Can We Save the EITC by Making the Form Tougher?

by Tom Yamachika, President Hawaii Tax Foundation

We have written before about the federal Earned Income Tax Credit, or EITC, which even folks the likes of Warren Buffett have endorsed as a means of targeting tax relief to the working poor. The biggest challenge with the credit is its complexity, which has contributed to an "error rate," meaning payouts to people not legally entitled to them, in excess of 20% for the last ten years.

Treasury suspected that a number of these erroneous returns were being submitted by paid preparers. So effective in 2012, the Treasury required preparers to fill out and attach an extra 4-page form, called a "due diligence checklist," as additional support for the credit. People who prepared their own returns, however, didn't need to file the additional form, only a 1-page schedule filed with the return.

This past July, the Senate Appropriations Committee, which has lots of influence over how much money each agency gets to spend, looked at this requirement and said it didn't make sense to have a double standard like this. So it directed the IRS to revise its EITC forms so that everyone submits the same thing. Thus, in tax filing seasons to come, everyone will need to fill out a 4- or 5-page form to claim the EITC.

(The Committee also asked that similar eligibility questions be added to forms for claiming other refundable tax credits such as the Child Tax Credit, the American Opportunity Tax Credit for education, and the Premium Tax Credit under Obamacare.)

Why is this happening? There are a few press reports saying that tax preparer H&R Block lobbied heavily for this. Some people think that Block's goal was to make the form so tough that normal people who wanted the credit would not be able to do it themselves and would need to go to paid preparers, including, of course, Block. Block, of course, denied this, saying it was all about preventing fraud and abuse.

Experience has shown that between people making honest mistakes and people trying to rip off the system, lots of government money is lost (according to Treasury, between $13 and $15 billion in 2013). But if lots more pages are added, how would that stop the fraud? If people are willing to claim the credit by saying they have kids who don't exist, and by backing it up with Social Security numbers of dead or random people, would a few more pages really make a difference? Isn’t the real problem that we are dangling a refundable credit in front of people and are allowing them to determine for themselves whether they are eligible for it? There’s an old Russian proverb that Ronald Reagan made famous: “Trust, but verify.” If we can’t effectively verify, we will have a tough time stopping the leakage.

With an exceedingly complex claim form, we think that the more likely result is that more deserving and eligible people will just not want to deal with it. The credit is for lower-income folks who can’t afford tax advisors. We can't expect these people to negotiate such a highly complex tax form and this will scare them off. As mentioned, more and more people are saying that the EITC, if allowed to work as it is designed, is the best program we know for fighting poverty. But it won’t work if people are too intimidated to participate.

Overall, then, turning our low-income tax credit forms into multi-page, labyrinthine monstrosities is a step in the wrong direction. Let’s take our cue from an old American proverb (Navy, 1960): “Keep it simple, stupid!”

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