner Werfel shared with the members of Congress PDF updating them on agency enforcement efforts and efforts to address audit disparity issues in areas such as the Earned Income Tax Credit.
The following is the text of a letter sent to members of Congress on Sept. 18, 2023 by IRS Commissioner Danny Werfel updating them on agency enforcement efforts and efforts to address audit disparity issues in areas such as the Earned Income Tax Credit. Following the one-year anniversary of enactment of the Inflation Reduction Act (IRA) and my sixth months as Commissioner, I am writing to update you on our ongoing efforts to rebalance the IRS’ enforcement activities. The investment of resources under the IRA represents a generational opportunity for the IRS to refocus our energy on closing the tax gap by ensuring efficient and effective tax administration. This rebalancing effort centers around high-income and high-wealth individuals, complex partnerships, and large
corporations who are not paying the taxes they legally owe, as well as any bad actors who victimize taxpayers.This effort also recognizes that the vast majority of taxpayers want to comply with tax law.
We aim to make this simpler and easier to do, while allowing taxpayers to interact with the IRS in the ways that work best for them. For the first time, and thanks to the new resources provided by the IRA, the IRS will help taxpayers identify mistakes before filing, quickly fix errors that delay their refunds, and claim the credits and deductions they are eligible for. Helping taxpayers get it right at the time of filing will reduce the need for the IRS to contact taxpayers through notices, correspondence audits, and other enforcement activities. To that end, the changes we are making benefit all Americans by promoting fairness and accuracy and protecting all taxpayers from scams and schemes. Following a top-to-bottom review of enforcement and in line with our Strategic Operating
Plan, IRS has begun announcing sweeping efforts to overhaul compliance efforts to improve tax administration. For example, IRS is intensifying collections activities that focus on high-income taxpayers with more than $250,000 in recognized tax debt. This builds off earlier successes that collected $38 million from more than 175 high-income earners this past spring. In addition, IRS staff are closely examining potential non-compliance among large, complex partnerships, including 75 of the largest partnerships in the U.S. identified as higher risk for tax compliance with the help of new AI tools as well as hundreds of partnerships with over $10 million in assets and balance sheet discrepancies. In the near term, we will be sharing details regarding our stepped-up activities to address noncompliance among large corporations. These changes, which leverage the IRA’s investment in modernized technology, expanded data science, and right sizing of our
workforce, will significantly improve the IRS’s ability to address the tax gap, which was projected to be $540 billion per year for 2017-2019.
Rev. Proc. 2021-23
Table of Contents
SECTION 1. PURPOSE
SECTION 2. CHANGES
SECTION 3. 2021 INCREASED REFUNDABLE CHILD TAX CREDIT
SECTION 4. 2021 EARNED INCOME CREDIT AS MODIFIED AND SURPERSEDED
SECTION 5. APPLICABLE PERCENTAGE TABLE FOR 2021 AS MODIFIED AND SUPERSEDED
SECTION 6. EFFECT ON OTHER DOCUMENTS
SECTION 7. EFFECTIVE DATE
SECTION 8. DRAFTING INFORMATION
SECTION 1. PURPOSE
The recently-passed American Rescue Plan Act contains several tax breaks for you and your family. Here are the major provisions of the bill that could mean more money in your pocket during the 2021 tax year.
Child tax credit (CTC)
- The CTC for 2021 increases from $2,000 to $3,000 for kids ages 6 to 17 and $3,600 for kids ages 5 and under.
- To receive the full tax credit your adjusted gross income must be under $75,000 (Single); $150,000 (Joint); or $112,500 (Head of Household).
- If your income is above the aforementioned thresholds, you can still receive $2,000 per child if your income is less than $200,000 (Single, Head of Household); or $400,000 (Joint).
- You can receive up to 50% of your 2021 child tax credit in 6 monthly payments starting July 2021. The IRS is warning, however, that this July start date may be delayed because a computer system still has to be built to handle these monthly payments.
Child and dependent care credit (DCC)
A new rule may help you if you experienced job loss or change in income in 2020. To qualify for earned income tax credit, people must have earned income. Generally, earned income includes taxable employee compensation and net earnings from self-employment, as well as certain disability payments.
You can use your 2019 earned income to figure your EITC, if your 2019 earned income was more than your 2020 earned income. The same is true for the additional child tax credit.
For details, see the instructions for Form 1040 PDF.
What is Earned Income?
The Earned Income Tax Credit (EITC) is one of the primary forms of public assistance for low income working taxpayers. However, the EITC is associated with a high improper payment rate. According to the Treasury Department’s Fiscal Year (FY) 2018 Agency Financial Report, the FY 2018 EITC improper payment rate is approximately 25 percent. A principal cause of the EITC improper payment rate is the complexity of the rules for claiming EITC, as reported by the Department of Treasury here and here. While I recognize the importance of tracking and minimizing improper payments, I am concerned that the focus on “a number” masks both the successes and challenges in improving EITC compliance. In fact, EITC improper payment estimates are based on audits of tax years four years in the past and do not reflect the most recent remedial measures. Additionally, the Treasury Inspector General for Tax Administration (TIGTA) reports that the EITC improper payment rate does not take into account that for every dollar of EITC improper payments, 40 cents of EITC went unclaimed by taxpayers who appear to be eligible for the credit.
In this year’s Annual Report to Congress I reported that IRS actions to reduce the EITC improper payment rate are not sufficiently proactive and may unnecessarily burden taxpayers. For instance, despite the acknowledged complexity of the rules for claiming EITC as a cause of improper EITC claims, IRS and Treasury legislative proposals to address EITC improper payments center on enforcement measures rather than on simplification.
WASHINGTON — The Internal Revenue Service has updated the tax year 2018 annual inflation adjustments to reflect changes from the Tax Cuts and Jobs Act (TCJA). The tax year 2018 adjustments are generally used on tax returns filed in 2019.
The tax items affected by TCJA for tax year 2018 of greatest interest to most taxpayers include the following dollar amounts: Read More
Can a simple educational letter to taxpayers who appear to have erroneously claimed the earned income tax credit (EITC) actually avert future noncompliance? Based on recent TAS research studies, the answer appears to be yes.
As readers of this blog already know, the EITC is a refundable credit designed to provide financial support to low income working taxpayers, especially those with children in the household. Because it focuses on household composition, the administration of the credit is very complex. While the IRS can generally establish the age of the child from various government databases, and sometimes the parent-child relationship, it cannot easily establish other relationships nor can it independently determine with whom the child lived for over half the year, as the law requires. Read More
Oops! You’ve discovered an error after your tax return has been filed. What should you do? You may need to amend your return.
The IRS usually corrects math errors or requests missing forms (such as W-2s) or schedules. In these instances, do not amend your return. However, do file an amended return if any of the following were reported incorrectly: Read More
Millions of Americans forgo critical tax relief each year by failing to claim the Earned Income Tax Credit (EITC), a federal tax credit for individuals who work but do not earn high incomes. Taxpayers who qualify and claim the credit could pay less federal tax, pay no tax or even get a tax refund.
Last year, an estimated 21 million taxpayers received approximately $37.5 billion in EITC. However, the IRS estimates Read More