eJournal of Tax Research, Vol. 5, No. 2, pp. 253-290, Nov. 2016
40 Pages Posted: 12 Apr 2016 Last revised: 15 Feb 2017
Date Written: 2016
The earned income tax credit (EITC) is the most significant earnings-based refundable credit in the U.S. tax system. Designed as an anti-poverty program, it is a social benefit administered by the Internal Revenue Service. The EITC reaches more than 27 million households annually. Studies show it has a positive impact upon the children whose families receive it. Despite its many positives, however, the EITC is a program that for years has been plagued by taxpayer noncompliance: the estimated rate of improper payments on EITC claims has ranged between 20 and 30%, totaling billions of dollars annually. Though it is believed that the majority of EITC noncompliance may be unintentional, public reports of misconduct and fraud add fuel to the political rhetoric about a revenue system in which nearly half of Americans pay no federal income tax.
This article unpacks the rhetoric. It describes why the term “improper payments” is not synonymous with fraud. It places EITC noncompliance within the broader context of the U.S. “tax gap” and examines what intentional EITC noncompliance has in common with sole proprietor noncompliance. It explores motivations for intentional EITC noncompliance and also examines the role of inadvertent error in the overclaim rate. It describes the ways in which self-prepared returns present wholly different challenges than those completed by paid preparers.
Building on the above, the article critiques the Internal Revenue Service for its shortcomings in administering and enforcing the EITC program. The article calls upon the IRS to continue pursuing unscrupulous tax return preparers, but also highlights the need to design meaningful sanctions to punish and deter unscrupulous individuals who self-prepare.
The article addresses these concerns within a comprehensive proposal to increase the amount of information required from all taxpayers (whether self-prepared or using a preparer) at the time of filing. It builds upon theories of taxpayer noncompliance in arguing that greater due diligence requirements will reduce both intentional and unintentional EITC errors. The article also proposes a program that would allow first-time EITC claimants the option to submit substantiating documentation at the time of filing in order to receive an expedited refund.
The article concludes that increasing due diligence requirements at the time of filing, coupled with slowing down the refund process generally, is a reasonable way to improve administration of the EITC program without unduly burdening low-income taxpayers.
Keywords: Earned Income Tax Credit, Poverty Law, Tax Compliance, Tax Policy
JEL Classification: D6, D63, H2, H24, I3, I31, K3, K34
Suggested Citation: Suggested Citation
Drumbl, Michelle Lyon, Beyond Polemics: Poverty, Taxes, and Noncompliance (2016). Washington & Lee Legal Studies Paper No. 2016-9. Available at SSRN: https://ssrn.com/abstract=2761083