Earned Income Tax Credit Eligibility and Participation
(14-DEC-01, GAO-02-290R).
The Earned Income Tax Credit (EIC), which is expected to provide
more than $20 billion in refundable tax credits in fiscal year
2002, is intended to offset the burden of the Social Security
payroll tax on low-income workers and encourage low-income
individuals to work. About 75 percent of the 17.2 million
eligible households have claimed the credit. GAO found that the
participation rate varied by the number of qualifying children in
the household. Participation rates for households with one or two
qualifying children were 96 percent and 93 percent respectively.
In contrast, participation rates for households with three or
more qualifying children was 62.5 percent. The participation rate
for households with no qualifying children was 44.7 percent.
Qualifying households were eligible to claim $22.3 billion in
EICs in 1999. The Internal Revenue Service estimates that
participating households actually claimed $20.9 billion that
year.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-290R
ACCNO: A02586
TITLE: Earned Income Tax Credit Eligibility and Participation
DATE: 12/14/2001
SUBJECT: Income taxes
Tax credit
Disadvantaged persons
Taxpayers
Statistical data
Children
Income statistics
Tax returns
Eligibility criteria
Eligibility determinations
Census Bureau Current Population Survey
Earned Income Tax Credit
Social Security Program
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GAO-02-290R
GAO- 02- 290R Earned Income Tax Credit Participation United States General
Accounting Office
Washington, DC 20548
December 14, 2001 The Honorable William J. Coyne Ranking Minority Member
Subcommittee on Oversight Committee on Ways and Means House of
Representatives
Subject: Earned Income Tax Credit Eligibility and Participation Dear Mr.
Coyne: The Earned Income Tax Credit (EIC), which is expected to provide over
$30 billion in refundable credits in fiscal year 2002, is a major federal
effort to assist the working poor. The EIC is intended to offset the burden
of the Social Security payroll tax on low- income workers and to encourage
low- income individuals to work. The amounts of credit that taxpayers
receive depend on the taxpayers? incomes and the number of qualifying
children they have. 1 Taxpayers must file a tax return in order to claim the
credit. Prior evidence suggests that many eligible households have not
received the credit. 2 You asked us to provide estimates of (1) the number
of eligible households and the number of those who did and did not
participate in the EIC program and (2) the amounts of credit foregone by
nonparticipating households. You also asked that we provide these estimates
disaggregated by the number of qualifying children in the households
claiming the credit.
We used data from the Census Bureau?s Current Population Survey (CPS) for
1999 to estimate the number of households eligible for the EIC. We obtained
estimates from the Internal Revenue Service (IRS) for the number of eligible
taxpayers who claimed the EIC for tax year 1999. Because the CPS and IRS
data are based on samples, our estimates are subject to sampling error. 3 In
addition, the CPS database, while useful for estimating EIC eligibility, do
not contain all of the data needed to definitively determine EIC
eligibility. Our methodology and its limitations are described in further
detail in the enclosure. We sent a draft of this correspondence to IRS for
1 A qualifying child must meet a relationship test (with respect to the
taxpayer claiming the credit), an age test, and a residence test. In tax
year 2001 the maximum amount of credit that a taxpayer with no qualifying
children can earn is $364. The maximum for a taxpayer with 1 qualifying
child is $2, 428, and the maximum for a taxpayer with 2 or more qualifying
children is $4, 008. 2 See, for example, John Karl Scholz, ?The Earned
Income Tax Credit: Participation, Compliance, and Antipoverty
Effectiveness,? National Tax Journal, Vol. 47, no. 1, (March 1994), pp. 63-
87. 3 The sampling errors measure the extent to which samples of different
sizes are likely to differ from the
populations that they represent. Each of the sample estimates in tables 1
and 2 is surrounded by a 95- percent confidence interval indicating that we
are 95- percent confident that the interval contains the actual population
value. In the tables, the upper and lower limits of the intervals are
indicated by the value added to and subtracted from the estimate.
GAO- 02- 290R Earned Income Tax Credit Participation
2 review and comment. Their comments and our response are summarized at the
end
of this letter. We did our work between February and December 2001 in
accordance with generally accepted government auditing standards.
Results
Table 1 shows the number of eligible households 4 , the number of those
households that did and did not participate in the EIC program, and the
participation rate. Of the total of 17.2 million households that were
eligible for the credit, about 12.9 million claimed the credit, representing
a participation rate of about 75 percent. The participation rate varied
considerably by number of qualifying children in the household. The
participation rates for households with one and two qualifying children were
about 96 percent and 93 percent, respectively. In contrast, the
participation rate for households with three or more qualifying children was
about 62.5 percent, and the rate for households with no qualifying children
was only about 44.7 percent.
The data available did not enable us to determine the reasons for these
differences. The differences in participation rates may reflect actual
behavioral differences across the household types, but they may also reflect
limitations in the data. Both explanations are discussed in the enclosure.
Given the possibility that limitations in our data may explain some of the
variation in participation rates by number of qualifying children and the
larger confidence intervals for these subgroups due to their smaller sample
size, we believe the estimates for the subgroups in tables 1 and 2 are less
certain than the estimates for all households.
Table 1: Number of Eligible Households, by Participation Status and Number
of Qualifying Children, 1999 a
Dollars in millions Households Total eligible Eligible
participants Eligible
nonparticipants Participation
rate Total 17.2 + .4 12.9 + .4 4.3 + .5 75.0 + 2.7% 0 qualifying children
4.7 + .2 2.1 + .2 2.6 + .3 44.7 + 3.9 1 qualifying child 5. 0 + .2 4.8 + .3
0.2 + .4 96.0 + 7.7 2 qualifying children 4.3 + .2 4.0 + .3 0.3 + .4 93.0 +
8.3 3 or more qualifying children 3.2 + .2 2.0 + .2 1.2 + .3 62.5 + 8.3 a
The actual number of households in any of the subgroups presented in the
table cannot be less than zero and the actual
participation rates cannot exceed 100 percent. Sources: GAO?s analysis of
data from the CPS and IRS.
In total, about 4.3 million eligible households did not claim the credit.
Figure 1 shows how these households were distributed by number of qualifying
children. More than half (about 60 percent) of the eligible nonparticipating
households had no qualifying children. Most of the remaining eligible
nonparticipating households (about 28
4 In this letter, households are individuals or married couples. Eligibility
is determined with respect to these persons according to the income,
residency, family relationship and other rules of the EIC.
GAO- 02- 290R Earned Income Tax Credit Participation
3 percent of the total) had three or more qualifying children. Households
with one or
two qualifying children accounted for only about 12 percent of the
nonparticipants, even though they represented about 54 percent of all
eligible households.
Figure 1: Eligible Nonparticipating Households, by Number of Qualifying
Children, 1999
Sources: GAO?s analysis of data from the CPS and IRS.
We estimate that in 1999 all qualifying households were eligible to claim a
total of $23.5 billion of EIC. IRS estimates that households that actually
participated in the program were eligible to claim $20.9 billion of EIC.
This implies that nonparticipating households did not receive about $2.7
billion of credits for which they were eligible. The amount foregone by
nonparticipating households represented about 11.1 percent of the total
credit that households were eligible to claim. Table 2 shows the amounts of
EIC that nonparticipating households within each of the qualifying child
categories were eligible to claim. The table compares these amounts to the
total amounts of EIC that all households within those categories were
eligible to claim.
GAO- 02- 290R Earned Income Tax Credit Participation
4 Table 2: Amounts of EIC That Participating and Nonparticipating Households
Were
Eligible to Claim, by Number of Qualifying Children, 1999 a
Dollars in billions Total amount that households were eligible to claim
Amount that households who participated were eligible to claim
Amount that households who did not participate were eligible to claim
Amount that nonparticipants were eligible to claim as a percent of the total
amount that households were eligible to claim
Total $23.5 + .5 $20.9 + .7 $2.7 + .7 11.1 + 3.5 % 0 qualifying children
0.8 + .0 .4 + .0 0.4 + .0 50.0 + 4.1 1 qualifying child 7. 2 + .2 7.1 + .3
0.1 + .3 1.4 + 4.8 2 qualifying children
9.0 + .2 9.0 + .4 0.0 + .5 0.0 + 5.4 3 or more qualifying children
6.5 + .2 4.3 + .3 2.2 + .4 33.8 + 5.0 a The actual number of households in
any of the subgroups presented in the table cannot be less than zero. The
same is true for the percentages in the last column. Numbers may not sum to
totals due to rounding. Sources: GAO?s analysis of data from the CPS and
IRS.
Figure 2 shows that households with three or more qualifying children
accounted for the preponderance (about 81 percent) of the EIC that
nonparticipating households were eligible to claim. Nonparticipating
households with no eligible children accounted for most of the remainder
(about 15 percent).
Figure 2: Distribution of EIC That Nonparticipating Households Were Eligible
to Claim, by Number of Qualifying Children in Household, 1999
Sources: GAO?s analysis of data from the CPS and IRS.
GAO- 02- 290R Earned Income Tax Credit Participation
5
Agency Comments and Our Evaluation
On December 12, 2001, we spoke with a representative of the Director of IRS?
Office of Research who provided oral comments on our draft letter. The
Director suggested that we add a few more specific caveats to the ones that
we already listed in our methodology discussion regarding the use of CPS
data to determine the number of households eligible for the EITC. He also
suggested that we describe in more detail how we applied the eligibility
rules to CPS data and that we clarify certain statements made in the draft.
We modified the correspondence as appropriate.
_ _ _ _ As arranged with your staff, unless you publicly announce its
contents earlier, we plan no further distribution of this report until 30
days after the date of this letter. At that time, we will send copies to the
Secretary of the Treasury, the Commissioner of Internal Revenue, and the
Chairmen and Ranking Minority Members of the Senate Finance Committee and
the House Ways and Means Committee, as well as the Chairman of the latter
Committee?s Oversight Subcommittee. The letter will also be available on
GAO?s home page at www. gao. gov.
If you have any questions, you may contact Jim Wozny or me at (202) 512-
9110. Kevin Daly, Wendy Ahmed, and MacDonald Phillips made key contributions
to this letter.
Sincerely yours, James R. White Director, Tax Issues
GAO- 02- 290R Earned Income Tax Credit Participation
6 Enclosure
Methodology for Estimating Participation Rates for the Earned Income Tax
Credit
We estimated the number of eligible households (individuals and married
couples) using the eligibility rules under section 32 of the Internal
Revenue Code and data from the Census Bureau?s Current Population Survey
(CPS). The CPS is a sample of households with information about their
income, age, marital status, number of children, and other characteristics.
We analyzed the data reported in the 2000 March Supplement of CPS which
contains this information for the preceding year. We identified households
in the CPS that met the eligibility rules under the Internal Revenue Code,
and, using the CPS sample weights, estimated the number of eligible
households in the U. S. population. We also estimated the amount of credit
that these households were eligible to claim.
We obtained estimates of the number of eligible claimants and the amount of
credit that they were eligible to claim from the Internal Revenue Service
(IRS). These estimates were based on a random sample of 1999 tax returns
with the EIC claimed on the return. IRS audited these returns to determine
the accuracy of the EIC claim and other tax return items, as part of their
forthcoming tax- year 1999 EIC compliance study. The estimates of eligible
claimants are based on the number of returns where the examiners did not
reduce the EIC claim to zero. The estimates of the amounts of credit are
based on the amounts corrected by the examiners for overclaims or
underclaims on the returns. IRS conducted consistency and other tests on the
data, and the audits were subject to quality review.
Limitations of Our Analysis
The CPS does not contain all of the information needed to determine
eligibility. Data such as capital gains and contributions to individual
retirement accounts are not requested in the CPS survey. However, it is
likely that the missing data have little effect on our participation
estimates. These types of income and deductions are not common for the
lower- income people who may be eligible for the credit. To verify this, we
examined the tax returns of households in the 1996 Statistics of Income
Public Use File, the most recent data available. We found that no more than
3 percent of households that met the other income limits for credit
eligibility had these types of income and deductions.
The CPS also does not have complete information for determining whether a
child is resident long enough in a household to be a ?qualifying child? for
the purpose of determining the amount of credit that the households are
eligible to claim. Children must reside in the household for more than half
the year (a full year for foster children) in order to be qualifying
children. The CPS survey asks only whether the child is resident in the
household during the week in which the survey is conducted. This limitation
in the CPS data means that some children reported in the survey may not meet
the residency requirement while others who meet the requirement may not
GAO- 02- 290R Earned Income Tax Credit Participation
7 be reported. To test the likely impact of this limitation, we checked the
low- income
households that were surveyed in both the 1999 and 2000 March Supplements of
the CPS. We found that 97 percent of the children who were living in these
households in 2000 were also living in the same household in 1999.
The CPS contains self- reported data from the survey respondents. Some
analysts have raised concerns that this information may not be reported
accurately. A National Research Council study that reviewed studies of the
accuracy of the survey data concluded that wage and salary information
appears to be fairly accurately reported in the CPS. The study also
concluded that other types of income, such as interest and dividends, may be
underreported but that this underreporting is probably not critical for
studies of low- income people for whom these are not important sources of
income. The study did not review the accuracy of other household
characteristics relevant to credit eligibility that are reported in the CPS.
Another limitation of the CPS data is the possible underreporting of certain
populations such as the homeless.
As we noted in the letter, differences in the participation rates across
household types may reflect actual taxpayer behavior. The lower
participation rate for households with three or more children may indicate
that taxpayers in those households may be more likely to be married and
filing jointly which is a filing status with a higher income threshold for
the requirement to file a tax return. Therefore, fewer of these households
may be required to file tax returns than households that have similar
incomes but fewer children. A household that is required to file a tax
return may be more likely to claim the EIC than a household that otherwise
would not be required to file a return. The relatively low participation
rate of households with no children may be due to the fact that these
households receive significantly smaller benefits from the credit than do
households with qualifying children. Or it may result from the fact that
there is a relatively narrow income range in which taxpayers with no
children are both above the filing threshold and below the income cut- off
for EIC eligibility. 5 Because we did not have CPS and IRS data for the same
households, we could not examine characteristics of the eligible households
that would enable us to test these and other factors that may affect
participation.
However, it is also possible that the variation in participation rates could
result from limitations of the data we used. If, for example, low- income
households with no qualifying children inaccurately claimed one or two
qualifying children and IRS did not detect all such cases of this
misreporting, then the number of no- children households in IRS? study would
be undercounted, while the number of one- and twochildren households would
be overcounted. An undercount of no- children households would mean that our
participation rate for that group is understated. Conversely, an overcount
of the other two groups would mean that our participation rates for them are
overstated.
5 In fact, none of the taxpayers who file joint returns and are eligible for
the no- child EIC have incomes above the filing threshold.
GAO- 02- 290R Earned Income Tax Credit Participation
8 The variation in participation rates across groups also could be
inaccurate if IRS
auditors involved in the EIC compliance study spent less effort (or had more
difficulty) determining whether households had more than two qualifying
children than determining whether taxpayers had one or two qualifying
children. The number of children up to two has a significant effect on the
amount of credit that all eligible households are allowed to claim. The
presence of a third eligible child is important only if one of the first two
children that a household identifies is determined to be ineligible.
Moreover, taxpayers are not asked to identify more than two qualified
children on schedule EIC when claiming the credit. If IRS counted some
households that have three or more qualifying children as two- child
households, then our estimate of the participation rate for households with
three or more children would be understated, and our estimated participation
rate for two- child households would be overstated. The data collection
instrument for IRS? study did call for auditors to collect information on
more than two qualified children.
At the time that we were issuing this letter the Treasury Inspector General
for Tax Administration (TIGTA) was about to issue a review of IRS? 1997 and
1999 EIC compliance studies. We read a draft of the TIGTA review and
discussed it with officials from TIGTA and IRS? Office of Research, which
had a leading role in the compliance studies. The TIGTA review does not
directly address IRS? counts of the number of eligible EIC participants. The
review raises questions about potential inaccuracies in IRS? estimates of
allowable credits for 1999, which we report in table 2. However, the review
does not provide a basis for us to determine the extent, if any, of actual
inaccuracies. IRS strongly disagrees with TIGTA?s assessment and believes
that their compliance estimates are reasonably accurate. We did not verify
the accuracy of IRS? study.
(440024)
*** End of document. ***