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.