Most Serious Problem: Earned Income Tax Credit (EITC)

The Future State's Reliance on Online Tools Will Harm EITC Taxpayers

The Earned Income Tax Credit (EITC) has become one of the government’s largest means-tested anti-poverty programs. In Tax Year 2014, 27.5 million taxpayers received about $66.7 billion in EITC benefits. However, the IRS recently announced its intention to pursue a “Future State” plan.  Major goals of the plan are to improve tax processing systems, increase electronic filing and payment options, and expand services available on irs.gov. The IRS’s Future State, which emphasizes a reliance on technology and taxpayer self-help as opposed to one-on-one communication, will do a disservice for many low income taxpayers by compounding existing obstacles facing this population.

The IRS primarily relies on the correspondence audit process in order to address questionable claims after a return has been filed. In fact, EITC audits make up approximately 36 percent of all IRS individual audits despite the fact that EITC returns account for only about 19 percent of all individual tax returns filed. The National Taxpayer Advocate has argued consistently that low income taxpayers need customer service approaches fine-tuned for their specific needs and preferences, including an emphasis on communication and education. This is because low income taxpayers, generally speaking, often share a unique set of attributes that may prevent them from navigating the audit process successfully on their own. These attributes include having lower levels of education, being more likely to speak English as a second language, and being less likely to have a bank account. The IRS’s Future State plans will likely be a disservice for many low income taxpayers by compounding these obstacles. In particular, the Future State is not reflective of low income taxpayers’ experiences. In addition, recent legislative changes, including expansion of math error authority and the underpayment penalty, make unintentional EITC errors very harmful to taxpayers. Given the increased harms that taxpayers may experience from unintentional errors, it is particularly concerning that the IRS has proceeded with the Future State without sufficient research into how it will affect low income taxpayers. TAS is conducting a study to evaluate the compliance impact of education and outreach on potentially noncompliant EITC taxpayers. In conjunction with IRS Online Services, TAS is also developing Taxpayer Digital Communication (TDC), a pilot project. These research initiatives will provide much needed information on the impact of the Future State on this important taxpayer population.

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Related Content of the Report:

Most Serious Problem: TAX REFORM: Restructure the Earned Income Tax Credit and Related Family Status Provisions to Improve Compliance and Minimize Taxpayer Burden

Volume 2:
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

Read All Most Serious Problems