Earned Income Credit: Opportunities To Make Recertification
Program Less Confusing and More Consistent (25-APR-02,
GAO-02-449).
The earned income credit (EIC) is a refundable tax credit
available to low-income, working taxpayers. Administering the EIC
is not an easy task for the Internal Revenue Service (IRS). IRS
has to balance its efforts to help ensure that all qualified
persons claim the credit with its efforts to protect the
integrity of the tax system and guard against fraud and other
forms of noncompliance associated with EIC. Although IRS made
some changes to its correspondence, improved its examiner
training, and expanded taxpayer outreach, certain aspects of the
recertification process continue to cause problems for taxpayers.
Since the inception of the EIC Recertification Program in 1998,
IRS has taken steps to improve some of the letters and forms it
uses to correspond with taxpayers about the program. However, two
standard forms that IRS uses in corresponding with taxpayers as
part of the recertification process can lead to unnecessary
taxpayer burden. IRS asks taxpayers to submit certain information
as part of the process that can be difficult for some EIC
claimants to obtain or is inconsistent with what many examiners
consider acceptable.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-449
ACCNO: A02877
TITLE: Earned Income Credit: Opportunities To Make
Recertification Program Less Confusing and More Consistent
DATE: 04/25/2002
SUBJECT: Fraud
Tax credit
Taxpayers
Noncompliance
Entitlement programs
Eligibility determinations
IRS Earned Income Credit Recertification
Program
Earned Income Credit
******************************************************************
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GAO-02-449
Report to the Chairman, Subcommittee on Oversight, Committee on Ways and
Means, House of Representatives
United States General Accounting Office
GAO
April 2002 EARNED INCOME CREDIT
Opportunities To Make Recertification Program Less Confusing and More
Consistent
GAO- 02- 449
Page i GAO- 02- 449 Earned Income Credit Letter 1
Results in Brief 2 Background 4 Scope and Methodology 7 One Standard Form
Used in the Recertification Process Is of
Questionable Value to IRS; Another Is Potentially Confusing to Taxpayers 8
IRS Asks for Information That Can Be Difficult for Taxpayers to
Obtain or Is Inconsistent with What Examiners Accept 14 Examiners Are
Inconsistent in How They Assess Taxpayer
Documentation 20 Conclusions 23 Recommendations for Executive Action 26
Agency Comments and Our Evaluation 27
Appendix I Evolution of the Earned Income Credit Recertification Program 30
Taxpayer Outreach and Correspondence and Examiner Training Have Improved 30
Appendix II Recent GAO and TIGTA Recommendations Relating to EIC
Recertification and IRS Corrective Actions 34
Appendix III Sampling Methodology and Results 38
Appendix IV IRS Forms 8862 and 886- R 40
Appendix V Comments from the Internal Revenue Service 44
Appendix VI GAO Contacts and Staff Acknowledgments 48 GAO Contacts 48
Acknowledgments 48 Contents
Page ii GAO- 02- 449 Earned Income Credit Tables
Table 1: Recertification Decisions in Five Case Scenarios 22 Table 2: Prior
GAO Report Findings on IRS?s Recertification
Process and IRS?s Corrective Actions 35 Table 3: TIGTA Recertification
Report Findings and IRS?s
Corrective Actions 36 Table 4: GAO Estimates from Its Survey of Examiners
Doing
Recertification Audits 39
Abbreviations
EIC earned income credit IRS Internal Revenue Service LITC Low Income
Taxpayer Clinic TIGTA Treasury Inspector General for Tax Administration
TRA97 Taxpayer Relief Act of 1997
Page 1 GAO- 02- 449 Earned Income Credit
April 25, 2002 The Honorable Amo Houghton Chairman, Subcommittee on
Oversight Committee on Ways and Means House of Representatives
Dear Mr. Chairman: The earned income credit (EIC) is a refundable tax credit
available to low- income, working taxpayers. From January through December
2001, according to IRS, about $31 billion was paid to about 19.0 million EIC
claimants. While it is important to ensure that all persons eligible for the
EIC receive it, equally important is the need to identify and deny erroneous
claims, whether due to fraud, negligence, or confusion. Because of a concern
about the extent of erroneous EIC claims, the Congress included provisions
in the Taxpayer Relief Act of 1997 (TRA97) 1 that led to the Internal
Revenue Service?s (IRS) establishment of a compliance effort known as the
EIC recertification program. Under the program, taxpayers who have been
disallowed the EIC through an IRS audit are to substantiate their
qualification for the EIC before IRS recertifies them to receive the credit
again.
Because of the need to strike an appropriate balance between compliance and
taxpayer burden, you asked us to assess the EIC recertification program. Our
objectives were to determine whether (1) IRS?s communications with taxpayers
about recertification meet the needs of IRS and taxpayers, (2) information
taxpayers are told to provide to prove their entitlement to the EIC is
reasonably easy to obtain and consistent with what IRS examiners accept in
making recertification decisions, and (3) examiners are consistent in how
they assess supporting documentation provided by taxpayers.
Our assessment of the recertification program included analyses of IRS
forms, correspondence, and guidance related to recertification; interviews
of IRS examiners who worked on recertification cases; and interviews of
representatives from organizations who provide assistance to low- income
1 P. L. 105- 34.
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 02- 449 Earned Income Credit
taxpayers in controversies with IRS. Although our assessment was directed at
the EIC Recertification Program, many of our findings would also apply to
other IRS enforcement efforts involving EIC claims.
Administering the EIC is not an easy task for IRS. IRS has to balance its
efforts to help ensure that all qualified persons claim the credit with its
efforts to protect the integrity of the tax system and guard against fraud
and other forms of noncompliance associated with the EIC. 2 While the
recertification program provides a vehicle for combating EIC noncompliance,
we believe that the program unnecessarily burdens taxpayers while not
ensuring that IRS obtains a reasonable evidentiary basis for determining
whether recertification applicants should be granted the EIC. As a
consequence, legitimate taxpayers may be discouraged from claiming a credit
to which they are entitled or IRS may make poorly supported decisions in
allowing or disallowing the credit.
Although IRS made some changes to its correspondence, improved its examiner
training, and expanded taxpayer outreach, certain aspects of the
recertification process continue to cause problems for taxpayers. In
particular, (1) one standard form that is an integral part of the
recertification process is of questionable value to IRS while another is
potentially confusing to taxpayers; (2) taxpayers are being asked to submit
information that is either difficult to obtain or inconsistent with what
many IRS examiners consider acceptable; and (3) IRS examiners? inconsistent
assessment of documentation submitted by taxpayers can result in different
recertification rulings for taxpayers in similar circumstances.
Since the inception of the EIC Recertification Program in 1998, IRS has
taken steps to improve some of the letters and forms it uses to correspond
with taxpayers about the program. However, two standard forms that IRS uses
in corresponding with taxpayers as part of the recertification process can
lead to unnecessary taxpayer burden. One form that all taxpayers seeking
recertification must submit is a 2- page document that requires taxpayers to
answer up to 37 questions and report detailed information about their
children. According to IRS, taxpayers need an average of 2
2 U. S. General Accounting Office, Earned Income Tax Credit Eligibility and
Participation,
GAO- 02- 290R (Washington, D. C.: Dec. 14, 2001) has an estimate of how many
households are eligible for the EIC but do not receive it. Results in Brief
Page 3 GAO- 02- 449 Earned Income Credit
hours and 44 minutes to complete and file the form, yet 86 percent of
examiners we surveyed said they do not use the form. The other form, which
is used by examiners to tell taxpayers what information they need to provide
to establish their eligibility for the EIC, is formatted in a way that can
easily confuse taxpayers into believing that they must satisfy requirements
that do not apply to the EIC. At the same time, the form provides
insufficient guidance on what information taxpayers need to provide to prove
that their relationship to the children listed on their EIC claim meets EIC
requirements.
IRS asks taxpayers to submit certain information as part of the process that
can be difficult for some EIC claimants to obtain or is inconsistent with
what many examiners consider acceptable. According to representatives from
10 Low Income Taxpayer Clinics (LITC) and various Census Bureau studies,
many low- income taxpayers move from location to location for job reasons,
receive their medical care at hospital emergency rooms, and rely on
relatives for free child care service. 3 For such taxpayers, obtaining the
kind of school, medical, and child care records sought by IRS can be
difficult. For example, many examiners told us that they would not accept
child- care provider statements from relatives because of a concern that
relatives might lie. While we understand the hesitancy to accept a
relative?s statement, refusing to accept child- care statements from
relatives can pose a hardship for low- income taxpayers who use relatives
for child care. IRS also tells taxpayers that the documentation they provide
from their child- care provider should either be on company letterhead or
notarized. However, many examiners told us that they would not accept a
notarized letter because the notary only verifies the signature, not the
content of the letter. Telling taxpayers that a notarized letter is
acceptable and then refusing to accept it can frustrate taxpayers and cause
them to unnecessarily pay whatever fee the notary public charged (as much as
$10 according to information we obtained from an industry publication).
Examiners are inconsistent in how they assess supporting documentation
provided by taxpayers. We asked 21 IRS examiners how they would evaluate 5
different sets of supporting documents submitted by potential taxpayers
seeking recertification. For none of the 5 scenarios did all 21 examiners
agree, and, in some cases, the examiners reached widely
3 LITCs provide assistance to low- income taxpayers in controversies with
IRS and/ or taxpayers for whom English is a second language.
Page 4 GAO- 02- 449 Earned Income Credit
varying judgments about whether the evidence was sufficient to support an
EIC claim.
We are making several recommendations that we believe will help make the
recertification program less confusing to taxpayers and the decisions
reached by IRS examiners more accurate and consistent. In commenting on a
draft of this report, the commissioner of Internal Revenue mentioned various
efforts underway to improve the EIC audit process and IRS?s communications
with EIC claimants, including the development of a decision support tool to
help examiners make consistent EIC eligibility determinations and
establishment of an IRS/ Treasury task force to review the EIC program. The
commissioner said that our report findings would be considered during
deliberations of the task force and that the new decision support tool and
revised IRS notices generally would incorporate our recommended changes.
Congress created the EIC to offset the impact of Social Security taxes and
to encourage low- income workers to seek employment rather than welfare.
Taxpayers earning income below a certain level may claim the credit. 4 The
amount of the EIC increases with increasing income, plateaus at a certain
level of earnings, and then decreases until it reaches zero when earned
income exceeds the maximum earning level allowed for the credit. Taxpayers
with children can claim the EIC if they (1) have at least one EIC qualifying
child, (2) meet income tests, (3) file with any filing status except
?married filing separately,? and (4) were not a nonresident alien for any
part of the year. 5 To claim the EIC without a qualifying child, taxpayers
must meet requirements 2, 3, and 4; be at least 25 years old but less than
65 at the end of the year; have lived in the United States for more than
half the year; and not be claimed as a dependent on another return.
Although the EIC has been credited with reducing welfare participation and
lifting millions of low- income earners out of poverty, it has also been
4 For tax year 2001, earned income had to be less than (1) $10,710 for
taxpayers with no qualifying children; (2) $28,281 for taxpayers with one
qualifying child; and (3) $32,121 for taxpayers with more than one
qualifying child.
5 A person qualifies as the taxpayer?s qualifying child if the person (1)
meets certain relationship requirements that are discussed later in the
report; (2) was, at the end of the tax year, under age 19 or under age 24
and a student, or permanently and totally disabled at any time during the
year regardless of age; and (3) lived with the taxpayer in the United States
for more than half of the tax year. Background
Page 5 GAO- 02- 449 Earned Income Credit
susceptible to error and abuse. In a February 28, 2002, report on its study
of tax year 1999 EIC claims, IRS said that of the estimated $31.3 billion in
EIC claims for that tax year, between $9.7 billion and $11.1 billion (30.9
to 35.5 percent) was overclaimed. 6 Of the overclaims, the largest amount
(about $2. 3 billion) was caused by taxpayers claiming children who did not
meet the qualifying child criteria. Most often, according to IRS, these
errors were due to taxpayers claiming children who did not meet the
residency requirements.
EIC eligibility, particularly related to qualifying children, is difficult
for IRS to verify through its traditional enforcement procedures, such as
matching return data to third- party information reports. Correctly
determining whether a child claimed by the taxpayer for EIC purposes meets
the qualifying tests requires IRS to have detailed knowledge of the
taxpayer?s household composition and living arrangements. 7 However, IRS
does not have the necessary resources to visit taxpayers? homes and conduct
the kind of interviews that would help it obtain that kind of detailed
knowledge, and there is no certainty that the cost of such an effort would
be worth the results. 8 Thus, IRS must rely on its ability to clearly
communicate to taxpayers what information is needed to certify them for the
EIC and on taxpayers? ability to produce documentation to substantiate their
qualification for the EIC.
IRS began implementing the recertification process in 1998, when, through
audits, it disallowed in whole or in part, the EIC claims on about 312,000
tax year 1997 returns and placed recertification indicators on its
computerized accounts for those taxpayers. The indicators, which, in effect,
tell IRS?s computers not to allow payment of any EIC claim to the taxpayers,
are to remain until the taxpayers successfully recertify. To
6 It is not known how much of the overclaims was due to simple error versus
negligence or fraud. 7 This is not unique to the EIC. IRS faces similar
problems, for example, in correctly determining whether a person claimed as
a dependent meets the qualifying tests for a dependent.
8 In August 1998, we reported that investigators in four states, which
accounted for 35 percent of the nation?s participants in the Food Stamp
Program, said that even with the ability to visit homes and contact
claimants? friends, neighbors, or landlords for information, these
verification techniques are hit- or- miss, time- consuming, costly
undertakings and provide information that is only as reliable as its source.
(U. S. General Accounting Office, Food Stamp Overpayments: Households in
Different States Collect Benefits for the Same Individuals, GAO/ RCED- 98-
228 (Washington, D. C.: Aug. 6, 1998)).
Page 6 GAO- 02- 449 Earned Income Credit
begin the recertification process, taxpayers are to attach a Form 8862
(Information To Claim Earned Income Credit After Disallowance) to the next
tax return they file that includes an EIC claim. If a taxpayer claims the
EIC without attaching Form 8862, IRS is authorized to disallow the credit,
process the return without considering the EIC claim, and inform the
taxpayer why it denied the claim.
Upon receipt of Form 8862, IRS procedures call for freezing the entire
refund claimed on the return (not just the portion related to the EIC) and
determining whether the return should be selected for audit. IRS examiners
are to select the return for audit unless the taxpayer is no longer claiming
the EIC child( ren) previously disallowed and is not claiming a new EIC
child. 9 Once the return has been selected for audit, the recertification
process, with some minor differences, essentially follows IRS?s normal
procedures for correspondence audits. These procedures generally involve
examiners (1) asking taxpayers to provide support, (2) reviewing any support
provided, and (3) advising taxpayers of the audit results.
Since the EIC recertification program?s implementation, IRS has, among other
things, expanded the information on recertification available to taxpayers,
revised some of the correspondence it sends to taxpayers, and improved
examiner training. Many of these changes were in response to recommendations
resulting from prior reviews by us and the Treasury Inspector General for
Tax Administration (TIGTA). (See app. I for a detailed discussion of the
changes in the EIC Recertification Program since 1999, and see app. II for
information on prior recommendations by us and TIGTA and IRS?s corrective
actions.) There have also been some significant program developments since
1998. Most relevant to this report, (1) the definitions of qualifying child
and eligible foster child for EIC purposes have changed and (2) starting
with tax returns filed in 2001, IRS, as authorized by TRA97, began imposing
a 2- year ban on credits to taxpayers who it determines negligently claimed
the EIC through reckless
9 Assume, for example, that a taxpayer, on the tax year 1997 return, claimed
two EICqualifying children and that IRS, upon audit, disallowed child #1 but
allowed child #2. Because part of the taxpayer?s EIC claim would have been
disallowed, the taxpayer would be required to recertify. If the taxpayer
claimed the EIC again on the tax year 1998 return and showed child #1 and/
or a new child as EIC- qualifying children, the return should be selected
for audit as part of the EIC recertification program. However, if the
taxpayer showed child #2 as the only EIC- qualifying child, the return
should not be selected for audit as part of the recertification program.
Page 7 GAO- 02- 449 Earned Income Credit
or intentional disregard of the regulations. These developments are
discussed in more detail later in the report.
To determine whether IRS?s communications with taxpayers about
recertification meet the needs of IRS and taxpayers, we analyzed IRS?s forms
and correspondence related to recertification, interviewed a representative
sample of IRS examiners (as described in the next paragraph) about certain
forms, and reviewed the results of related work done by TIGTA.
To determine whether information taxpayers are told to provide to prove
their entitlement to the EIC is reasonably easy to obtain and consistent
with what examiners accept, we did the following:
We surveyed, via telephone, a random sample of 90 tax examiners from a
list of 323 tax examiners, which, according to IRS, represented the
population of examiners in its 10 processing centers who were working on
recertification cases as of April 2001. The purpose of our survey was to
determine how examiners evaluated evidential support from taxpayers and to
help identify aspects of the EIC eligibility criteria that taxpayers had the
most difficulty documenting. More details on our survey methods, as well as
the confidence intervals of the estimates for all examiners that we made
from our sample are provided in appendix III.
We talked with representatives from 10 LITCs about any problems taxpayers
have in understanding IRS correspondence related to recertification and in
complying with IRS?s documentation requirements. We obtained a list from
IRS?s Taxpayer Advocate?s Office of the 102 LITCs that were operating in
2001. From that list, we randomly selected 20 LITCs. After eliminating those
LITCs that either chose not to participate or said that they did no EIC
recertification work, we talked with representatives of 10 LITCs. Given our
relatively small sample size and the relatively small proportion of the
sample from which we were able to get useful information, we have no
assurance that the results from this sample can be reliably generalized to
all 102 LITCs. However, our sample does provide the views of about one-
tenth of the listed 102 LITCs.
To determine whether IRS?s treatment of similarly situated taxpayers is
consistent, we analyzed IRS guidance and criteria related to the EIC and
recertification; developed five scenarios involving various kinds of
documentation that taxpayers might provide IRS in an attempt to prove their
eligibility for the EIC; and held structured interviews with 21 Scope and
Methodology
Page 8 GAO- 02- 449 Earned Income Credit
examiners to determine, among other things, how they interpreted IRS?s
recertification guidance and how they assessed the documentation in our five
scenarios. We obtained the documents for our scenarios from EIC
recertification cases that we had reviewed, and we deleted
taxpayeridentifiable information, such as Social Security numbers, from the
documents before giving them to the examiners. We subjectively selected the
21 examiners, on the basis of their availability to meet with us, from the
187 EIC recertification examiners at 4 of IRS?s 10 processing centers
(Atlanta, Brookhaven, Kansas City, and Memphis). 10 As such, the results of
this analysis cannot be generalized beyond the 21 examiners. We also
reviewed IRS?s plans for developing and implementing a decision support tool
to be used by examiners working EIC cases, including those involving
recertification.
We performed our work between February 2000 and January 2002 in accordance
with generally accepted government auditing standards.
Although IRS has revised some of the correspondence it sends taxpayers as
part of the recertification process, two standard forms that are an integral
part of the process can lead to unnecessary taxpayer burden because they (1)
are of questionable value to the recertification process and/ or (2) provide
the taxpayer with inadequate or confusing information. The forms are Form
8862 and Form 886- R (Supporting Documents). Copies of the two forms are in
appendix IV.
Taxpayer confusion can have even more critical implications now that IRS has
begun imposing a 2- year EIC ban on credits to taxpayers who it determines
have negligently claimed the EIC through reckless or intentional disregard
of the regulations. Accurately determining whether a taxpayer?s erroneous
claim is due to a simple mistake versus reckless or intentional disregard of
the regulations can be complicated when the requirements for claiming the
EIC are confusing.
10 We selected these four centers because (1) Brookhaven is the site of the
EIC Correspondence Exam National Office, (2) Memphis had the most
recertification cases in 1999, and (3) we had staff available to do work in
Atlanta and Kansas City. One Standard Form
Used in the Recertification Process Is of Questionable Value to IRS; Another
Is Potentially Confusing to Taxpayers
Page 9 GAO- 02- 449 Earned Income Credit
Taxpayers begin the recertification process by filing Form 8862 with their
tax return. In a 1999 report, we raised concerns about the usefulness of
Form 8862 and its potential for misleading or confusing taxpayers. 11 We
recommended that IRS stop using the form if it is not needed for
recertification purposes. IRS did not eliminate the form because it said it
relies on the form to ?identify the type of action to be taken for taxpayers
required to recertify.? In that regard, IRS does use Form 8862 to decide
whether or not to initiate the recertification process. If a taxpayer files
a return claiming the EIC and does not attach a Form 8862, IRS is authorized
to disallow the credit without going through the recertification process and
inform the taxpayer that the disallowance is due to the failure to attach
Form 8862. 12 If a taxpayer submits Form 8862, according to IRS?s
recertification guidelines, the taxpayer?s return is to be forwarded for
audit if the taxpayer is still claiming the previously disallowed EIC child
or is claiming a new EIC child. However, Form 8862 does not assist in this
determination, because the names and Social Security numbers of the
taxpayer?s children that IRS needs to match against the prior year?s tax
return do not appear on the form.
On the basis of our telephone survey of IRS examiners, we estimate that 86
percent of all examiners working in the recertification program do not find
Form 8862 useful. A few examiners pointed out that Form 8862 is generally
not part of the case file they receive when they begin recertification. Even
when Form 8862 is in the case file, some examiners said that they do not use
it because there are no supporting documents submitted with the form.
Although the great majority of examiners do not find Form 8862 useful, IRS
estimates that taxpayers need an average of 2 hours and 44 minutes to
complete and file the form. In that regard, of the 10 LITC representatives
we talked with, 7 said that Form 8862 is not easy for most of their clients
to understand.
Thirteen of the examiners we surveyed did say that Form 8862 had some value.
Some pointed out that the form gave them some initial information about the
taxpayer before seeking additional information. Others said that the form
would alert taxpayers to the kind of documentation they should expect to
provide during the recertification process. However, taxpayers
11 U. S. General Accounting Office, Tax Administration: IRS? 1999 Tax Filing
Season,
GAO/ GGD- 00- 37 (Washington, D. C.: Dec. 15, 1999). 12 If a taxpayer, after
being informed of a disallowance for failure to submit Form 8862, sends IRS
a Form 8862, IRS is to begin the recertification process. Form 8862 Is of
Questionable Value
Page 10 GAO- 02- 449 Earned Income Credit
would have to deduce the type of information needed because neither Form
8862 nor its instructions specifically tell taxpayers what, if any,
documentation they may be asked to send IRS.
On the basis of our telephone survey, we determined that an estimated 16
percent of examiners believe that Form 8862 misleads taxpayers into thinking
that IRS?s final decision on their eligibility will be based on information
in the form. Such a misconception seems understandable given the amount of
information taxpayers are asked to provide on the Form 8862. Form 8862 is a
2- page form that requires taxpayers who are claiming the EIC with
qualifying children to answer numerous questions and report information on
such things as (1) the name of the school the child attended or the day care
provider, (2) addresses where the child lived during the year, (3) the name
and social security number of any other person the child may have lived with
for more than half a year, and (4) the child?s health care provider or
social worker if the child was disabled and older than 18.
Form 886- R is the vehicle IRS examiners use to tell taxpayers what
information they need to provide to prove their eligibility for the EIC as
well as to gather information on two other tax issues- whether the taxpayer
can also claim dependents and whether the taxpayer qualifies as a head of
household. 13 That form is confusing and incomplete.
Of the 10 LITC representatives we interviewed, 8 did not believe that IRS
adequately explained to taxpayers how EIC recertification is achieved and
what documentation is needed to achieve recertification. We believe that
Form 886- R contributes to that confusion.
The format of Form 886- R could easily confuse taxpayers. For example, in
addition to listing documents and information needed to prove eligibility
for the EIC, the form lists documents and information needed to prove
eligibility for dependent exemptions and the head of household filing
status. Requesting documentary evidence to support a dependency claim and
head of household filing status could confuse or mislead taxpayers about the
requirements they need to meet for EIC recertification. To claim
13 Because other IRS audits of EIC claims have the same basic purpose as
recertification audits (proving that the claimant meets the EIC eligibility
requirements), IRS has a similar form (886- H) that it sends to claimants
who are being audited outside of the Recertification Program. Form 886- R
Provides
Confusing and Incomplete Information
Confusing Information
Page 11 GAO- 02- 449 Earned Income Credit
a person as a dependent, for example, a taxpayer must generally prove, among
other things, that he or she provided more than one- half of the person?s
total support during the calendar year. Therefore, the evidence IRS asks
taxpayers to submit to prove that a child is their dependent includes
documentation relating to financial support. However, the law does not
require that taxpayers meet a financial support test to claim the EIC, and,
thus, taxpayers can qualify for the EIC even if they cannot meet the
financial support requirement for the dependency exemption. Form 886- R does
not make clear that persons can still qualify for the EIC even if they
cannot prove that their child qualified as a dependent, and there are no
instructions sent to taxpayers along with the Form 886- R that provide that
clarification. Thus, persons might incorrectly assume that because they
cannot substantiate a child as a dependent, they do not qualify for the EIC.
Taxpayers might also be confused by the references in Form 886- R to school
records. The form tells taxpayers that one acceptable form of proof that a
child lived with them is a school record or transcript containing, among
other things, ?dates of attendance for the entire tax year.? Since a tax
year generally runs from January to December of the same year and a school
year typically runs from September of one year to May or June of the next,
some taxpayers may not easily discern that they need to obtain school
records for 2 school years in order to provide adequate documentation for 1
tax year. In that regard, an IRS taxpayer advocate and an IRS lead examiner
in one field office both told us that school year versus tax year is a
difficult concept for taxpayers to understand, and examiners we interviewed
said that school records submitted by taxpayers often relate to a school
year rather than a tax year. The lack of more specific guidance on Form 886-
R about the need for 2 years of school data increases the risk that a
taxpayer will submit incorrect information, which, at a minimum, could (1)
cause extra work for the examiner, (2) cause the taxpayer to contact the
school again, and (3) delay a final decision on the taxpayer?s eligibility
for the EIC.
With a trend toward more nontraditional family units and recent changes in
the definitions of qualifying child and foster child for EIC purposes,
taxpayers must clearly understand what evidence IRS requires to substantiate
the EIC relationship requirement. Form 886- R does not satisfy that need. In
listing the documentation needed to prove eligibility for the EIC, Form 886-
R includes (1) the child?s birth certificate and (2) the name, address, and
Social Security number of the child?s mother and father (if other than the
taxpayer and the taxpayer?s spouse). That documentation would be
insufficient, however, to prove, for example, that a person is the
Incomplete Information
Page 12 GAO- 02- 449 Earned Income Credit
taxpayer?s adopted child, grandchild, stepchild, or foster child- all of
whom meet the definition of an EIC qualifying child. For example, as
described by one examiner, a grandmother raising a grandchild with a
different last name would have to prove her relationship to the child?s
parents.
Some examiners we interviewed said that they would accept various official
documents that established the relationship requirement between a
nonparental taxpayer and the EIC- qualifying child. The official documents
they mentioned included birth certificates of the various parties, an
adoption paper, some social program?s paperwork that states the relationship
between child and taxpayer, or some insurance or medical record that states
the relationship. None of these documents is mentioned on the Form 886- R.
Although an examiner may eventually obtain the necessary documentation
through follow- up correspondence with the taxpayer, the need for additional
correspondence leads to extra work for examiners and taxpayers and can
lengthen the time needed to close the audit and pay the EIC, if the taxpayer
is found eligible.
Census Bureau statistics provide an indication of the prevalence of
nontraditional family units. According to 1997 Census Bureau statistics,
there were 3.9 million children living in homes maintained by their
grandparents. Of this number, 1.27 million lived with their grandparents
without the presence of either parent, 1.77 million had only a mother
present, 0.57 million had both parents present, and 0.28 million had only a
father present. According to Census Bureau statistics, the greatest growth
between 1992 and 1997 occurred among grandchildren living with grandparents
with no parent present. The Census Bureau attributed the increase in
grandchildren in these ?skipped generation? living arrangements to the
growth in drug use among parents, teen pregnancy, divorce, the rapid rise of
single- parent households, mental and physical illness, AIDS, crime, child
abuse and neglect, and the incarceration of parents.
In addition to children living with grandparents without the presence of
either parent, the Census Bureau found, as of Fall 1996, that 688,000
children without parents were living with other relatives and 622,000
children without parents were living with nonrelatives.
Recent changes in the definitions of qualifying child and foster child for
EIC purposes further highlight the need for IRS to make clear what evidence
it requires to substantiate the EIC relationship requirement. To qualify as
a taxpayer?s qualifying child in tax year 1999, a person had to be
Page 13 GAO- 02- 449 Earned Income Credit
the taxpayer?s son, daughter, adopted child, grandchild, stepchild, or
foster child, with a foster child defined as any child that (1) the taxpayer
cared for as if it were the taxpayer?s own child and (2) lived with the
taxpayer for the whole year, except for temporary absences. Those
definitions were revised first by the Ticket to Work and Work Incentives
Improvement Act of 1999 (P. L. 106- 170) and then by the Economic Growth and
Tax Relief Act of 2001 (P. L. 107- 16).
As a net result of those two laws, the current definition of a qualifying
child is (1) a son, daughter, stepson, or stepdaughter, or a descendant of
any such individual; (2) a brother, sister, stepbrother, or stepsister, or a
descendant of any such individual, who the taxpayer cares for as the
taxpayer?s own child; or (3) an eligible foster child of the taxpayer. An
eligible foster child is now defined as an individual who is placed with the
taxpayer by an authorized placement agency and cared for as the taxpayer?s
own child. Also, a child who is legally adopted or is placed with the
taxpayer by an authorized placement agency for adoption is considered the
taxpayer?s child by blood for purposes of the EIC relationship test.
With these definitional changes, for example, a taxpayer claiming a nephew
as an EIC- qualifying child would have to provide documentation to prove
that the child is a descendant of the taxpayer?s sibling. Before the
definitional changes, the taxpayer would not have had to prove a blood
relationship to the child but only that the taxpayer cared for the child as
if it were the taxpayer?s own child.
TRA97 authorizes IRS to ban a taxpayer from receiving the EIC for 2 years if
it determines that the taxpayer negligently claimed the EIC through reckless
or intentional disregard of the regulations. In addition to being banned for
2 years from receiving the EIC, taxpayers may be penalized an amount equal
to 20 percent of their tax liability underpayment. IRS began imposing the 2-
year ban starting with tax year 1999 returns (i. e., returns filed in 2000).
During calendar year 2000, IRS imposed the ban on 7, 608 taxpayers. IRS
imposed another 14,432 bans during calendar year 2001.
IRS provided guidance to its examiners on how to determine whether a 2- year
ban should be imposed. Included in the guidance is the following criterion:
?The taxpayer?s EIC in a prior year was disallowed by audit because the
taxpayer could not demonstrate the child was the taxpayer?s qualifying
child. The taxpayer files a subsequent Imposition of 2- Year Ban
for Negligence Makes Clear Communication with Taxpayers Even More Important
Page 14 GAO- 02- 449 Earned Income Credit
return claiming EIC and again cannot demonstrate that the child was the
taxpayer?s qualifying child. You can consider that the taxpayer
intentionally disregarded the EIC rules and regulations and impose the two-
year ban.?
No doubt some taxpayers seeking recertification are intentionally
disregarding the EIC rules and regulations. However, accurately
differentiating between negligence and simple error can be hampered when
taxpayers are faced with evidentiary requirements that are difficult to
understand and/ or comply with.
Providing documentation to show that a child lived with the taxpayer has
consistently been identified as the toughest EIC eligibility requirement to
substantiate. This is true for EIC claimants in general, not just those who
have to recertify. With respect to the Recertification Program, 80 percent
of examiners said that when a taxpayer failed to be recertified, most or all
of the time the taxpayer?s inability to substantiate that a child lived with
the taxpayer led to the failure.
As noted in the following excerpt from Form 886- R, IRS provides taxpayers
with several examples of acceptable documents to establish a child?s living
arrangement. The quoted excerpt clearly indicates that taxpayers only need
to submit one of the three types of documentation listed (school, child
care, or medical). 14
?School records or transcripts or an administrative statement from a school
official on school letterhead containing the child?s name, address, and
dates of attendance for the entire tax year, and the name and address of the
child?s parent or guardian, or
A statement on company letterhead or a notarized statement from a child care
provider containing the child?s name, address, and dates of care for the
entire tax year, the name and address of the child?s parent or guardian, and
the name and taxpayer identification number of the child care provider, or
Medical records or an administrative statement from a health care provider
containing the child?s name, address, and dates of medical care during the
tax year, and the name and address of the child?s parent or guardian.?
14 This same language is in Form 886- H, which IRS sends to EIC claimants
who are being audited outside of the Recertification Program. IRS Asks for
Information That Can Be Difficult for Taxpayers to Obtain or Is Inconsistent
with What Examiners Accept
Page 15 GAO- 02- 449 Earned Income Credit
Our interviews with LITC representatives and IRS examiners indicated that
each of these three types of documentation could pose problems for EIC
claimants. In discussing EIC recertification with LITC representatives, we
heard of various circumstances facing low- income taxpayers that complicate
the ability of these taxpayers to obtain documents that might not seem so
difficult for other taxpayers. Our interviews with IRS examiners also
indicated that the evidentiary requirements related to child care are not
consistent with what most examiners consider acceptable.
In order for school records to be accepted, they must include an address for
the child and an address for the taxpayer and, as discussed earlier, must be
for 2 school years in order to cover the tax year in question. According to
some IRS examiners we interviewed, the school records submitted by taxpayers
often do not have both the child?s and the taxpayer?s addresses and often
relate to a school year rather than a tax year. Earlier in this report, we
discussed the problems taxpayers might encounter in distinguishing between a
school year and a tax year.
Another potential problem related to school records was raised by IRS?s
National Taxpayer Advocate in a December 31, 2001, report to the Congress.
15 In the report, the Advocate noted that examiners sometimes disallow the
EIC because school records submitted by taxpayers reflect the addresses of
the taxpayers? relatives or friends. As explained by the Advocate, parents
may provide school authorities with a relative?s or friend?s address,
instead of their own, ?in order for their child to attend a particular
school for purposes of busing and facilitating before- school or after-
school care.?
Medical records can also cause problems for EIC claimants. According to some
examiners we interviewed, many taxpayers submit their child?s immunization
records as the medical record to prove residency. Of the 21 examiners we
interviewed, 18 did not accept immunization records as proof of residency.
Some examiners explained that immunization records do not include the
addresses of either the child or the taxpayer and, as such, cannot be
accepted as proof of residency. Some of the 18 examiners said that they
would accept a letter from a physician or an official record from a medical
center showing the child?s address as well as the taxpayer?s address as
proof that the taxpayer and child have the same address.
15 National Taxpayer Advocate FY2001 Annual Report to Congress (Dec. 31,
2001). School and Medical
Records
Page 16 GAO- 02- 449 Earned Income Credit
However, according to the LITC representatives we interviewed, many low-
income taxpayers have no ongoing medical care. In that regard, we reported
in 1997 that 10.6 million children, living generally in lowerincome working
families, were uninsured in 1996. 16 We further reported that, according to
various national studies,
a high proportion of these children?s parents worked for small employers
that most likely did not offer health insurance;
even when employers offered medical coverage, the amount that employees
had to pay toward it to cover their families could have made health
insurance unaffordable;
these uninsured children were less likely to (1) have a usual source of
care, (2) see a specific physician, (3) receive care from a single site, (4)
have had a visit to a physician in the past year, and (5) ever have had
routine care; and
medical care for uninsured children was more likely to be sporadic and
fragmented.
Considering the medical coverage of low- income taxpayers, obtaining medical
records that provide enough information to demonstrate that the taxpayer?s
and child?s addresses were the same for at least one- half a year may not be
easy.
LITC representatives said that getting documentation, such as medical
records or school records, to prove residency or living arrangements is not
easy. For example, migrant workers would have a tough time getting school
records from the schools their children attended throughout the year. As we
reported in October 1999, during 1993- 94, 78 percent of migrant crop worker
families lived in two or more locations. 17
Of the 10 LITC representatives we interviewed, 5 said that IRS should
develop a standard form on which it could indicate the specific period of
time for which IRS needed support. A taxpayer could then take the form to a
school or a medical office, which could just write in the child?s and
taxpayer?s address for the specific tax year IRS wanted. A few of the
examiners we surveyed also said that they would benefit from such a
16 U. S. General Accounting Office, Health Insurance: Coverage Leads to
Increased Health Care Access for Children, GAO/ HEHS- 98- 14 (Washington, D.
C.: Nov. 24, 1997). 17 U. S. General Accounting Office, Migrant Children:
Education and HHS Need to Improve the Exchange of Participant Information,
GAO/ HEHS- 00- 4 (Washington, D. C.: Oct. 15, 1999).
Page 17 GAO- 02- 449 Earned Income Credit
standard form because it would give them the exact information they are
looking for to recertify taxpayers.
In 1998, examiners in one processing center started using a locally devised
form that essentially served the purpose of the standard form suggested by
the LITC representatives. Use of the form by examiners at the center was
optional. Although no study was done of its effectiveness, anecdotal
information indicates that examiners found it effective. One examiner who
used the form estimated that one- half of the taxpayers to whom she sent the
form were able to secure verification compared with the very few taxpayers
who were able to secure verification without the form.
Form 886- R states that a notarized statement from a child- care provider
with certain detailed information about the child and the child- care
provider would be considered acceptable evidence for residency. In our
telephone survey, we asked examiners if they would accept a notarized
statement from babysitters. We estimate that 62 percent of recertification
examiners would not accept a notarized statement from a babysitter as
evidence. The nonacceptance rate went up to 79 percent if the notarized
letter was from a relative, such as a grandparent, who claimed to be the
child?s babysitter.
Several examiners said that they would not accept the notarized letter
because the notary public verifies the signature but not the content of the
letter. These examiners are correct in their understanding of the purpose of
the notary public. However, a notarized letter from a child- care provider
is a document listed on Form 886- R as acceptable proof of residency. We do
not know how many taxpayers failed to recertify for the EIC because
examiners would not accept a notarized letter from their babysitter.
However, telling taxpayers that a notarized letter is acceptable and then
refusing to accept it can frustrate taxpayers and subject them to
unnecessary burden. Not only would those taxpayers have spent unnecessary
time and effort writing the letters and locating a notary public, but they
would have had to pay for the notary public?s service. 18
Perhaps the more problematic issue related to evidence of child care is the
general unwillingness of examiners to accept statements from relatives.
18 According to The National Notary (May 2001), notaries public charge
anywhere from $0.50 to $10.00 for each notarized signature. Child- Care
Statements
Page 18 GAO- 02- 449 Earned Income Credit
Some examiners told us, for example, that they would accept child- care
provider statements if they were from child- care centers, but expressed the
belief that relatives would lie to help a taxpayer get the EIC. While we
understand the hesitancy to accept a relative?s statement, refusing to
accept child- care statements from relatives can pose a hardship for
lowincome taxpayers who use relatives for child care. The problem is
compounded by the clear implication on Form 886- R that a ?notarized
statement from a child care provider? containing certain information, such
as the child?s name, address, and dates of care for the entire tax year, is
acceptable documentation to verify that a child lived with the taxpayer.
Form 886- R says nothing to alert taxpayers that additional documentation
may be needed if the child- care provider is a relative.
Grandparents and other relatives play an especially large part in the care
of poor preschoolers. In a March 1996 report entitled, Who?s Minding Our
Preschoolers?, and an update issued in November 1997, the Census Bureau
found that, in 1993 and 1994, relatives provided care for 62 percent of
preschoolers in poor families while their mothers were working. This
reliance on relatives, and especially grandparents, for child care was noted
again in Census? October 2000 report entitled Who?s Minding the Kids? Child
Care Arrangements. Among other things, the report concluded, using Fall 1995
data, that ?Fifty percent of preschoolers were cared for by a relative, with
grandparents being the single most frequently mentioned care provider (30
percent).?
In reports issued in May 1997 and November 1999, we discussed three major
barriers that confront low- income persons in trying to find child care:
availability; accessibility; and cost, especially for infants and toddlers.
19 As discussed in these reports,
many parents of low- income families are likely to obtain work at low-
skill jobs, such as janitor or cashier, that operate on nonstandard
schedules at workplaces that often do not offer child care during hours
outside the traditional ?9 to 5? work schedule;
according to a 1999 Urban Institute paper, more than a quarter of
lowincome mothers work night hours;
19 U. S. General Accounting Office, Welfare Reform: Implications of
Increased Work Participation for Child Care, GAO/ HEHS- 97- 75 (Washington,
D. C.: May 29, 1997) and U. S. General Accounting Office, Education and
Care: Early Childhood Programs and Services for Low- Income Families, GAO/
HEHS- 00- 11 (Washington, D. C.: Nov. 15, 1999).
Page 19 GAO- 02- 449 Earned Income Credit
accessibility, such as transportation to get to providers, was especially
problematic in rural or remote areas; and
child care consumes a high percentage of poor families? income. Regarding
the cost of child care, the Census Bureau, in its October 2000 report, said
that poor families, in 1995, who paid for child care ?spent 35 percent of
their income on child care, compared with 7 percent spent by nonpoor
families.? Asking relatives to serve as child- care providers may be one way
for poor families to limit the cost of child care. In that regard, the
Census Bureau noted in its March 1996 report that preschoolers in poor
families were 50 percent more likely to be cared for by their grandparents
or other relatives than were preschoolers in nonpoor families.
As noted in several places throughout the preceding discussion, lowincome
taxpayers face many problems that complicate their ability to satisfy the
evidentiary requirements associated with the EIC recertification program.
For example, many low- income taxpayers
move from location to location for job reasons,
have children who receive their medical care at hospital emergency rooms
and have no medical insurance, and
rely on relatives for free child- care service instead of taking their
child to a child- care center.
In a December 31, 2001, report to the Congress, IRS?s National Taxpayer
Advocate identified the 23 most serious problems faced by taxpayers. Fifth
on that list was ?documenting [EIC] eligibility.? In discussing this
problem, the Advocate said the following:
?Low- income taxpayers usually cannot afford to take time off from work to
gather the documentation required. They often do not maintain financial
records. Many have moved several times, making it even more difficult to
provide what is asked of them. Obtaining such documentation may therefore
involve long- distance calls, which are beyond the financial means of these
taxpayers.?
In general, the 10 LITC representatives who we talked with said that the
recertification process was confusing to their clients and difficult to
comply with. Some representatives noted that these problems had caused
clients to give up on EIC recertification. One LITC representative said that
for migrant workers, getting documentation might include writing to Mexico
for birth certificates and other information. According to the
representative, (1) some agencies or companies may charge a fee for Low-
Income Taxpayers
Face Problems That Complicate Their Ability to Comply with EIC Evidentiary
Requirements
Page 20 GAO- 02- 449 Earned Income Credit
documents; (2) requesting information through the mail would be difficult
since many low- income taxpayers are illiterate; and (3) it takes time to
gather support, and many taxpayers get discouraged and give up. Another LITC
representative said his client gave up on the EIC because he had moved to
another city for a new job and getting the records IRS wanted would require
him to take time off from work and travel back to his old home town, neither
of which he could afford to do.
Some LITC representatives told us that some examiners were more lenient than
others in assessing supporting documents and that third- party statements
were not always treated the same. Four of the 10 LITC representatives we
interviewed said that they have seen some of their client?s EIC claims
denied because they could not substantiate that the child was a dependent.
However, an EIC child does not have to be a dependent of the taxpayer to
qualify that taxpayer for the EIC. As such, financial support, which is a
factor in determining if a child qualifies as a taxpayer?s dependent, should
not be a factor in determining if the child is a qualifying child for EIC
purposes.
Because we did not review any LITC client case data, we cannot be certain
whether IRS examiners denied the EIC because a taxpayer could not
substantiate that the child was a dependent or if the denial was for other
reasons. However, our interviews of examiners provided significant evidence
to support the statements by LITC representatives. Fifty- three percent of
examiners said that a least some of the taxpayers who failed to be
recertified failed because they could not provide documentation of the
eligible child?s financial support. Also, although we did not do any
systematic review of recertification audit case files, we did look at some
cases to get a better understanding of the recertification audit process. In
one case, we found correspondence from an examiner to a taxpayer that
exemplified the dependent exemption versus EIC problem. The correspondence
said:
?Since you have not verified that you are entitled to the exemption( s)
claimed on your return, we have disallowed the deduction. Since the
exemption for your child (or children) has been disallowed, you are not
entitled to the earned income credit and/ or child tax credit; therefore we
have disallowed it/ them.?
Contrary to those statements, denial of a dependency exemption does not
automatically mean that a taxpayer is not entitled to the EIC. Examiners Are
Inconsistent in How They Assess Taxpayer Documentation
Page 21 GAO- 02- 449 Earned Income Credit
In an effort to see how consistently IRS examiners assess evidence submitted
by taxpayers, we presented 21 examiners at the four processing centers we
visited with five scenarios involving differing sets of supporting
documents. We obtained these documents from EIC recertification cases that
we had reviewed. We deleted taxpayer- identifiable information, such as
names, Social Security numbers, and addresses, from the documents before
giving them to the examiners.
The five scenarios were as follows:
Case A- a single mother sending in copies of Social Security cards, the
child?s birth certificate, and a school record listing the child?s address.
Case B- a married couple, filing jointly, sending in copies of Social
Security cards, the child?s birth certificate, and a locally devised IRS
form signed by a school official verifying the child?s address.
Case C- a single father sending in copies of Social Security cards, the
child?s birth certificate, an immunization certificate showing the taxpayer
as the parent and that the child received shots throughout the tax year, and
a formal lease listing the taxpayer as the leasee but with no reference to
the child. This case also included a notarized letter from the taxpayer?s
grandmother stating that she provided child care for the taxpayer?s daughter
while the taxpayer worked. The grandmother gave her own address and Social
Security number.
Case D- a single father sending copies of Social Security cards, the
child?s birth certificate, an immunization record that did not have either
the child?s or the taxpayer?s name, various monthly rental receipts not
showing the full dates, and a letter from someone (without a title) written
on apartment letterhead.
Case E- a single father sending in copies of Social Security cards, the
child?s birth certificate, a lease agreement not listing the child?s name,
and a non- notarized letter from a babysitter stating that she cared for the
taxpayer?s child throughout the year while the taxpayer was at work. The
babysitter mentioned the salary she received from the taxpayer, but did not
give her address, telephone number, or Social Security number.
As seen in table 1, in no case did all examiners agree and, in some cases,
their decisions varied significantly. Case Scenarios Indicate
Variance in Recertification Decisions
Page 22 GAO- 02- 449 Earned Income Credit
Table 1: Recertification Decisions in Five Case Scenarios Decision Case A
Case B Case C Case D Case E
Documents support EIC 13 19 3 7 4 Documents do not support EIC 8 2 18 14 17
Source: GAO?s analysis of the results of 21 examiner interviews.
Cases B, C, and E showed the most consistent decisions. Of the 19 examiners
who accepted the Case B documentation, 7 said that they did so because the
taxpayer was married and filed jointly and because the child lived with both
parents and 1 said that he was swayed by the school verification (the other
11 did not explain their reasoning). Case C was almost unanimously rejected
because examiners would not accept a notarized letter from the taxpayer?s
grandmother who claimed to be the child- care provider. Although the
grandmother?s letter had met all the specifications listed on Form 886- R,
examiners still did not accept it as adequate proof of living arrangement.
This is consistent with the results of our examiner interviews, which, as
discussed earlier, showed that 79 percent of examiners would not accept such
a letter. In Case E, we included a nonrelative babysitter?s letter as
evidence of residence. Although the babysitter?s letter was not notarized
and did not have the babysitter?s Social Security number or address, more
examiners were willing to accept this letter than the notarized letter in
Case C from a grandmother who gave her Social Security number as required by
IRS.
Examiners? decisions varied significantly in Cases A and D. For Case A,
three examiners pointed out that they would not accept the school record
submitted because it pertained to a school year and not the tax year. A
taxpayer would have to submit school records for 2 school years to cover the
tax year in question. Some examiners who decided that the documents in Case
D did not support recertification thought that the apartment letterhead on
the letter saying that the taxpayer lived there looked too simplistic or
fake to be trusted. They pointed out that almost anyone with a computer
could easily come up with such a letterhead.
IRS is aware of the need for more consistency in the evaluation and
determination of EIC cases. According to the Director of Reporting
Page 23 GAO- 02- 449 Earned Income Credit
Compliance in IRS?s Wage and Investment Division, 20 IRS is in the process
of developing a decision support tool to be used by examiners working EIC
cases. Because all EIC audits involve the same basic issue- proving that the
EIC claim satisfies all eligibility tests- the decision tool is to be used
for all EIC cases, including those involving recertification. The goals of
this project are to (1) automate the decision process examiners go through
when performing audits, (2) reduce inconsistency in how EIC audits are
conducted nationwide and subsequently improve the quality of examinations,
and (3) decrease the time spent on EIC audits since the logic will be built
into the tool to determine the appropriate questions for the individual
case. IRS is planning to implement the first phase of this project and
deliver training to examiners by May 2002.
As described to us by the Director of Reporting Compliance, the first phase
basically involves automating the current process. As such, it does not
include a reconsideration of the documentation requirements discussed in
this report. In that regard, for example, we noted, in reviewing preliminary
information on the tool, that it included information to suggest that
documentation of financial support was necessary to determine EIC
eligibility. We advised the Director of our concerns in that regard, and he
agreed to look into the matter. According to the Director, the project team
is expected to take on the issue of what documentation taxpayers need to
submit to prove their eligibility for the EIC during phase 2 of the project.
In a related move, an IRS/ Treasury task force was formed in February 2002
to comprehensively review the EIC program in general. The task force?s
objective is to develop recommendations for achieving the objectives of the
EIC program ?while reducing taxpayer confusion and increasing the accuracy
of the administration of benefits.? The task force was to complete its work
within 4 months.
Administering the EIC is not an easy task for IRS. IRS has to balance its
efforts to help ensure that all qualified persons claim the credit with its
efforts to protect the integrity of the tax system by guarding against fraud
and other forms of noncompliance associated with the EIC. Furthermore,
20 As a result of a recent reorganization, IRS has four main operating
divisions, each responsible for a distinct group of taxpayers. The Wage and
Investment Division is responsible for taxpayers whose only income comes
from wages and investments. That Division is responsible for audits done
under the EIC Recertification Program. Conclusions
Page 24 GAO- 02- 449 Earned Income Credit
as with other provisions of the tax code, IRS must minimize the burden
imposed on taxpayers yet ensure that it has a reasonable basis for judging
whether taxpayers have properly claimed the credit. Although the
recertification program provides a vehicle for combating EIC noncompliance,
we believe that the program unnecessarily burdens taxpayers and provides
inadequate assurance that IRS has a reasonable evidentiary basis for
determining whether recertification applicants should be granted the EIC. As
a consequence, taxpayers may be discouraged from claiming credits to which
they are entitled or IRS may make poorly supported decisions in allowing or
disallowing the credit.
We identified several opportunities to make the recertification program less
confusing to taxpayers and the decisions reached more accurate and
consistent, without adversely affecting IRS?s ability to protect against EIC
noncompliance.
Two important forms used in the recertification process are problematic.
Form 8862 is required of all taxpayers seeking recertification, yet 86
percent of IRS examiners who audit recertification cases say they do not use
it. Since IRS is basically using Form 8862 only as a trigger for initiating
the recertification process, we believe that a simpler version of Form 8862
could serve that same purpose. Form 886- R, which tells taxpayers what
documentation they need to submit to prove their eligibility for the EIC,
says nothing about documentation that taxpayers in nontraditional
childrearing arrangements- which are likely common among the EIC recipient
population- need to provide to demonstrate that they meet the EIC
relationship test. At the same time, Form 886- R lists documentation that
substantial majorities of examiners said they would not accept. The form
states that a notarized statement from a child- care provider is acceptable
evidence that a child lived with the claimant. However, 62 percent of
examiners said that they would not accept such statements generally and 79
percent said that they would not accept such statements from relatives who
provide child care.
Other documentation listed on Form 886- R, while useful in gauging a
taxpayer?s eligibility for the EIC, can lead to unnecessary taxpayer burden.
IRS could minimize that burden and increase the probability of obtaining
useful information by clarifying Form 886- R itself or providing simple
supplemental forms that serve the same purpose. For instance, taxpayers
would be less likely to submit school year attendance information rather
than tax year attendance information if IRS were to develop a simple form
that specified the period (e. g., January through December 2000) for which
Page 25 GAO- 02- 449 Earned Income Credit
taxpayers must provide information. A taxpayer could then take the form to
the school( s) for completion.
When IRS has gathered information to judge whether a taxpayer should be
recertified, examiners reviewing the information are likely to reach
differing conclusions. The 21 examiners who reviewed five case scenarios we
developed based on actual case files did not all agree on any scenario and,
in some cases, reached widely varying judgments about whether the evidence
was sufficient to support an EIC claim. Furthermore, 53 percent of the
examiners we interviewed said that they have sometimes denied
recertification because taxpayers did not provide documentation of financial
support for the EIC- qualifying child- reflecting a fundamental
misunderstanding of the law since financial support is not a criterion for
the EIC.
The results of our review suggest that IRS needs to reassess the evidentiary
requirements for recertification and take steps to better ensure that
examiners understand and more consistently apply the criteria for
recertification. The inability to prove that qualifying children have lived
with taxpayers for the requisite period of time- the residency requirement-
has historically been a major reason why taxpayers are judged not eligible
for the EIC. IRS examiners will continue to exercise discretion in
determining whether documentation is sufficient even when using IRS?s
proposed new decision support tool. Furthermore, each of the three types of
acceptable documentation cited on Form 886- R for establishing residency can
prove problematic for an EIC claimant. Therefore, the chances of a claimant
being able to prove to an examiner?s satisfaction that a child?s living
arrangement meets EIC requirements might be enhanced if taxpayers were
encouraged to send IRS various types of documentation. Form 886- R, as
currently worded, encourages taxpayers to send in just one type of
documentation- be it school records, medical records, or statements from a
child care provider- which can leave an examiner with less than conclusive
evidence. If taxpayers provided more than one document, an examiner could
disregard a document that seemed questionable but possibly find one or more
of the other documents persuasive. Also, a pattern of evidence across
several corroborating documents may provide a more meaningful basis for
examiners to judge residency.
Although our review was directed at the EIC Recertification Program, many of
our findings would also apply to other IRS audits of EIC claims because
IRS?s requirements for proving eligibility for the EIC apply to all EIC
claimants, not just those who have to recertify. In that regard, while
Page 26 GAO- 02- 449 Earned Income Credit
we understand that it is not possible, and probably not desirable, to
eliminate all subjectivity from examiners? decisions about EIC eligibility,
there is room to bring more consistency to that process- not only
consistency among examiners but also consistency between the requirements of
the tax law (e. g., no financial support test to claim the EIC) and
examiners? practices. IRS recognizes the need for more consistency and is
working to develop a decision support tool for EIC audits. More broadly, an
IRS/ Treasury task force has been charged with developing recommendations
for making the overall EIC program less confusing to taxpayers and easier
for IRS to administer. The results of our work should be useful to IRS in
developing the decision support tool and to the task force in deliberating
on possible changes to the EIC program.
We recommend that the commissioner of Internal Revenue reassess the
evidentiary requirements for recertification. As part of that reassessment,
we recommend that the commissioner do the following:
Revise Form 8862 to make it a simple request for recertification that IRS
can use to trigger the recertification process and eliminate all of the
information that taxpayers are now asked to provide on the form.
Revise Form 886- R (and similar forms used for other EIC audits) to
clarify that taxpayers who are seeking EIC recertification do not have to
demonstrate that their EIC- qualifying child is a dependent to qualify for
the EIC;
help taxpayers understand what documentation they must provide (such as
birth certificates, adoption papers, etc.) to establish their relationship
with the EIC- qualifying child, especially when the child is not their
natural born son or daughter;
eliminate the need to have the statement from a child- care provider
notarized, since a notary public does not verify the content of the
statement and most examiners placed no validity on the notary stamp; and
encourage taxpayers to submit more than one type of document to
demonstrate that the EIC- qualifying children lived with them.
If IRS is not willing to accept a relative?s child- care statement as
evidence that a child lives with the taxpayer, make that clear on Form 886-
R, on similar forms used for other EIC audits, and in the EIC decision
support tool and suggest additional evidence that a taxpayer might provide.
Whatever IRS?s official position on statements from relatives, ensure that
examiners are aware of that position and apply it consistently.
Develop a standard form that taxpayers can give to a school or health-
care provider that specifies the information needed and on which examiners
can indicate the period of time for which that information is needed.
Recommendations for
Executive Action
Page 27 GAO- 02- 449 Earned Income Credit
If IRS decides not to develop a standard form, revise Form 886- R to
clearly remind taxpayers that records for parts of 2 school years are needed
to document a living arrangement for the tax year.
Take appropriate steps to ensure that the new EIC decision support tool
does not continue the inappropriate linkage of financial support to
decisions on EIC eligibility.
In conjunction with the establishment of the EIC decision support tool,
which is intended to improve consistency among EIC examinations, provide
examiners with the training needed to better ensure consistent and accurate
decisions. As part of the training, emphasize to examiners the difference
between the eligibility requirements for an EIC- qualifying child and a
dependent.
We requested comments on a draft of this report from IRS. We obtained
written comments in an April 10, 2002, letter from the commissioner of
Internal Revenue (see app. V).
The commissioner cited several steps being taken with respect to the EIC,
including the development of the decision support tool and convening of the
IRS/ Treasury task force, referred to earlier, and the redesign of EIC
taxpayer notices. The commissioner said that the IRS/ Treasury task force
would consider the findings discussed in this report in evaluating
?legislative and administrative solutions to [EIC] recertification
problems.? With respect to our recommendation that IRS revise Form 8862, the
commissioner said that the Wage and Investment Division will study the use
of Form 8862 in EIC recertifications and the examination of related issues.
Based on the results of that study and our findings, IRS ?will
evaluate possible revisions to the form that will make communications
clearer, reduce taxpayer burden, and aid the recertification and examination
processes.? IRS anticipates completion of this study by June 2003. Such a
study, with the objectives cited by the commissioner, would be responsive to
our recommendation.
Regarding our recommendation that IRS revise Form 886- R and similar forms,
the commissioner said that IRS plans to have revised forms that incorporate
feedback from taxpayers and tax practitioners by the 2003 filing season. We
agree wholeheartedly with the plan to obtain feedback from taxpayers and
practitioners and look forward to seeing the results of these efforts.
However, the commissioner?s response did not clearly indicate that the
intended revisions to the forms would reflect the specific Agency Comments
and Our Evaluation
Page 28 GAO- 02- 449 Earned Income Credit
changes we recommended. We encourage the commissioner to ensure that the
recommended changes are made.
In response to our two recommendations relating to child care provided by a
taxpayer?s relative, the commissioner said the following:
?A child- care provider?s statement by itself may not be sufficient to
verify eligibility. In that instance, the taxpayer will need to provide
additional collaborating evidence to support his or her [EIC] claim. We will
show examples of this evidence on Form 886- R.?
IRS will enhance examiner awareness of IRS?s official position on this
issue and the consistency of its application through the decision support
tool, in examiner training and the Internal Revenue Manual, and during
quality reviews.
The actions referred to by the commissioner would be responsive to our
recommendations.
With respect to our two recommendations about helping ensure that taxpayers
obtain documentation for the proper time period, the commissioner said that
IRS was revising Form 886- R to clearly remind taxpayers that records for
parts of 2 school years are needed to document a living arrangement for the
tax year. That would be responsive to our recommendation.
Finally, the commissioner said that the new EIC decision support tool has
been revised to incorporate our recommendation that IRS take appropriate
steps to ensure that the new tool does not continue the inappropriate
linkage of financial support to decisions on EIC eligibility. The new tool
is to be rolled out nationwide in May 2002.
As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution of it until 30 days
from the date of this report. We will then send copies to the Chairmen and
Ranking Minority Members of the Senate Committee on Finance and the House
Committee on Ways and Means; the Ranking Minority Member of this
Subcommittee; the secretary of the Treasury; the commissioner of Internal
Revenue; the director, Office of Management and Budget; and other interested
parties. We will also make copies available to others on request.
Page 29 GAO- 02- 449 Earned Income Credit
This report was prepared under the direction of David J. Attianese,
Assistant Director. Other major contributors to this report are acknowledged
in appendix VI. If you have any questions, contact Mr. Attianese or me on
(202) 512- 9110.
Sincerely yours, Michael Brostek Director, Tax Issues
Appendix I: Evolution of the Earned Income Credit Recertification Program
Page 30 GAO- 02- 449 Earned Income Credit
The Congress established the earned income credit (EIC) in 1975 to offset
the impact of Social Security taxes paid by low- income workers and to
encourage low- income persons to choose work over welfare. A significant
number of taxpayers are affected by EIC. In 2001, 18.7 million taxpayers
claimed a total of $31 billion in EIC.
Since 1995, we have identified EIC noncompliance as one of the high- risk
areas within IRS. 1 EIC noncompliance has resulted in billions of dollars in
EIC claims that IRS paid, but should not have. In its most recent EIC
compliance study, IRS determined that of an estimated $31.3 billion in EIC
claims for tax year 1999, between $9.7 billion and $11.1 billion was
overclaimed. After deducting the estimated amount of those overclaims that
it recovered during the processing of returns and through enforcement
programs, IRS determined that between $8.5 billion and $9.9 billion in tax
year 1999 EIC claims was paid out that should not have been.
The Taxpayer Relief Act of 1997 reflects the Congress? concern about the
level of EIC noncompliance. Among other things, the 1997 act amended the
Internal Revenue Code to provide that taxpayers who are denied EIC during an
IRS audit are ineligible to receive the EIC in subsequent years unless they
provide documentation to demonstrate their eligibility. IRS developed a
recertification program designed to deal with this new requirement.
Taxpayers were first required to recertify, based on a 1997 audit, when
submitting their 1998 tax returns.
Tax year 1998 returns filed in 1999 were the first returns to which affected
EIC claimants would have to attach a Form 8862 for recertification. In
preparation for that event, IRS provided little information to taxpayers on
what to expect when they sought recertification. IRS issued recertification
guidelines to service center examiners at the beginning of the 1999 filing
season but, according to examiners we interviewed, gave no formal training
on recertification to examination staff. As described in appendix II, we and
TIGTA found that service centers did not consistently follow the
recertification guidelines, and a number of forms and letters IRS used for
recertification contained inconsistent or irrelevant information.
1 Initially, this high- risk area was referred to as ?IRS Tax Filing Fraud.?
In January 2001, we narrowed the focus of the high- risk area and renamed it
?Noncompliance With EIC.? Appendix I: Evolution of the Earned Income
Credit Recertification Program Taxpayer Outreach and Correspondence and
Examiner Training Have Improved
Appendix I: Evolution of the Earned Income Credit Recertification Program
Page 31 GAO- 02- 449 Earned Income Credit
IRS?s outreach and correspondence to taxpayers and its training of examiners
have improved since then. For example, IRS began to distribute basic
information on the recertification program through its web site on the
Internet, Publication 596 (Earned Income Credit) was revised to include a
section on what taxpayers need to do if they have been disallowed the EIC as
a result of audit, some changes were made to improve the quality of IRS
correspondence, and more guidance was provided to examiners.
In 1998, IRS disallowed, through audits, the EIC claims on about 312,000
taxpayers. According to IRS?s Recertification Guidelines, these taxpayers
were to be sent Letter 3094 notifying them that:
?The law now requires when we deny EIC [as a result of deficiency
procedures], we must also deny it for any succeeding years unless you
provide information showing you are entitled to the credit.
You must, therefore, complete and attach Form 8862, Information to Claim
Earned Income Credit After Disallowance, to the next return on which you
claim EIC. While we determine if you are entitled to the credit, we will
delay any refund due. If you claim EIC on your return without attaching a
completed Form 8862, we will disallow the credit.
You can get Form 8862 at most locations where tax forms are available. You
will also be able to submit Form 8862 electronically when you file federal
tax return??
None of the 1999 IRS publications, forms, and instructions regarding the EIC
provided any information on the recertification process or requirements
other than the need to file Form 8862. 2 Even IRS?s publication of the need
to file Form 8862 was not completely effective. An internal IRS study found
that of the 312,000 required- to- recertify taxpayers, 38 percent (118,989)
claimed the EIC again for tax year 1998. However, nearly 46 percent of these
taxpayers (54,194 of the 118,989) did not attach the Form 8862 with their
returns and thus were automatically denied the EIC.
2 We reviewed the following IRS information: Form 8862 and the accompanying
instructions, Publication 17 (Your Federal Income Tax), Publication 596
(Earned Income Credit), Form 1040 and the accompanying instructions, and a
transcript of pre- recorded EIC information available on IRS?s TeleTax
system. Slow Start- 1999, First
Year of Recertification Requirement
Appendix I: Evolution of the Earned Income Credit Recertification Program
Page 32 GAO- 02- 449 Earned Income Credit
Within IRS, there was also confusion over the recertification process. At
the beginning of the 1999 filing season, IRS issued recertification
guidelines for Service Center examiners, but examiners we interviewed said
that there was no formal training for examiners on recertification. With
some exceptions pertaining to which EIC children an examiner should seek
verification and how the recertification indicator should be handled after a
taxpayer has been recertified, the recertification process essentially
follows IRS?s normal process for conducting examinations via correspondence.
During our review of the 1999 filing season, we found that (1) form letters
that IRS sent to taxpayers seeking recertification contained inconsistent
and irrelevant information; (2) form letters that IRS sent to taxpayers
asked for information beyond that specified in the recertification
guidelines; and (3) service centers were not consistently following the
recertification process. 3
A more detailed review by TIGTA disclosed, among other things, that (1) the
indicator used to identify taxpayers who must recertify was not always
removed accurately; (2) some suspended refunds were not released timely; (3)
recertification audits were not always processed in a timely manner; (4) not
all recertification determinations were accurate; and (5) IRS correspondence
was unclear. 4 TIGTA attributed these problems, in part, to (1) the IRS
correspondence used did not clearly explain how the program worked or what
was required for the taxpayer to be recertified and (2) IRS did not ensure
that employees received, understood, and implemented recertification
procedures. (See app. II for TIGTA?s findings and IRS?s corrective actions.)
Outreach to taxpayers for filing seasons 2000 and 2001 improved compared
with 1999. For example, in 2000, IRS revised Publication 596 (Earned Income
Credit) by expanding the section on EIC recertification. The publication
provided examples of who would be required to file Form 8862 and alerted
taxpayers that they may have to provide additional documentation before
being recertified. In 2001, IRS included questions on EIC recertification in
the ?Frequently Asked Questions? section of its Web
3 GAO/ GGD- 00- 37. 4 TIGTA, Reference No. 2001- 40- 030. Improvements
During the
2000 and 2001 Filing Seasons
Appendix I: Evolution of the Earned Income Credit Recertification Program
Page 33 GAO- 02- 449 Earned Income Credit
site and further expanded the chapter on EIC recertification in Publication
596.
The 2001 improvement in outreach was especially critical because the Ticket
to Work and Work Incentives Improvement Act of 1999 (P. L. 106170) had
tightened the definition of an eligible foster child for EIC purposes. IRS
publicized this change on its Web site, in Publications 596 and 553
(Highlights of 2000 Tax Changes), and on Schedule EIC.
Recertification training for examiners also improved compared with 1999. EIC
training videos that were sent to IRS?s processing centers for the 2001
filing season included materials on recertification. IRS also incorporated
the recertification guidelines into the Internal Revenue Manual section
dealing with correspondence examinations in an effort to improve program
consistency. Forms and letters were revised and examiners were instructed,
via IRS?s internal Taxpayer Service Electronic Bulletin Board, to correct
improper handling of recertification cases.
Appendix II: Recent GAO and TIGTA Recommendations Relating to EIC
Recertification and IRS Corrective Actions
Page 34 GAO- 02- 449 Earned Income Credit
Since July 1999, we 1 and the Treasury Inspector General for Tax
Administration (TIGTA) 2 have reported several concerns about the EIC
Recertification Program and have made several recommendations. In response
to those recommendations, IRS implemented several corrective actions. The
recommendations and corrective actions are described in tables 2 and 3.
1 U. S. General Accounting Office, IRS Correspondence to Taxpayers on Earned
Income Credit Recertification, GAO/ GGD- 99- 112R (Washington, D. C.: July
30, 1999.) and GAO/ GGD- 00- 37.
2 Improvements Are Needed in the Earned Income Credit Recertification
Program,
TIGTA, Reference No. 2001- 40- 030, Dec. 29, 2000. Appendix II: Recent GAO
and TIGTA
Recommendations Relating to EIC Recertification and IRS Corrective Actions
Appendix II: Recent GAO and TIGTA Recommendations Relating to EIC
Recertification and IRS Corrective Actions
Page 35 GAO- 02- 449 Earned Income Credit
Table 2: Prior GAO Report Findings on IRS?s Recertification Process and
IRS?s Corrective Actions GAO findings GAO recommendations IRS corrective
actions
Irrelevant information in IRS Letter 3094 could confuse taxpayers.
Revise Letter 3094 by either (1) making the paragraph relating to reckless
or intentional disregard of law and fraud an optional paragraph to be used
only when it is relevant; (2) restricting letter 3094 to cases that do not
involve reckless or intentional disregard of the law or fraud; or (3)
rewording the paragraph to make it clear that it does not apply to the
specific audit finding covered by the letter but is being provided to alert
taxpayers to the potential consequences if they continue their noncompliant
behavior.
IRS revised Letter 3094 by eliminating the 2- year penalty warning for those
taxpayers who were not found reckless. This revised letter also included a
statement that ?Even though you attach Form 8862, we may request additional
documentation to substantiate your EIC claim.? A new letter, 3094A, was
designed for those taxpayers who were found recklessly disregarding the EIC
rules. Letter 3094A tells taxpayers that (1) they were found to have
recklessly or intentionally disregarded the EIC rules and would be subjected
to the 2- year penalty and (2) when and how they can claim the EIC in the
future.
IRS Letters 3177 and 3183 contain inconsistent information. Revise Letter
3177 and/ or letter 3183 so
that consistent refund issuance time frames are cited in both letters.
Revised Letters 3177 and 3183 for fiscal year 2000 so that consistent refund
issuance time frames are cited in both letters. IRS Letter 3184 and Form
886- H are inconsistent with IRS?s operating procedures.
Make the documentation requirements in Letter 3184 and Form 886- H more
consistent with the requirements in IRS?s internal recertification
guidelines.
Letter 3184 was discontinued, and Form 886- R, which IRS now uses in
recertification cases instead of Form 886- H, was revised in November 1999.
IRS examiners did not rely on the information on Form 8862 to recertify
taxpayers claiming EIC based on a qualifying child. Form 8862 may mislead
taxpayers to believe the information they provide on the form would be
sufficient for recertification.
If IRS does not rely on Form 8862 for recertification purposes, discontinue
its use. If IRS continues using Form 8862 for recertification purposes,
redesign the form to include reference to the documentation listed on Form
886H and any other documentation that IRS thinks is necessary for
recertification so that taxpayers who are required to recertify know as
early as possible what documentation is required for recertification.
IRS said that it relies on Form 8862 to ?identify the type of action to be
taken for taxpayers required to recertify.? IRS also noted that redesigning
Form 8862 to include references to documentation that might be needed for
recertification may be counterproductive to IRS?s efforts to reduce taxpayer
burden. We revisited the need for and design of Form 8862 as part of this
review of the Recertification Program and have a recommendation in this
report that supersedes our prior recommendation.
Despite the issuance of national guidance on the recertification process,
procedures were not being followed consistently.
Ensure that all service centers implement the recertification procedures
according to national guidelines to avoid possible disparate treatment of
taxpayers.
According to IRS (1) the guidelines were incorporated into the Internal
Revenue Manual, (2) adherence to procedures in the manual is mandatory, and
(3) special reviews were to be done during fiscal year 2000 to assess
conformance to the procedures.
Source: GAO/ GGD- 99- 112R and GAO/ GGD- 00- 37.
Appendix II: Recent GAO and TIGTA Recommendations Relating to EIC
Recertification and IRS Corrective Actions
Page 36 GAO- 02- 449 Earned Income Credit
Table 3: TIGTA Recertification Report Findings and IRS?s Corrective Actions
TIGTA findings TIGTA recommendations IRS?s corrective actions
(1) IRS should ensure that the recertificiaton indicators on taxpayers?
accounts are accurate. Accordingly, it should remove indicators from
taxpayers? accounts if they have proven their EIC eligibility.
In January 2000, IRS formalized EIC recertification procedures by including
them in the Internal Revenue Manual that is available to all EIC examiners.
(2) IRS should improve its quality review process to help ensure employees
remove indicators when appropriate.
IRS disagreed with the need to revise the quality review process since
closed recertification cases accounted for only 1.4 percent of all EIC
cases. However, IRS said it would revise its procedures and training to
ensure employees remove indicators when appropriate. IRS agreed to
reconsider its quality review procedures if future reviews indicate
problems. IRS did not always remove the
recertification indicators accurately. IRS allowed the EIC but did not
remove the recertification indicator for an estimated 11,400 taxpayers
nationwide. Additionally, IRS erroneously removed the recertification
indicator for an estimated 4,100 taxpayers nationwide. IRS should remove the
recertification indicators from those accounts where taxpayers have proven
their EIC eligibility and should improve its quality review process to help
ensure employees remove indicators when appropriate. (3) IRS should clarify
its procedures
to specifically instruct employees as to what information and actions are
needed to prove taxpayers are qualified to receive the income- only EIC.
These procedures should also be clarified to ensure that taxpayers are not
considered recertified when they file Forms 8862 but do not claim or receive
an EIC.
IRS revised its procedures to specifically instruct employees as to what
information and actions are needed to prove taxpayers are qualified to
receive the income- only EIC. IRS also revised Letter 3094 to explain to
taxpayers how to claim income- only EIC.
(4) IRS should identify and resolve recertification accounts with
incorrectly suspended refunds.
IRS performed a one- time extract to identify recertification accounts with
suspended refunds and issued instructions to examination personnel for
working these cases. Also, according to IRS, it has been generating, since
January 2001, a monthly extract of nonreversed refunds, which is forwarded
to each Examination Branch for action and resolution. Some suspended refunds
were not
released timely. In a sample of 200 accounts with actions to suspend any
refunds, TIGTA identified that IRS did not release refunds timely for 86
(43%) accounts.
(5) IRS should modify computer programs to ensure that the weekly listings
used to determine whether to release suspended refunds or to conduct an
audit include all applicable taxpayer accounts with suspended refunds.
IRS said it (1) corrected the programming by automating transaction codes on
pick- up cases, which should ensure that weekly listings contain all
accounts with suspended refunds and (2) issued instructions to Examination
personnel to work the list within 5 business days and included the
instructions in the Internal Revenue Manual. (6) IRS should ensure that
inventory reports are effectively used to monitor and identify processing
delays and provide timely feedback to offices where delays occur.
The monthly extract in Corrective Action #4 above should assist examiners in
identifying and resolving processing delays. IRS?s National Office was to
perform monthly oversight to ensure feedback is provided to offices where
delays occur. Other IRS monitoring tools included (1) status workload
reports that were to be generated every 2 weeks in each processing center
and (2) monthly inventory oversight by headquarters and field office
analysts. Recertification audits were not
always completed timely. TIGTA reviewed 104 EIC recertification audits and
identified 59 (57%) that had not been timely processed. The delays ranged
from 2 weeks to 29 weeks and averaged 8 weeks.
(7) IRS should use the correct project codes to identify recertification
audits.
IRS corrected the programming on pick- up cases by automating relevant
transaction codes and the project code, which will ensure all cases contain
the correct code.
Appendix II: Recent GAO and TIGTA Recommendations Relating to EIC
Recertification and IRS Corrective Actions
Page 37 GAO- 02- 449 Earned Income Credit
TIGTA findings TIGTA recommendations IRS?s corrective actions
(8) IRS should establish minimum standards for auditors determining the
extent of source documents required to allow child- related EIC and children
claimed as exemptions.
IRS said that (1) it revised the Internal Revenue Manual to include
guidelines for EIC examiners, (2) training packages for the applicable tax
law allowing deductions and credits are available to the EIC examiners, (3)
performance reviews are done to ensure that the Manual and tax laws are
followed, and (4) a national training tape was provided to all centers to
ensure consistency in training. TIGTA found that not all
recertification determinations were accurate. TIGTA identified 40 returns
where IRS allowed child- related EIC totaling about $82,000 without
sufficient documentation provided by taxpayers. These 40 returns included 22
returns from a sample of 69 returns that had been audited and 18 returns
from a sample of 37 returns that had not been audited.
(9) IRS should emphasize the procedures to send Recertification Program
claims to the Examination function.
IRS said it would update the Internal Revenue Manual to emphasize procedures
for the Recertification Program for Customer Account Service employees.
(10) IRS should revise letters sent to taxpayers in the Recertification
Program to ensure letter accuracy and to better explain the program and
should revise computer programming to ensure only appropriate letters are
generated.
IRS revised Letter 3094 to inform taxpayers that additional documentation
may be required to substantiate their claims for EITC when they file Form
8862 following disallowance. In addition, IRS designed a letter, CP 75A,
specifically for the Recertification Program, which tells taxpayers that
their refund will be delayed. IRS also implemented a program change to
suppress the CP 75A when the taxpayer has a balance due on the original
filing. Correspondence to taxpayers about
the recertification process was not always clear or was not sent.
(11) IRS should notify potentially qualified taxpayers subject to
recertification that they might be entitled to income- only EIC. Any
corrective action should take into consideration the rules for taxpayers
previously denied the EIC due to reckless or intentional disregard for the
law or fraud.
IRS revised Letter 3094 to tell taxpayers that they may qualify for income-
only EIC even though child- related EIC was denied.
Recertification Program procedures and the recertification indicators are
not based on the reasons the EIC is denied. Taxpayers who receive income-
only EIC when child- related EIC had been previously denied should not be
considered recertified.
(12) To increase revenue protection, IRS should consider changing the
Recertification Program regarding when taxpayers are recertified. If this
recommendation is adopted, IRS should make a business decision as to what
actions are necessary for taxpayers to receive incomeonly EIC after child-
related EIC has been denied. Any changes should take into consideration the
rules for taxpayers previously denied the EIC due to reckless or intentional
disregard for the law or fraud.
IRS issued Final Rules on Eligibility for Earned Income Credit Following
Denial, which state that IRS will explore whether, and to what extent, its
system is capable of undertaking a change to have taxpayers establish
eligibility the next time they claim the credit with one or more qualifying
children rather than the next time they claim the credit.
Source: TIGTA, Reference No. 2001- 40- 030.
Appendix III: Sampling Methodology and Results
Page 38 GAO- 02- 449 Earned Income Credit
To help identify any problems taxpayers may have in understanding and
complying with the EIC recertification process and determine how
consistently IRS examiners assess evidentiary support, we conducted a
telephone survey of IRS examiners doing recertification audits. We obtained
from IRS a list of all examiners who were working on EIC recertification
cases as of April 2001. From that list of 323 examiners, we selected a
simple random sample of 105 examiners. We found that 12 of those 105
examiners were not doing recertification audits at the time of our survey
and 3 others were unavailable for us to interview during our survey
timeframe. 1 Therefore, our survey results represent the views of about 277,
or about 97 percent, of the estimated 286 examiners doing recertification
audits at the time of our survey. 2
The estimates we made from our telephone survey and their 95- percent
confidence intervals are provided in table 4.
1 The 12 included 3 examiners on extended leave, 7 examiners no longer doing
recertification audits, and 2 examiner who reported never having done any
recertification audits.
2 The confidence interval for our estimate of 277 is from 254 to 294. The
confidence interval for our estimate of 97 percent is from 92 to 99 percent.
The confidence interval for our estimate of 286 is from 265 to 301. All
confidence intervals are at the 95- percent level of confidence. Appendix
III: Sampling Methodology and
Results
Appendix III: Sampling Methodology and Results
Page 39 GAO- 02- 449 Earned Income Credit
Table 4: GAO Estimates from Its Survey of Examiners Doing Recertification
Audits
Amounts in percent
95- percent confidence interval Of about 277 examiners doing recertification
audits at the time of our review, the percentage that Estimate Lower
estimate Upper estimate
Did not find Form 8862 useful. 86 78 91 Believed that Form 8862 had some
value. 13 8 21 Believed that Form 8862 misleads taxpayers into thinking that
IRS?s final decision on their eligibility will be based on information in
the form.
16 10 24 Said that when a taxpayer failed to be recertified, most or all of
the time the taxpayer?s inability to substantiate that a child lived with
the taxpayer led to the failure.
80 72 87 Would not accept a notarized statement as evidence. 62 53 71 Would
not accept a notarized letter from a relative, such as a grandparent. 79 70
86 Examined the filing status and dependent exemptions on a taxpayer?s
return in addition to the EIC. 97 91 99 Also audited other items such as
child tax, child care, and education credits. 57 47 66 Said that at least
some of the taxpayers who failed to be recertified failed because they
couldn?t provide documentation of the eligible child?s financial support.
53 44 63 Note: Confidence intervals were computed using the hypergeometric
distribution. In doing these computations, we used a population size of 323
and a sample size of 90. Had we known exactly how many of the 323 examiners
were doing recertification audits at the time of our survey, the confidence
intervals we computed would have been somewhat narrower.
Source: GAO?s survey of IRS examiners.
Appendix IV: IRS Forms 8862 and 886- R Page 40 GAO- 02- 449 Earned Income
Credit
Appendix IV: IRS Forms 8862 and 886- R
Appendix IV: IRS Forms 8862 and 886- R Page 41 GAO- 02- 449 Earned Income
Credit
Appendix IV: IRS Forms 8862 and 886- R Page 42 GAO- 02- 449 Earned Income
Credit
Appendix IV: IRS Forms 8862 and 886- R Page 43 GAO- 02- 449 Earned Income
Credit
Appendix V: Comments from the Internal Revenue Service
Page 44 GAO- 02- 449 Earned Income Credit
Appendix V: Comments from the Internal Revenue Service
Appendix V: Comments from the Internal Revenue Service
Page 45 GAO- 02- 449 Earned Income Credit
Appendix V: Comments from the Internal Revenue Service
Page 46 GAO- 02- 449 Earned Income Credit
Appendix V: Comments from the Internal Revenue Service
Page 47 GAO- 02- 449 Earned Income Credit
Appendix VI: GAO Contacts and Staff Acknowledgments Page 48 GAO- 02- 449
Earned Income Credit
Michael Brostek (202) 512- 9110 David Attianese (202) 512- 9110
In addition to those named above, Karen Bracey, Tara Carter, Art Davis, Ben
Douglas, Ann Lee, Susan Mak, Anne Rhodes- Kline, Clarence Tull, and James
Ungvarsky made key contributions to this report. Appendix VI: GAO Contacts
and Staff
Acknowledgments GAO Contacts Acknowledgments
(268904)
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