    Advance Earned Income Tax Credit: Low Use and Small Dollars Paid
    Impede IRS's Efforts to Reduce High Noncompliance (10-AUG-07,
    GAO-07-1110).

    The Advance Earned Income Tax Credit (AEITC) allows individuals
    to receive a portion of the Earned Income Tax Credit (EITC) in
    their paychecks, instead of receiving all of it when filing their
    year-end tax return. Limited research has been conducted on the
    AEITC since GAO last examined it in the early 1990s. GAO was
    asked to determine (1) how many individuals received the AEITC
    compared with the EITC in tax years 2002 through 2004, what
    actions, if any, have been taken to increase use, and the
    potential for increases in use in the future; (2) the extent of
    noncompliance, if any, associated with the AEITC; and (3) how
    well the Internal Revenue Service's (IRS) procedures address the
    areas of noncompliance. To address these questions, GAO analyzed
    Forms W-2 and tax return data and interviewed IRS and Social
    Security Administration (SSA) officials.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-1110
        ACCNO:   A74228
      TITLE:     Advance Earned Income Tax Credit: Low Use and Small
    Dollars Paid Impede IRS's Efforts to Reduce High Noncompliance
         DATE:   08/10/2007
      SUBJECT:   Advance payments
    	     Cost effectiveness analysis
    	     Data integrity
    	     Eligibility determinations
    	     Income taxes
    	     Noncompliance
    	     Program evaluation
    	     Reporting requirements
    	     Social security number
    	     Tax administration
    	     Tax credit
    	     Tax law
    	     Tax return audits
    	     Tax returns
    	     Program goals or objectives
    	     Earned Income Tax Credit

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    GAO-07-1110

         * [1]Results in Brief
         * [2]Background
         * [3]AEITC Use Low and May Be Difficult to Increase

              * [4]AEITC Use Has Not Increased Significantly Despite Several Ta
              * [5]Future AEITC Growth Is Unlikely

         * [6]High Noncompliance Exists with AEITC Requirements

              * [7]About 20 Percent of AEITC Recipients Had an Invalid SSN
              * [8]Almost 40 Percent of AEITC Recipients Did Not File the Requi
              * [9]About Two-Thirds of AEITC Recipients Who Filed a Federal Tax
              * [10]AEITC Recipients Were Noncompliant with Other Program Requir

         * [11]IRS's AEITC Compliance Procedures Have Limited Effectiveness

              * [12]IRS's Procedures to Verify SSNs Have Limited Effectiveness f
              * [13]Many Taxpayers Underreported AEITC and IRS Worked on a Limit
              * [14]IRS Works on a Limited Number of AEITC Nonfiler Cases
              * [15]Collection Handles Few AEITC Cases
              * [16]IRS Audits and Criminal Investigation Identified a Small Num
              * [17]Soft Notices Have Increased Compliance in Situations Similar
              * [18]Federal On-Line SSN Verification Services Could Be Used to D
              * [19]IRS Does Not Require Submission of Forms W-5 from Employers
              * [20]Options to Reduce AEITC Noncompliance May Be Cost Effective
              * [21]Eligible Taxpayers Could Receive Full EITC Benefits If the A

         * [22]Conclusions
         * [23]Recommendations for Executive Action
         * [24]Agency Comments
         * [25]GAO Contacts
         * [26]Acknowledgments
         * [27]GAO's Mission
         * [28]Obtaining Copies of GAO Reports and Testimony

              * [29]Order by Mail or Phone

         * [30]To Report Fraud, Waste, and Abuse in Federal Programs
         * [31]Congressional Relations
         * [32]Public Affairs

    Report to the Joint Committee on Taxation

    United States Government Accountability Office

    GAO

    August 2007

    ADVANCE EARNED INCOME TAX CREDIT

    Low Use and Small Dollars Paid Impede IRS's Efforts to Reduce High
    Noncompliance

    GAO-07-1110

    Contents

    Letter 1

    Results in Brief 3
    Background 6
    AEITC Use Low and May Be Difficult to Increase 9
    High Noncompliance Exists with AEITC Requirements 15
    IRS's AEITC Compliance Procedures Have Limited Effectiveness and Options
    to Better Address Noncompliance Have Advantages and Disadvantages 21
    Conclusions 44
    Recommendations for Executive Action 45
    Agency Comments 46
    Appendix I IRS's Implementation of Recommendations from GAO's 1992 Report
    on the Advance Earned Income Tax Credit 47
    Appendix II Scope and Methodology 49
    Appendix III Demographic Characteristics of Advance Earned Income Tax
    Credit Recipients and Their Employers 56
    Appendix IV Administrative and Legislative Changes to the Advance Earned
    Income Tax Credit Since 1990 76
    Appendix V Additional Analyses of Advance Earned Income Tax Credit
    Noncompliance 78
    Appendix VI Comments from the Internal Revenue Service 92
    Appendix VII GAO Contacts and Staff Acknowledgments 96

    Tables

    Table 1: EITC Requirements for 2006 That All AEITC Recipients Must Also
    Expect to Meet 8
    Table 2: Percentage of AEITC Recipients Receiving an Amount of AEITC, Tax
    Years 2002 through 2004 11
    Table 3: Frequency of Individuals Electing the EITC and AEITC, Tax Years
    2002 through 2004 14
    Table 4: AEITC Recipients and Recipients with Invalid SSN on Form W-2,
    Individuals and Dollars, Tax Years 2002 through 2004 17
    Table 5: AEITC Recipients and Recipients Who Did Not File a Tax Return,
    Individuals and Dollars, Tax Years 2002 through 2004 18
    Table 6: AEITC Recipients, Recipients Who Did Not File a Federal Tax
    Return, and Recipients Who Did Not File a Tax Return and Had an Invalid
    SSN on the Form W-2, Individuals and Dollars, Tax Years 2002 through 2004
    19
    Table 7: AEITC Matches and Mismatches between Form(s) W-2 and Filed Tax
    Returns, Tax Years 2002 through 2004 20
    Table 8: IRS Implementation of Recommendations from GAO's 1992 Report on
    the Advance Earned Income Tax Credit 47
    Table 9: Number of Forms W-2, Number of Individuals, and the Dollars for
    Each Subpopulation, Tax Years 2002 through 2004 51
    Table 10: Number of Forms W-2 Received by Subpopulation, Tax Years 2002
    through 2004 58
    Table 11: AGI for AEITC and EITC Recipients, Number, Average, and Sum, for
    Tax Year 2002 62
    Table 12: AGI for AEITC and EITC Recipients, Number, Average, and Sum, for
    Tax Year 2003 63
    Table 13: AGI for AEITC and EITC Recipients, Number, Average, and Sum, for
    Tax Year 2004 63
    Table 14: Wages Reported for AEITC and EITC Recipients, Number, Wage
    Amount, and Average Dollars Received for Tax Years 2002 through 2004 65
    Table 15: Filing Status of AEITC and EITC Recipients, Number and
    Percentage, Tax Years 2002 through 2004 66
    Table 16: Age of AEITC and EITC Recipients, Tax Years 2002 through 2004 68
    Table 17: Gender of AEITC and EITC Recipients, Number and Percentage, Tax
    Years 2002 through 2004 70
    Table 18: Number of Qualifying Children for AEITC and EITC Recipients,
    Number and Percentage, Tax Years 2002 through 2004 72
    Table 19: Filing Method of AEITC and EITC Recipients, Number and
    Percentage, Tax Years 2002 through 2004 72
    Table 20: Employer Size, Number of Employers, Number of Forms W-2
    Employers Issued to AEITC Recipients and Total Dollars Reported on Forms
    W-2, Tax Years 2002 through 2004 75
    Table 21: Administrative Changes to the AEITC since 1990 76
    Table 22: Number of Individuals and AEITC Dollars Received by AEITC
    Recipients and Individuals Who Elected the AEITC Consecutively Using an
    Invalid SSN and an Invalid SSN and Not Filing, Tax Years 2002 through 2004
    79
    Table 23: Number of AEITC Consecutive Recipients with Matches and
    Mismatches between Forms W-2 and Filed Tax Returns, Tax Years 2002 through
    2004 80
    Table 24: Amount of AEITC Received Per Invalid Form W-2, Number and
    Percentage, Tax Years 2002 through 2004 81
    Table 25: Number of Individuals Receiving a Form(s) W-2, Total Number of
    Form(s) W-2 Reporting AEITC, Total Associated and Average Dollars Received
    Relative to Number of Form(s) W-2 Reporting AEITC for AEITC Recipients
    with an Invalid SSN on the Form(s) W-2, Tax Year 2002 82
    Table 26: Number of Individuals Receiving a Form(s) W-2, Total Number of
    Form(s) W-2 Reporting AEITC, Total Associated and Average Dollars
    Received, Relative to Number of Form(s) W-2 Reporting AEITC for AEITC
    Recipients with an Invalid SSN on the Form(s) W-2, Tax Year 2003 83
    Table 27: Number of Individuals Receiving a Form(s) W-2, Total Number of
    Form(s) W-2 Reporting AEITC, Total Associated and Average Dollars
    Received, Relative to Number of Form(s) W-2 Reporting AEITC for AEITC
    Recipients with an Invalid SSN on the Form(s) W-2, Tax Year 2004 84

    Figures

    Figure 1: AEITC Process for Employees and Employers 7
    Figure 2: Number of EITC Recipients, EITC Recipients Potentially Eligible
    for the AEITC, AEITC Recipients, and Total Dollars They Received, Tax
    Years 2002 through 2004 10
    Figure 3: Percentage of AEITC Recipients Compliant and Noncompliant with
    at Least One AEITC Requirement, Tax Years 2002 through 2004 15
    Figure 4: Submission Processing Procedures for Paper and Electronic Tax
    Returns Reporting AEITC 22
    Figure 5: AUR Program Procedures to Resolve Discrepancies between AEITC
    Amounts on Forms W-2 and Tax Returns 26
    Figure 6: Average Amount of AEITC Received by Consecutive and AEITC
    Recipients, Tax Years 2002 through 2004 61
    Figure 7: Geographic Location of AEITC Recipients in the Valid
    Subpopulation, Tax Years 2002 through 2004 74
    Figure 8: Geographic Location of AEITC Recipients in the Invalid Name
    Subpopulation, Tax Years 2002 through 2004 87
    Figure 9: Geographic Location of AEITC Recipients in the Invalid Number
    Subpopulation, Tax Years 2002 through 2004 89
    Figure 10: Number of Forms W-2 Received with Amounts above the Yearly
    AEITC Maximum, Tax Years 2002 through 2004 90
    Figure 11: AEITC Dollars Reported on Form W-2s above the Yearly AEITC
    Maximum, Tax Years 2002-2004 91

    Abbreviations

    AEITC Advance Earned Income Tax Credit
    AGI Adjusted Gross Income
    AUR Automated Underreporter
    DM-1 Data Master File
    EITC Earned Income Tax Credit
    ERS Error Resolution System
    IRS Internal Revenue Service
    OBRA '93 Omnibus Budget Reconciliation Act of 1993
    SSA Social Security Administration
    SSN Social Security number
    SSNVS Social Security Number Verification System
    TIN Taxpayer Identification Number

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
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    separately.

    United States Government Accountability Office
    Washington, DC 20548

    August 10, 2007

    The Honorable Charles B. Rangel
    Chairman
    The Honorable Max Baucus
    Vice Chairman
    Joint Committee on Taxation

    Beginning in 1979, eligible taxpayers could elect to receive the Earned
    Income Tax Credit (EITC), a refundable credit available to low income
    workers, as an advance payment--an option currently found in only one
    other federal tax credit.^1 Individuals who elect this option receive a
    portion of the EITC from their employer throughout the year with their
    regular pay, instead of receiving only a lump sum refund or tax credit
    when filing their year end federal income tax returns.^2 The Advance
    Earned Income Tax Credit (AEITC) provides employees an immediate benefit
    from the credit, which may help them meet their daily expenses by
    increasing their take-home pay.

    Little has been known about the individuals who receive the AEITC, the
    employers who pay it, and compliance with its requirements. Neither the
    Internal Revenue Service (IRS) nor the employer is required to confirm the
    eligibility of those who elect the AEITC before they receive it. Thus, the
    extent of compliance problems related to the AEITC may depend on factors
    such as how knowledgeable individuals applying for the AEITC are about
    eligibility requirements and how well the IRS addresses various kinds of
    noncompliance that the agency may identify only after AEITC payments have
    been made.

    Limited research has been conducted on the AEITC since we last examined it
    in the early 1990s. In 1992, we reported that the percentage of
    individuals receiving the EITC in 1989 who also received the AEITC was low
    and that many eligible workers were not aware of it.^3 We estimated that
    almost half of those who received the AEITC in 1989 and filed a tax return
    did not report receiving it and that 45 percent of people whom IRS records
    show may have received the AEITC never filed a tax return, meaning that
    IRS would have no way of determining their eligibility. We made six
    recommendations to the Commissioner of Internal Revenue designed to
    increase awareness of the AEITC among eligible individuals and improve
    compliance among those who receive it. Appendix I discusses IRS's
    implementation of the recommendations from our 1992 AEITC report.

    ^1 The other credit with an advance option is the Health Coverage Tax
    Credit, which pays 65 percent of qualified health plan premiums for
    eligible trade-affected workers and certain Pension Benefit Guaranty
    Corporation benefit recipients.

    ^2 In tax year 2004, about 22 million individuals received about $40
    billion in EITC payments from the IRS. Any portion of the EITC that an
    individual did not obtain as an advance can be obtained when he or she
    files a tax return, assuming qualifications are maintained.

    To provide current information on the AEITC, the Committee asked us to
    answer the following questions: (1) How many individuals received the
    AEITC compared with the EITC and how much did they receive in tax years
    2002 through 2004? What actions, if any, have been taken to increase use
    since 1992 and what is the potential for significant increases in the
    future? (2) What is the extent of noncompliance, if any, associated with
    the AEITC? (3) How well do IRS's procedures address any areas of
    noncompliance? In addition, the Committee asked us to provide basic
    demographic characteristics of AEITC recipients and their employers and to
    identify legislative and administrative changes made since our 1992
    report, some of which were discussed by IRS in its response to that
    report's recommendations. The information is presented in appendixes I and
    III through V.

    To answer these questions, we obtained a data file from IRS containing all
    Form W-2 "Wage and Tax Statements" that reported AEITC in tax years 1999
    through 2004. We performed data reliability tests on this file to
    determine whether the data were sufficiently reliable for our intended
    purposes and determined that they were. This process involved, among other
    things, checking the validity of the Social Security number (SSN) on the
    Form W-2, determining whether the AEITC amount was above the yearly
    maximum limit, and creating subpopulations in which to conduct our
    analyses. Using the Form W-2 data and data from other sources, such as
    IRS's Individual Return Transaction File that contains tax return
    information, we compiled relevant demographic characteristics data and
    compared AEITC data with EITC data when possible. We also reviewed
    administrative and legislative changes as well as relevant reports and
    considered these along with our data analyses. To examine actions intended
    to increase use and determine the potential for increases in future AEITC
    use, we reviewed various reports and literature and interviewed IRS
    officials and individuals we determined to be experts. We also used the
    Form W-2 and other data to identify areas of noncompliance by comparing
    the data to the AEITC requirements. In addition, we examined IRS's
    procedures for processing individual income tax returns with AEITC and
    interviewed IRS officials to determine how IRS addressed noncompliance.
    Finally, we explored possible remedies for the noncompliance we identified
    through literature searches and interviews with various Department of the
    Treasury, IRS, and Social Security Administration (SSA) officials. It was
    not within the scope of our work to fully evaluate the potential cost and
    benefits of these options for reducing noncompliance. We conducted our
    work in accordance with generally accepted government auditing standards
    from December 2005 through July 2007. Appendix II provides more detail on
    the scope and methodology we used to conduct our work.

    ^3 GAO, Earned Income Tax Credit: Advance Option Is Not Widely Known or
    Understood by the Public, [33]GAO/GGD-92-26 (Washington, D.C.: Feb. 19,
    1992).

    Results in Brief

    AEITC use and the amount paid out by employers was low in tax years 2002
    through 2004--only about 3 percent of the EITC recipients potentially
    eligible for the advance received it and about half of the recipients
    received $100 or less per year. In total, approximately 514,000
    individuals received about $146 million of AEITC in each of the 3 years.
    Several federal efforts, including two legislative and several
    administrative changes, have been aimed at increasing AEITC use in the
    last approximately 15 years. For example, the Omnibus Budget
    Reconciliation Act of 1993 (OBRA '93), directed IRS to send notices to
    taxpayers during 2 tax years informing them that they were potentially
    eligible for the advance. Similarly, IRS made changes to its forms and
    increased speaker seminars to inform the public about the AEITC. Despite
    these efforts, use has not substantially increased and, for several
    reasons, it may be difficult to significantly increase it in the future.
    For example, IRS officials, other experts, and our prior work suggest that
    individuals often do not elect the AEITC because they prefer receiving the
    entire EITC as a lump sum when filing their tax return. An IRS-funded
    study revealed that low use is also attributed to concerns that
    prospective recipients would receive more in advance than they would
    ultimately be entitled to, thus owing the difference when filing their tax
    return.

    As many as 80 percent of recipients did not comply with at least one AEITC
    requirement, while some individuals were noncompliant with more than one
    requirement. Approximately 20 percent (more than 100,000) of all AEITC
    recipients each year may not have been eligible for the advance because
    they did not have a valid SSN, that is, a SSN that has been assigned by
    the SSA or a SSN/name combination that could be matched to SSA records.
    These individuals received $37 million to $39 million in each tax year
    from 2002 through 2004. Almost 40 percent (about 200,000 recipients) did
    not file the required tax return; they received between $42 million and
    $50 million of AEITC for each of these years. When individuals do not file
    a return, IRS cannot readily identify whether they were eligible for AEITC
    and whether they owed IRS any of the amounts they received. Conversely, by
    not filing a tax return, some individuals did not receive additional EITC
    monies that they could only receive had they filed. Of the 60 percent of
    AEITC recipients who did file a return, about 300,000 individuals in each
    of the 3 years, two-thirds misreported the amount they received--the
    majority did not report receiving any AEITC. As a result, these AEITC
    recipients who claimed the EITC when filing their return collectively
    received an excess amount of EITC of about $64 million for the 3 years.

    Although IRS has processing and enforcement procedures in place to monitor
    the AEITC, the agency has limited effectiveness in addressing AEITC
    noncompliance, in large part because it targets most of its enforcement
    efforts at more widely used programs that involve larger amounts of money.
    For example, Automated Underreporter (AUR) staff worked only a fraction of
    the AEITC underreporting cases because resource constraints and criteria
    limited case selection. Moreover, AUR and other IRS enforcement programs
    use revenue collection potential as a primary criterion in identifying
    cases on which to work, and AEITC cases generally have low revenue
    potential. Although all AEITC nonfiler cases are eligible to be worked on
    by various enforcement programs, IRS officials said they work on only a
    limited number for similar reasons.

    One means to improve AEITC compliance might be to send "soft notices."
    Recent IRS tests have shown that the agency has successfully reduced
    subsequent noncompliance in situations that involve relatively small
    amounts of money by sending soft notices that ask taxpayers to voluntarily
    fix their misreporting by filing an amended return or not repeating the
    action in the next year. However, high annual turnover in the AEITC
    population could undermine this approach. Another means to improve AEITC
    compliance would be to partially verify individuals' eligibility before
    they receive the advance by verifying their SSNs. IRS operates the
    Taxpayer Identification Number (TIN) Matching service and SSA maintains
    the Social Security Number Verification System (SSNVS), both of which are
    open to registered public users for the purpose of determining the
    validity of an SSN. Both have unique advantages and disadvantages that
    would come into play if employers were required to use them to verify the
    SSNs of individuals seeking AEITC. SSA emphasized that verifying
    eligibility for the AEITC is most appropriate for IRS because it is a tax
    administration issue and therefore outside the scope of SSA's mission.
    Separately, IRS could verify individuals' SSNs and take other enforcement
    steps if it had a database of AEITC applicants. However, IRS cannot create
    such as database because it does not require employers to send copies of
    the Form W-5, "Earned Income Credit Advance Payment Certificate," to them
    when an employee requests receipt of the AEITC. Despite some benefits, IRS
    officials questioned the effectiveness of such a requirement due to (1)
    the low anticipated return on investment of AEITC compared with other
    areas with noncompliance problems and (2) their experience with the prior
    Questionable W-4 program, which required employers to submit information
    to IRS on taxpayers claiming more than 10 withholding allowances or
    exemptions, that showed employers did not adhere to similar requirements
    imposed by the agency.

    We recommend that the Acting Commissioner of Internal Revenue analyze
    whether it could cost effectively and significantly reduce AEITC
    noncompliance by sending soft notices to potentially noncompliant AEITC
    recipients, requiring employers to verify the SSN of employees seeking the
    AEITC, or requiring employers to submit Forms W-5 to IRS to create an
    AEITC database. To better identify the costs and implementation issues as
    well as the likelihood for these or other options to reduce AEITC
    noncompliance, where practical, the Acting Commissioner of Internal
    Revenue should test these options to make a more fully informed judgment
    about whether any would be worthwhile. If the Acting Commissioner of
    Internal Revenue determines that none of these options would be cost
    effective and that no other remedies are viable, then the Treasury
    Secretary should inform the Congress of this and provide Treasury's
    opinion about whether the AEITC should be retained.

    In providing written comments on a draft of this report (see app. VI), the
    Acting Commissioner of Internal Revenue agreed with our recommendation and
    outlined the actions IRS would take to address that recommendation,
    including conducting further analyses and possible testing of proposed
    options for reducing AEITC noncompliance. He also stated that IRS will
    conduct its cost-benefit analyses in conjunction with a congressional
    requirement to study the impact of expanding eligibility of the AEITC to
    all EITC recipients.^4 We also provided a draft of this report to the
    Department of the Treasury and SSA and incorporated technical comments
    where appropriate. SSA emphasized that verifying eligibility for the AEITC
    is most appropriate for IRS because it is a tax administration issue and
    outside the scope of SSA's mission.

    Background

    The EITC was enacted in 1975 and was originally intended to offset the
    burden of Social Security taxes and provide a work incentive for
    low-income taxpayers.^5 It is a refundable federal income tax credit,
    meaning that qualifying working taxpayers may receive a refund greater
    than the amount of income tax they paid for the year. For tax year 2006,
    the maximum amount of EITC a taxpayer could receive was $4,536.

    Beginning in 1979, individuals could elect to receive the EITC in advance
    payments from their employer during the year along with their regular
    pay.^6 One purpose of the advance payment is to provide employees with an
    immediate reward for their work effort rather than forcing them to
    postpone receiving the credit until they file their tax returns. To get
    the credit, at any time during the year, an employee would complete the
    Form W-5 and provide it to his or her employer.^7

    Upon receiving a completed Form W-5, the employer calculates the amount of
    the AEITC payment to include with the employee's pay by considering (1)
    the employee's wages, (2) whether the employee is married or single, and
    (3) if married, whether the employee's spouse has a Form W-5 in effect
    with an employer. The AEITC payment to the employee is considered to be
    equivalent to the employer making a payment to IRS for employee income tax
    withholding and employee and employer Social Security and Medicare tax.
    When employers file their quarterly tax returns, they show the total
    payments made to employees on the AEITC payment line on Form 941,
    "Employer's Quarterly Federal Tax Return." This amount is then subtracted
    from the total amount of tax the employer owes.

    ^4 U.S. Troop Readiness, Veteran's Care, Katrina Recovery, and Iraq
    Accountability Appropriations Act of 2007, Pub. L. No. 110-28.

    ^5 26 U.S.C. Sec. 32.

    ^6 Pub. L. No.103-66 (1993). The Omnibus Budget Reconciliation Act of 1993
    limited the amount of advance payments that eligible individuals can
    receive to 60 percent of the EITC available with one qualifying child.

    ^7 The Form W-5, completed by the employee, expires at the end of each
    calendar year. Therefore, employees must resubmit the form each year if
    they want to receive the AEITC.

    At the end of the calendar year, the employer indicates the total AEITC
    payments the employee received on the employee's Form W-2. Employees are
    then required to report this amount either on their Form 1040 or Form
    1040A tax return. Assuming the employee qualified for the EITC, the AEITC
    amount received should be reported on the tax return as other taxes,
    which, in effect, subtracts the amount received from the total amount of
    any EITC. If the employee did not qualify for the EITC, he or she is still
    required to file a tax return, regardless of income level, and the AEITC
    amount paid is added to any taxes owed. Figure 1 illustrates this process
    and notes the major forms involved.

    Figure 1: AEITC Process for Employees and Employers

    An individual must meet certain requirements to qualify for the AEITC.
    Specifically, an individual must expect to (1) be able to claim the EITC
    for the current year (EITC requirements for 2006 are shown in table 1),
    (2) have at least one qualifying child, and (3) have earned income and
    adjusted gross income below a certain amount for that year. There are
    additional requirements that an individual may only have one Form W-5 in
    effect at a time and that he or she informs their employer if their spouse
    also has a Form W-5 in effect.^8 AEITC recipients can receive up to 60
    percent of the EITC benefits for one qualifying child. The maximum AEITC
    amount for 2006 was $1,648.

    Table 1: EITC Requirements for 2006 That All AEITC Recipients Must Also
    Expect to Meet

                                          Second, an individual must
                                          meet all the rules in one of   Third, an individual
    First, an individual must meet all    these columns, whichever       must meet the rules
    the rules in this column.             applies.                       in this column.
                                                           Rules if do
                                                           not have a
                                          Rules if have a  qualifying    Figuring and claiming
             Rules for everyone           qualifying child child         the EITC
    1. Adjusted gross     2. Must have    8. Child must    11. Must      15. Earned income
    income (AGI) must     a valid         meet the         be at         must be less than:
    be less than:         Social          relationship,    least age
                             Security        age, and         25 but                o $36,348
               o $36,348     number.         residency        under age             ($38,348
               ($38,348      3. Filing       tests.           65.                   for
               for           status          9. Qualifying    12. Cannot            married
               married       cannot be       child cannot     be the                filing
               filing        "Married        be used by       dependent             jointly)
               jointly)      filing          more than one    of another            if more
               if more       separately."    person to        person.               than one
               than one      4. Must be a    claim the        13. Cannot            qualifying
               qualifying    U.S. citizen    EIC.             be a                  child
               child.        or resident     10. Cannot be    qualifying
                             alien all       a qualifying     child of              o $32,001
               o $32,001     year.           child of         another               ($34,001
               ($34,001      5. Cannot       another          person.               for
               for           file Form       person.          14. Must              married
               married       2555 or Form                     have lived            filing
               filing        2555-EZ                          in the                jointly)
               jointly)      (relating to                     United                if one
               if one        foreign                          States                qualifying
               qualifying    earned                           more than             child, or
               child, or     income).                         half of
                             6.                               the year.             o $12,120
               o $12,120     Investment                                             ($14,120
               ($14,120      income must                                            for
               for           be $2,800 or                                           married
               married       less.                                                  filing
               filing        7. Must have                                           jointly)
               jointly)      earned                                                 if no
               if no         income.                                                qualifying
               qualifying                                                           child.
               child.

    Source: Excerpt of IRS Publication 596, Earned Income Credit.

    ^8 When both spouses have a Form W-5 in effect, the amount each person can
    receive is reduced to below 60 percent of the EITC maximum.

    A change in an individual's personal circumstances after submitting the
    Form W-5 could affect their eligibility for both the EITC and the AEITC.
    For example, an individual who received the AEITC, separated from his or
    her spouse during the year, and used the married filing separately filing
    status would not be eligible for the AEITC (or EITC). In such cases, when
    the individual files their tax return and reports the AEITC amount
    received, the amount would be added to any taxes due or subtracted from
    any refund.

    AEITC Use Low and May Be Difficult to Increase

    About 3 percent of the EITC recipients potentially eligible for the
    advance, about 514,000 individuals on average, elected it in each year,
    tax years 2002 through 2004, according to data employers reported on the
    Form W-2. As shown in figure 2, about 21 million taxpayers received the
    EITC each year and of these recipients, about 17 million were eligible for
    the AEITC.^9

    9 Individuals who receive the EITC without a qualifying child are not
    eligible for the AEITC.

    Figure 2: Number of EITC Recipients, EITC Recipients Potentially Eligible
    for the AEITC, AEITC Recipients, and Total Dollars They Received, Tax
    Years 2002 through 2004

    Note: This figure includes the valid, invalid name, and invalid number
    subpopulations. (see app. II).

    In total, AEITC recipients received an average of about $146 million in
    AEITC for each tax year from 2002 through 2004. Yet, those who elected it
    often received relatively few dollars from their employers. As table 2
    indicates, about half of all individuals who got AEITC received $100 or
    less each year and about 75 percent received $500 or less. Even at $100
    per year, this equates to about $8 a month, or $4 every 2 weeks, and even
    at $500 per year, this equates to about $42 a month or $19 every 2 weeks.
    The amounts most individuals received were significantly less than the
    yearly maximum, and were consistent for the 3 years we reviewed.

    Table 2: Percentage of AEITC Recipients Receiving an Amount of AEITC, Tax
    Years 2002 through 2004

                                Percentage of AEITC recipients
    Amount of AEITC received       2002      2003      2004
    $1--$100                         50        50        48
    $101--$250                       17        17        17
    $251--$500                       13        13        13
    $501--$750                        7         7         8
    $751--$1,000                      5         5         5
    $1,001--yearly maximum            7         8         8

    Source: GAO analysis of IRS data.

    Note: The AEITC yearly maximum was $1,503, $1,528, and $1,563 for tax
    years 2002, 2003, and 2004, respectively. This table includes the valid,
    invalid name, and invalid number subpopulations.

    The number of individuals who have elected the AEITC has remained low for
    many years. For example, between 1990 and 1997, AEITC use never exceeded 2
    percent of qualifying EITC recipients. IRS calculated use based on tax
    returns showing receipt of the AEITC divided by the EITC population that
    reported at least one qualifying child. Using this same methodology, use
    for tax years 2002 through 2004 was relatively the same at an average of
    0.8 percent. Our figures for 2002 through 2004 are higher than these prior
    AEITC figures because our figures are based upon the Forms W-2 that
    reported AEITC (see fig. 2). Historically, AEITC use has been based upon
    the number of individual federal tax returns that reported an amount on
    the AEITC line. The historic method excludes individuals who did not file
    a federal tax return and individuals who filed a federal tax return but
    did not report the AEITC.

    Additional demographic data about individuals who elected the AEITC are
    included in appendix III. These additional data represent new analysis
    that has not been previously available, including each recipient's filing
    method, age, and gender, and each employer's size.

    AEITC Use Has Not Increased Significantly Despite Several Targeted Efforts

    Use of the AEITC has remained low for many years despite several targeted
    efforts to increase it. There have been several federal efforts targeted
    to increase AEITC use over the last approximately 15 years, including both
    legislative and administrative changes. (A full description of these
    changes is included in app. IV.) One significant piece of legislation was
    OBRA '93, which involved the AEITC in two ways: it (1) reduced the maximum
    amount of EITC an individual could receive in advance and (2) required IRS
    to conduct outreach directly to potentially eligible AEITC recipients.
    First, OBRA '93 reduced the AEITC maximum from 100 percent to 60 percent
    of the maximum credit available to a taxpayer with one qualifying child.
    This change was made to improve compliance and lessen concerns that
    recipients would owe the difference when filing their federal tax return,
    which was thought to discourage AEITC use.

    Second, OBRA '93 directed IRS to send notices to taxpayers who were likely
    to be eligible for the AEITC for 2 years and directed the Secretary of the
    Treasury to study the effect of the notice program on AEITC use. Only some
    information is available about the first notice mailing, which occurred in
    1994.^10 For the first notice mailing, IRS mailed Publication 1235,
    "Advance Earned Income Tax Credit Brochure," and the Form W-5 to about
    13.5 million taxpayers who were potential AEITC candidates during tax year
    1993 informing them about the AEITC. AEITC use increased about 1 percent
    following this effort; however, because other outreach efforts were
    ongoing during this time, IRS could not conclude that the increase was
    attributable to the notice or any other effort specifically.

    In 1997, IRS mailed the notice to about 6 million taxpayers who claimed
    the EITC in tax year 1996, but did not report receiving AEITC on their
    federal tax return. With this second mailing, IRS created two groups, a
    test group of about 60,000 taxpayers that received the notice and a
    control group of about 60,000 taxpayers with similar characteristics who
    did not. Results from the IRS report indicated that about 1.27 percent
    (771 taxpayers) of the tax returns in the test group reported the AEITC
    compared to 0.51 percent (309 taxpayers) of returns in the control group.
    The summary report concluded that further efforts to increase AEITC use
    substantially are unlikely to succeed.^11 Further, the study recommended
    that notification of EITC recipients about the advance not be repeated.

    Some of IRS's administrative changes include outreach to specific groups
    and changes to publications. For example, after our 1992 report, the White
    House, the Treasury Department, and IRS conducted extensive EITC and AEITC
    outreach efforts, including a 1993 announcement of the AEITC by President
    Clinton. Other outreach efforts included IRS contacts with charitable,
    social welfare, and minority groups to encourage awareness of the EITC and
    AEITC among their memberships. IRS also contacted a number of employer
    organizations to encourage them to publicize the AEITC with their
    memberships. IRS also made changes to its forms, developed print and video
    products, and increased speaker seminars to inform the public about the
    AEITC. For example, IRS developed publicity materials, such as grocery bag
    and milk carton art, brochures, and posters; provided information in the
    Small Business Taxpayer Education Program guide; and increased outreach
    speaker seminar efforts.^12

    ^10For the first notice mailing, specific information on how the population
    was selected, for example, is not known.

    ^11IRS, National Research Office, Advance Earned Income Tax Credit 1994
    and 1997 Notice Study, A Report to Congress (Washington, D.C.: August
    1999).

    Presently, IRS continues to conduct outreach about the AEITC as part of
    its EITC outreach efforts. IRS focuses its outreach to large employer
    organizations or to specific large employers, which then promote the AEITC
    to employers or employees.

    Future AEITC Growth Is Unlikely

    Increasing AEITC use in the future is unlikely for several reasons, but
    perhaps primarily because of potential recipients' preferences and high
    AEITC turnover. Interviews with IRS officials, other experts, and our
    prior AEITC work suggest that those eligible for the AEITC prefer
    receiving the EITC in a lump sum after they file their federal tax return
    instead of receiving relatively small portions spread throughout the
    year.^13 Another reason is that, despite the reduction in the yearly AEITC
    maximum to 60 percent of the maximum credit available to a taxpayer with
    one qualifying child, results from an IRS-funded study using focus groups
    of EITC participants and interviews we conducted with experts indicated
    that potential recipients continue to have concerns that they would
    receive more AEITC than they were ultimately entitled to and that they
    would owe the difference when filing their federal tax return.

    In addition, AEITC growth is adversely affected by individuals who elect
    the AEITC and fail to elect it again, i.e., turnover. As table 3
    indicates, more than half of the individuals who elected the AEITC did so
    for the first time since 1999 in either tax year 2002, 2003, or 2004. With
    the overall AEITC use remaining relatively constant over the 3 years, this
    indicates the large number of yearly first-time recipients was almost
    equally offset by existing recipients forgoing the AEITC in a following
    year.^14 The percentage of AEITC first-time recipients is much higher than
    the percentage of first-time EITC recipients, which is slightly less than
    one-third. Also, of the individuals who elected the AEITC for the first
    time in 2002 or 2003, about 28 percent elected it again in the following
    year, 2003 or 2004, respectively, while the remainder did not elect it
    again in the subsequent year. Conversely, only about 98,000 (9 percent)
    individuals elected the AEITC consecutively in all 3 years, 2002 through
    2004.

    ^12The Small Business Taxpayer Education Program provides help to those
    who are starting or already have a small business and need information in
    such areas as taxes, recordkeeping, accounting practices, and completing
    federal business and employment tax returns. Much of the assistance is
    free.

    ^13We identified other studies with limited populations that also found
    taxpayers preferred receiving a lump sum instead of smaller periodic AEITC
    payments; for example, Jennifer Romich and Thomas Weisner, "How Families
    View and Use the EITC: Advance Payment vs. Lump Sum Delivery," National
    Tax Journal (December 2000).

    Table 3: Frequency of Individuals Electing the EITC and AEITC, Tax Years
    2002 through 2004

                                        Tax year 2002 Tax year 2003 Tax year 2004
    EITC recipients                     20,918,823    21,431,377    21,721,218
    First-time EITC recipients           6,077,104     5,313,089     4,842,922
    (percentage) ^a, b
                                                (29%)         (25%)         (22%)
    AEITC recipients                       531,799       503,382       507,957
    First-time AEITC recipients            271,600       259,579       259,282
    (percentage) ^a, c
                                                (51%)         (52%)         (51%)
    First-time AEITC recipients who        198,096       187,871           N/A
    did not elect the advance in the
    subsequent year (percentage) ^d          (73%)         (72%)
    First-time AEITC recipients who         73,504        71,708           N/A
    elected the advance in the
    subsequent year (percentage) ^d          (27%)         (28%)
    Number of individuals who                         97,998
    consecutively received the AEITC
    (percentage) ^e                                    (9%)

    Source: GAO analysis of IRS data.

    Note: N/A means not applicable. Tax year 2004 data are not applicable
    because we did not look at any subsequent years. All AEITC figures include
    the valid, invalid name, and invalid number subpopulations.

    aFirst-time EITC recipients are based upon how often a primary or
    secondary taxpayer filed a federal tax return receiving EITC for the first
    year since 1999. First-time AEITC recipients are based upon the first year
    an individual (defined by unique SSN) received AEITC since 1999. IRS
    officials agreed this approach is a reasonable method to compare AEITC and
    EITC first-time use.

    bPercentage is out of EITC recipients.

    cPercentage is out of AEITC recipients.

    dPercentage is out of first-time AEITC recipients.

    eNumber of individuals who consecutively received the AEITC are
    individuals who received the advance each year in tax years 2002 through
    2004. Percentage is of individuals who received the AEITC each year in tax
    years 2002 through 2004 out of all recipients who received it at least
    once during these same years (1,133,908 individuals). The percentage who
    received it twice during these years is 19 percent (213,234) and once is
    73 percent (822,676). Percentages may not add due to rounding.

    ^14 One reason an AEITC recipient may not elect the advance in a
    subsequent year is because he or she no longer meets the eligibility
    requirements.

    High Noncompliance Exists with AEITC Requirements

    Overall, as many as 80 percent of all AEITC recipients did not comply with
    or made errors involving one of the three AEITC requirements that we
    reviewed, and they received about $282 million when the 3 years, 2002
    through 2004, are aggregated. Some taxpayers were noncompliant with more
    than one requirement. Those requirements are having a valid SSN, filing a
    federal tax return, and reporting the proper amount of AEITC received on
    the tax return (see fig. 3).

    Figure 3: Percentage of AEITC Recipients Compliant and Noncompliant with
    at Least One AEITC Requirement, Tax Years 2002 through 2004

    Note: The pie chart includes the valid, invalid name, and invalid number
    subpopulations.

    aThis includes the invalid name and invalid number subpopulations.

    bThis includes the valid, invalid name, and invalid number subpopulations.

    cThis is of individuals who filed a federal tax return in the valid,
    invalid name, and invalid number subpopulations.

    Specifically, in tax year 2002, we found that individuals were
    noncompliant with at least one of three requirements we reviewed 79
    percent of the time and they received about $93 million of AEITC. For tax
    year 2003 and 2004, individuals were noncompliant with at least one
    requirement 78 percent (about $91 million) and 79 percent (about $98
    million) of the time, respectively.

    Some of the noncompliance we identified could have resulted from IRS or
    employer clerical errors or improper reporting by the taxpayer. Therefore,
    some of the errors may be correctible or were corrected by filing an
    amended return. IRS cannot readily identify the number of amended returns
    specifically associated with the AEITC because such returns combine
    several credits onto one line. The explanation attached to the amended
    return would provide details on the change and any analysis of the
    explanation would be a manual process.

    About 20 Percent of AEITC Recipients Had an Invalid SSN

    AEITC recipients are required to provide their employer with a valid SSN
    for the Form W-2.^15 As table 4 illustrates, about 20 percent (more than
    100,000) of AEITC recipients each year may not have been eligible for the
    advance because they did not have a valid SSN on their Form W-2.
    Collectively, these individuals received between $37 million and $39
    million in AEITC each year. The data are consistent over the 3 years
    reviewed.^16

    ^15 AEITC recipients must expect to be able to claim the EITC, which
    requires that taxpayers and their spouses, if filing a joint return, have
    valid SSNs issued by SSA to all U.S. citizens or individuals eligible to
    work.

    ^16If any portion of the invalid SSNs is attributable to aliens not
    currently authorized to work in the United States, the number of invalid
    SSNs could be affected if the Congress changes policies regarding such
    aliens. See Treasury Inspector General for Tax Administration, The
    Internal Revenue Service's Individual Taxpayer Identification Number
    Creates Significant Challenges for Tax Administration, 2004-30-023
    (January 2004), for more information about aliens' use of invalid SSNs.

    Table 4: AEITC Recipients and Recipients with Invalid SSN on Form W-2,
    Individuals and Dollars, Tax Years 2002 through 2004

                         Tax year 2002       Tax year 2003       Tax year 2004
                      Individuals Dollars Individuals Dollars Individuals Dollars
    AEITC              531,799    $145     503,382    $143     507,957    $150
    recipients                 million             million             million
    AEITC              113,025     $37     104,856     $37     109,622     $39
    recipients                 million             million             million
    with an              (21%)               (21%)               (22%)
    invalid SSN on               (26%)               (26%)               (26%)
    Form W-2
    (percentage)^a

    Source: GAO analysis of IRS data.

    aPercentage is out of AEITC recipients. This analysis includes the invalid
    name and invalid number subpopulations.

    For purposes of this report, invalid SSNs include instances where the SSN
    did not match SSA's records (i.e., the number was never assigned by SSA)
    and the SSN/name combinations reported on the Form W-2 did not match SSA
    records.^17 Some of these individuals were likely eligible for the AEITC.
    For example, a name/SSN mismatch could include instances when a woman who
    receives the AEITC marries and changes her name with her employer but not
    with SSA. This could result in the employer issuing a Form W-2 in the new
    name, but IRS and SSA only identifying her by the former name.^18

    Individuals who file a federal tax return are required to include a valid
    SSN on their return.^19 An individual who provides an invalid SSN on the
    tax return is not compliant in meeting AEITC requirements and may also
    violate the Social Security Act.^20 Such an individual is also required to
    provide a valid SSN to their employer for income tax withholding purposes
    and for purposes of certifying eligibility for the AEITC and could be
    subject to a penalty for failure to do so.^21 Further, if the individual
    does not file a valid SSN, IRS is unable to assess the recipient's federal
    tax liability and SSA cannot credit the recipient for money withheld for
    Social Security purposes.^22 Also, because taxpayers often do not report
    receipt of the advance on their tax return, IRS cannot determine whether
    the taxpayer owes money or deserves a refund.

    ^17There could be some instances where the SSN reported on the Form W-2
    does not match the SSN the taxpayer used on the tax return. Even still,
    IRS uses the SSN on the Form W-2 and other third party forms for document
    matching to identify noncompliance such as wage underreporting.

    ^18 Of the more than 100,000 AEITC recipients with an invalid SSN, most
    involved a SSN that did not match the individual's name on the Form W-2.

    ^19 IRC S 6109(a)(1).

    ^20 42 U.S.C. S 408.

    ^21 IRC S6723.

    Almost 40 Percent of AEITC Recipients Did Not File the Required Federal Tax
    Return

    All AEITC recipients are required to file a federal tax return, regardless
    of the amount of their income, which is generally the primary basis for
    determining whether a return is required to be filed. Table 5 shows that
    between 36 and 40 percent, about 200,000 AEITC recipients, did not file a
    required federal tax return each year. Collectively, these individuals
    received between $42 million and $50 million of AEITC benefits.^23

    Table 5: AEITC Recipients and Recipients Who Did Not File a Tax Return,
    Individuals and Dollars, Tax Years 2002 through 2004

                         Tax year 2002       Tax year 2003       Tax year 2004
                      Individuals Dollars Individuals Dollars Individuals Dollars
    AEITC              531,799    $145     503,382    $143     507,957    $150
    recipients                 million             million             million
    AEITC              192,857     $42     186,423     $44     200,706     $50
    recipients who             million             million             million
    did not file a       (36%)               (37%)               (40%)
    federal tax                  (29%)               (31%)               (33%)
    return
    (percentage)^a

    Source: GAO analysis of IRS data.

    aPercentage is of AEITC recipients. This analysis includes the valid,
    invalid name, and invalid number subpopulations.

    About 56,000 to 60,000 of the about 200,000 individuals who did not file
    the required tax return (about 30 percent) had an invalid SSN on the Form
    W-2 each year, as shown in table 6. Having a valid SSN is another AEITC
    requirement, discussed previously, which means these individuals were
    noncompliant or made an error with at least two AEITC requirements.

    ^22 IRS can file a substitute return for people who do not voluntarily
    file. IRS assesses a tax liability and notifies the taxpayer of any tax
    due based on the substitute tax return, which is created from available
    Form W-2 and other information.

    ^23 There could be instances where our methodology did not detect a filed
    tax return; for example, when a taxpayer's SSN on the Form W-2 might have
    been incorrect. See our scope and methodology (app. II).

    Table 6: AEITC Recipients, Recipients Who Did Not File a Federal Tax
    Return, and Recipients Who Did Not File a Tax Return and Had an Invalid
    SSN on the Form W-2, Individuals and Dollars, Tax Years 2002 through 2004

                         Tax year 2002       Tax year 2003       Tax year 2004
                      Individuals Dollars Individuals Dollars Individuals Dollars
    AEITC              531,799    $145     503,382    $143     507,957    $150
    recipients                 million             million             million
    AEITC              192,857     $42     186,423     $44     200,706     $50
    recipients who             million             million             million
    did not file a       (36%)               (37%)               (40%)
    federal tax                  (29%)               (31%)               (33%)
    return
    (percentage)
    ^a
    AEITC               59,607     $20      55,601     $20      58,370     $21
    recipients who             million             million             million
    did not file a       (31%)               (30%)               (29%)
    federal tax                  (48%)               (45%)               (42%)
    return and had
    an invalid SSN
    on Form W-2
    (percentage)
    ^b

    Source: GAO analysis of IRS data.

    aPercentage is of AEITC recipients. This analysis includes the valid,
    invalid name, and invalid number subpopulations.

    bPercentage is of AEITC recipients who did not file a federal tax return.
    An unknown portion of these recipients may have corrected the SSN error
    and subsequently filed a tax return. This analysis includes the invalid
    name and invalid number subpopulations.

    There are several reasons why a significant number of AEITC recipients
    might not have filed a federal tax return. For example, depending on their
    filing status, age, and type of income they receive, recipients may not
    have had a filing responsibility other than for the AEITC and they may not
    have remembered or understood they must file a return. In addition, AEITC
    recipients may not have filed because they were not initially eligible or
    they became ineligible for the AEITC because of a change in their personal
    circumstances, and filing would require them to pay back the AEITC they
    received.

    When individuals are required to file a federal tax return and do not, IRS
    cannot readily identify whether the individual was eligible for the
    advance or whether they owed IRS any of the amounts they received.
    Conversely, by not filing a federal tax return, some individuals did not
    receive additional EITC monies that they could only receive had they
    filed.

    About Two-Thirds of AEITC Recipients Who Filed a Federal Tax Return Misreported
    the Amount of AEITC They Received

    All AEITC recipients are required to report on their federal tax return
    the amount of AEITC they received according to the Form(s) W-2. Reporting
    this amount allows the IRS to determine whether the taxpayer received too
    much AEITC, and owes money back to the IRS, or whether the taxpayer is
    entitled to additional amounts of the EITC.

    Of the approximately 60 percent (about 300,000) AEITC recipients who filed
    a federal tax return, two-thirds misreported the amount they received in
    tax year 2002 through 2004, as shown in table 7. Misreported means that
    the total amount of AEITC reported on the Form W-2 does not match the
    AEITC amount reported on the federal tax return. Approximately one-third
    of the federal tax returns correctly matched to the Form(s) W-2 AEITC
    amount. Of those that misreported, the vast majority did not report
    receiving any AEITC.

    Table 7: AEITC Matches and Mismatches between Form(s) W-2 and Filed Tax
    Returns, Tax Years 2002 through 2004

                         Tax year 2002        Tax year 2003        Tax year 2004
                       Number      Dollars  Number      Dollars  Number      Dollars
    Number of      342,841 $108,189,196 320,588 $101,078,453 309,724 $102,512,732
    individuals
    who filed
    federal tax
    returns^a
    Number of      112,421  $51,457,254 111,266  $52,246,111 106,980  $52,338,650
    returns that
    matched the      (33%)        (48%)   (35%)        (52%)   (35%)        (51%)
    Form(s) W-2
    AEITC amount
    (percentage)^b
    Number of      230,420  $56,731,942 209,322  $48,832,342 202,744  $50,174,082
    mismatches
    between          (67%)        (52%)   (65%)        (48%)   (65%)        (49%)
    Form(s) W-2
    and filed
    federal tax
    return
    (percentage)^b
    Number of      222,691  $53,343,102 202,152  $45,487,033 195,571  $46,806,223
    mismatches due
    to               (97%)        (94%)   (97%)        (93%)   (96%)        (93%)
    nonreporting
    of AEITC
    (percentage)^c
    Number of        4,996   $2,349,197   4,779   $2,389,854   4,881   $2,337,603
    mismatches due
    to                (2%)         (4%)    (2%)         (5%)    (2%)         (5%)
    underreporting
    of AEITC
    (percentage)^c
    Number of        2,733   $1,039,643   2,391     $955,455   2,292   $1,030,256
    mismatches due
    to                (1%)         (2%)    (1%)         (2%)    (1%)         (2%)
    overreporting
    AEITC
    (percentage)^c

    Source: GAO analysis of IRS data.

    Note: Percentages may not add due to rounding. This table includes
    individuals who filed a tax return in the valid and invalid name
    subpopulations.

    aThe total number of filed federal tax returns is greater than the total
    number of AEITC recipients who filed a return because there were some
    dependents who received AEITC and were listed on more than one federal tax
    return. The total number of AEITC recipients who filed a federal tax
    return can be calculated using table 5 by subtracting the number of AEITC
    recipients who did not file a federal tax return from the number of AEITC
    recipients.

    bWe considered a match to be anything plus or minus a dollar on the Form
    W-2 in order to allow for taxpayer rounding. We tested the sensitivity of
    this result by using a difference between the AEITC reported on the Form
    W-2 and the tax return of up to $100 and the results were similar.
    Percentage is of number of individuals who filed federal tax returns.

    cPercentage is of number of mismatches between Form(s) W-2 and filed
    federal tax returns.

    Taxpayers may not report the amount of AEITC they received because they
    either forget or do not know they are required to do so. Underreporting
    can occur when there is a computation error involving multiple Forms W-2,
    a taxpayer disagrees with the amount reported on the Forms W-2, or there
    is willful noncompliance. IRS officials in the AUR program pursue some
    AEITC cases where taxpayers either underreport or do not report receipt of
    the AEITC. These procedures are discussed in detail in a following
    section.

    Due to the high number of mismatches, many of the AEITC recipients who
    also claimed the EITC likely received excess benefits. For example, of the
    222,691 taxpayers who did not report receipt of the AEITC on their tax
    return in tax year 2002, almost half went on to claim the EITC. We
    determined that those taxpayers received nearly $22 million in excess
    AEITC benefits. For the 3 years, 2002 through 2004, taxpayers received a
    total of about $64 million in excess AEITC benefits.

    AEITC Recipients Were Noncompliant with Other Program Requirements

    Additional noncompliance or errors existed with other program
    requirements, such as receiving excess AEITC. Details and demographic
    information on the noncompliant individuals are in appendix V.

    IRS's AEITC Compliance Procedures Have Limited Effectiveness and Options to
    Better Address Noncompliance Have Advantages and Disadvantages

    IRS's Submission Processing is responsible for receiving, processing, and
    archiving the nation's federal tax returns, payments, and information
    returns. In the context of AEITC, Submission Processing attempts to catch
    mismatches between both paper and electronic tax returns and Forms W-2
    (see fig. 4).

    Figure 4: Submission Processing Procedures for Paper and Electronic Tax
    Returns Reporting AEITC

    aAfter some initials checks, such as comparing the EITC/AEITC line of a
    tax return to the Form W-2(s), all paper returns go to Submission
    Processing staff, who enter select data from the Form 1040 into an
    electronic database.

    bEffective January 2, 2007, at our suggestion, Submission Processing
    changed its selection criteria to include filing status.

    Between 32 percent and 22 percent of tax returns reporting an AEITC amount
    were filed on paper between tax years 2002 and 2004, respectively. If a
    paper tax return has an entry on either the AEITC or EITC lines on the
    Form 1040, Submission Processing tax examiners are required to ensure that
    the AEITC amount reported on the return matches the amount in box 9 of the
    Form(s) W-2, which records the amount of AEITC paid by the employer to the
    employee.^24

    If the amounts on the AEITC line of the tax return and Form W-2(s) match,
    the tax examiner takes no further action. If the amounts differ (e.g., the
    tax return reports a lesser amount than is reflected on the Form(s) W-2)
    the examiner is required to adjust the entry on the return to equal the
    total AEITC amount from the Form(s) W-2. All paper returns then go to
    staff who enter data from the Form 1040 into an electronic database.

    After an examiner makes an adjustment, IRS sends a letter to the taxpayer
    explaining that an adjustment was made and it was based on the mismatch
    between the tax return and the Form(s) W-2. IRS sent 282 and 220 such
    letters in tax years 2003 and 2004, respectively.^25 Submission
    Processing's role is to ensure that the return amount is consistent with
    the Form W-2, not to determine which of the differing numbers accurately
    reflects the amount of AEITC actually paid to the employee. If the
    taxpayer disagrees with the adjustment, e.g., believes that the amount on
    the Form(s) W-2 is incorrect, the taxpayer can dispute it.

    Between 68 percent and 78 percent of returns reporting an AEITC amount
    were filed electronically between tax years 2002 and 2004. Submission
    Processing runs a computer check to find any mismatches between the
    amounts on the electronic tax returns and the electronic Form(s) W-2. When
    mismatches are found, Submission Processing rejects the return and sends
    it to the taxpayer or preparer to correct and retransmit to IRS.

    In most tax preparation software, once a user enters an amount from the
    Form(s) W-2, the amount is automatically transferred to the appropriate
    line of the tax return. Thus, if the user errs in entering the proper
    amount from the Form W-2, the software would enter this erroneous number
    on the tax return. As a result, Submission Processing rarely identifies
    AEITC tax return/Form(s) W-2 mismatches because the original Form(s) W-2
    from the employer(s) is rarely included in electronic filings.^26 IRS
    rejected 172 electronically filed returns reporting AEITC in tax year 2004
    and 147 in tax year 2003. Adding these mismatches to the paper return
    mismatches, Submission Processing found 392 mismatches in tax year 2004
    and 429 in tax year 2003.

    ^24 Because AEITC is an advance payment of the EITC, filers who claim the
    EITC are required to reduce the EITC by any AEITC received. By examining
    the Form(s) W-2 of EITC claimants for AEITC payments, the IRS attempts to
    ensure that excess amounts of EITC are not claimed.

    ^25 Submission Processing did not have tax year 2002 data available.

    ^26 The electronic Form (s)W-2, which is an iteration of a user's entries
    into the tax preparation software, is generally included in the electronic
    filing submission.

    Next, Submission Processing sends the return through its Error Resolution
    System (ERS) when the AEITC amount on the Form 1040 meets certain
    selection criteria.^27 If ERS finds that AEITC exceeds this amount, a tax
    examiner matches the Form 1040 AEITC amount to the Form W-2(s). If they
    match, no action is taken, and the return is posted in IRS's Masterfile,
    the agency's central repository for taxpayer information. If there is a
    mismatch, IRS adjusts the return to match the Form(s) W-2, and IRS sends a
    letter to the taxpayer describing the error and the ERS correction.
    Taxpayers who disagree with the change can dispute it. The ERS process
    thus serves as a back-up check in case the earlier physical or electronic
    processes missed these AEITC mismatches. ERS examined 3,380 tax returns
    with AEITC in tax year 2004. IRS was not able to tell us how many of these
    returns involved mismatches.

    Prior ERS selection criteria would not have identified some returns for
    individuals when the Form(s) W-2 had AEITC amounts that were above the
    legal maximums, but below the ERS selection criteria. While interviewing
    Submission Processing officials, we suggested that the criteria be
    modified and associated with filing status. IRS made such changes to the
    criteria, effective January 2, 2007.

    IRS's Procedures to Verify SSNs Have Limited Effectiveness for AEITC Recipients
    Due to Taxpayer Noncompliance in Reporting and Filing

    Submission Processing's procedures have limited effectiveness in verifying
    that AEITC recipients have a valid SSN because, as previously noted, many
    individuals do not file the required tax return and, for those who do,
    most do not report receipt of the advance.

    For both paper and electronically filed returns, Submission Processing
    checks IRS's Data Master (DM-1) file, which is a database that includes,
    among other things, all validly issued SSNs and the individual's name
    associated with each SSN. Submission Processing rejects electronically
    filed tax returns with an invalid SSN on the Form 1040, including those
    from taxpayers who received the AEITC, and sends back the tax return to
    the taxpayer for correction before processing. For returns filed on paper
    with an invalid SSN on the Form 1040, Submission Processing processes the
    return, but disallows certain credits and exemptions, such as the EITC. If
    the taxpayer's SSN is invalid and the AEITC is claimed on a paper return,
    Submission Processing processes any AEITC reported. Since the AEITC is
    reported as tax, it will either offset all or part of any refund due or,
    if no refund is due, require the taxpayer to pay back the full AEITC
    amount.

    ^27 ERS is the system for examining and correcting electronic and paper
    individual income tax returns rejected due to taxpayer and processing
    errors. ERS treats paper and electronic returns in the same way.

    Thus, of the approximately 514,000 individuals who received the AEITC each
    year between tax years 2002 through 2004, Submission Processing's
    procedures would apply to about 118,000 taxpayers--those who filed and
    reported receipt of the advance. For nonfilers, Submission Processing
    cannot verify SSNs because there are no tax returns---the basis of its
    examination. While Submission Processing performs a SSN verification for
    those who file and do not report receipt of the AEITC, it is not effective
    for the advance since the advance is not reported on the return.

    Many Taxpayers Underreported AEITC and IRS Worked on a Limited Number of These
    Cases, Some of Which Submission Processing Did Not Find

    After a return has been processed, the next point when IRS might identify
    and correct AEITC noncompliance is when it matches tax returns to other
    documents it receives. Overall, each year AUR identifies about 14 million
    discrepancies between taxpayer income and deduction information submitted
    by third parties and amounts reported on individual income tax returns.
    AUR has the resources to only work on a fraction of these cases each year
    and uses criteria, such as revenue collection potential, for case
    selection.

    For AEITC, AUR compares the amount of AEITC that employers report on a
    taxpayer's Form W-2 to the amount reported on an individual's tax return
    (see fig. 5). AUR receives this information in separate databases from SSA
    and undertakes these comparisons in August and December of each year--well
    after Submission Processing has completed its review of the returns and
    associated Forms W-2.

    Figure 5: AUR Program Procedures to Resolve Discrepancies between AEITC
    Amounts on Forms W-2 and Tax Returns

    Generally, AUR does not take action when the AEITC amounts match the
    amounts reported on the return or when the discrepancy does not meet IRS
    case selection criteria. For example, for tax year 2003, our data show
    that there were about 209,000 tax returns where the AEITC amount did not
    match the amount on taxpayers' Forms W-2, primarily because the returns
    failed to report any AEITC or underreported the amount. AUR identified
    about 25,000 of those cases in tax year 2003 as potential cases on which
    to work.

    In tax year 2003, Submission Processing identified 429 instances where the
    amount of AEITC reported on the tax return was less than the amount on the
    Forms W-2, which was much fewer than the about 25,000 mismatches detected
    by AUR that year. The mismatches involving individuals who filed paper
    returns and reported receiving the AEITC should have been caught by
    Submission Processing because its examiners are supposed to match the
    amount reported on the return with the Form(s) W-2. However, Submission
    Processing examiners review huge volumes of returns and it can be a
    challenge to identify the relatively few with AEITC.

    Because AUR does not break down its AEITC cases by filers who underreport
    and filers who fail to report any AEITC amount or by filers of paper
    versus electronic returns, it is not possible to determine exactly how
    many AUR cases should have been caught by Submission Processing. AUR
    officials told us that it would be difficult for them to routinely break
    out this information in this way because this would require new computer
    programming and the budget for new programming requests was reduced for
    fiscal year 2007.

    In accordance with return processing procedures, if Submission Processing
    identifies an underreporter, it reduces the size of the refund that will
    be sent to the taxpayer. Thus, using Submission Processing, rather than
    AUR, better protects revenue because the erroneous EITC amounts are never
    paid to the taxpayer. If AUR works on the case, it assesses the tax owed,
    but further IRS action is required to collect the actual
    overpayment--through a future refund offset or a current effort to collect
    the refund paid erroneously.

    Although catching AEITC underreporting in Submission Processing would
    better protect revenue than do AUR processes, the benefits to improving
    Submission Processing to catch AEITC errors may already be small and could
    get smaller. This is because the number of EITC returns filed
    electronically is more than 68 percent and has been growing and, as
    previously noted, Submission Processing identifies few mismatches for
    returns that are filed electronically because the electronic Form W-2 is
    an iteration of the user's entries. In its July 2006 report, the Treasury
    Inspector General for Tax Administration recommended that IRS reemphasize
    the use of the current AEITC review procedures for paper returns, but
    agreed with IRS that it could not implement additional procedures for
    electronic returns because IRS is unable to fully verify the accuracy of
    the Form(s) W-2 during electronic processing of returns.

    AUR worked on about twice as many AEITC cases in tax year 2003 as in the
    previous year. The total amount of tax assessed in these cases in tax year
    2003 was more than three times the amount in the previous year, and the
    amount assessed per case increased about 71 percent, from $555 to $947,
    which is near the average AUR assessment of about $1,000.^28 These trends
    were either holding steady or improving for the 84 percent of tax year
    2004 cases for which we had data when we completed our review. The number
    of cases in which the taxpayer fully agreed with the assessment rose from
    about 29 percent in tax year 2002 to about 41 percent in tax year 2003.
    The number of cases in which IRS withdrew the assessment, generally after
    the taxpayer provided documentation that it was erroneous, dropped from
    about 15 percent in tax year 2002 to about 4 percent in tax year 2003.

    ^28 AUR categorizes a case as an AEITC case if AEITC is the primary issue,
    responsible for at least 80 percent of the increased tax liability. Thus,
    the total amount assessed in each AEITC case may include other
    underreported amounts. The total amount assessed is not necessarily the
    total amount that IRS collects from the taxpayer.

    IRS Works on a Limited Number of AEITC Nonfiler Cases

    As previously noted, from tax years 2002 through 2004, about 40 percent of
    the individuals who had a Form W-2 reporting that they received AEITC did
    not file a tax return as required by law.

    All nonfiler cases, including AEITC nonfiler and other lower dollar
    nonfiler cases, are eligible to be worked on by IRS's Wage and Investment
    and Small Business/Self Employed divisions. IRS's policy dictates that
    some lower dollar cases and even some cases in which nonfilers are due a
    refund may be worked on to ensure that all kinds of cases have the
    possibility of being worked on. Still, a key criterion that IRS uses to
    determine cases on which to work is potential revenue or the anticipated
    net balance due. The higher this amount, the more likely the case will be
    worked on. IRS does not track the total number of nonfiler cases worked on
    or the kinds of income or credits taken by the nonfilers whose cases were
    worked on. Because IRS selects cases based on these criteria, IRS
    officials said they worked on few AEITC nonfiler cases.

    Beyond AEITC nonfiler cases potentially being worked on by Wage and
    Investment and the Small Business/Self Employed divisions, these cases are
    also eligible to be worked on by other IRS programs. For example, the
    automated collection system involves calls from IRS staff to taxpayers
    asking them to file a return or explain why they believe filing is not
    required.^29 IRS's automated substitute for return program involves
    collection staff preparing a tax return on behalf of a nonfiler based on
    third-party and other information that IRS has available. Once a return
    has been created, IRS can act to collect any taxes due.

    During 2005 through 2006, IRS conducted a test to determine whether
    receipt of AEITC should be a criterion to determine nonfiler cases on
    which to work. The test involved working on cases from tax years 2000
    through 2003 for 433 taxpayers drawn from a sample of taxpayers who did
    not file a return in tax year 2002, but did receive the AEITC that year,
    and whose income was between $35,000 and $50,000 for that year.^30 The
    cases were worked on in the same way that IRS works on other nonfiler
    cases.

    ^29 The automated collection system primarily focuses on collecting taxes
    from taxpayers who are delinquent in paying assessed taxes.

    In interviews with IRS officials about the AEITC nonfiler test, we found
    that the agency's test plan lacked documentation and detail, such as test
    justification, likely costs and benefits, and implementation details. It
    also lacked a rationale for some important decisions underlying the test
    and some changes implemented after the test began were also not well
    documented. In our report on three tests conducted by IRS in 2004 to
    address leading sources of EITC errors, we noted that the lack of such
    documentation hindered monitoring and oversight and did not foster a
    common understanding of the tests among management and staff.^31 One of
    our recommendations was that the rationale for key decisions on such tests
    be documented, and the Commissioner of Internal Revenue agreed with that
    recommendation.

    Because IRS had not completed its evaluation of the test as of June 2007,
    the agency has not decided whether AEITC should be a criterion to
    determine nonfiler cases on which to work. Regardless of the agency's
    decision, however, it is unlikely to significantly reduce the number of
    AEITC nonfilers because any increase in cases worked on would likely
    represent only a small number of such nonfilers, relative to both the
    total number of AEITC nonfilers and all nonfiler cases worked on by IRS.

    Collection Handles Few AEITC Cases

    All AEITC cases are eligible to be worked on in IRS's collection program;
    however, it generally does not work on cases involving AEITC because the
    amounts involved are below selection criteria that determine which cases
    to pursue.

    Collection does not keep track of the specific types of income and credits
    claimed by the individuals whose cases they handle. Still, collection
    officials stated that they worked on few, if any, cases involving the
    AEITC. Instead, these cases go into "deferral status," which means any
    refund the taxpayer is due will be reduced until the balance due has been
    paid off. Like other taxpayers with an outstanding tax liability, these
    taxpayers would also get a notice stating how much they owe.

    ^30 IRS officials said they decided to work on the cases for all 4 years,
    even if they did not involve the taxpayer receiving the AEITC in some of
    those years so as to bring taxpayers in these cases into full compliance.

    ^31 GAO, Earned Income Tax Credit: Implementation of Three New Tests
    Proceeded Smoothly, but Tests and Evaluation Plans Were Not Fully
    Documented, [34]GAO-05-92 (Washington, D.C.: Dec. 30, 2004).

    Collection had an effort under way to work on cases under its selection
    criteria by setting up automatic monthly installment arrangements and
    notifying taxpayers that they were expected to begin paying what they
    owed. Officials said that too many taxpayers ignored the arrangements, and
    as a result, the program was determined to be cost prohibitive. The
    program was therefore discontinued.

    IRS Audits and Criminal Investigation Identified a Small Number of AEITC Cases

    IRS annually audits about 500,000 of the more than 21 million tax returns
    that claim the EITC. With only about 3 percent of EITC recipients
    potentially eligible for the advance receiving it, only a small number of
    the audited returns are likely to involve the AEITC.^32 When IRS audits
    tax returns claiming the EITC, an examiner is required to determine if the
    taxpayer was eligible for it, whether the taxpayer took the AEITC and, if
    so, whether the taxpayer reported the correct amount. If the examiner
    determines that the taxpayer was not eligible for the EITC, then the AEITC
    is disallowed.

    In addition, Criminal Investigation, which investigates potential criminal
    violations of the tax code and related financial crimes, has identified
    six cases associated with the AEITC since 2001. Five of the six cases
    involved refund fraud based on individuals creating fake businesses in
    order to obtain the AEITC. The other case involved a business owner
    attempting to evade employment tax by falsely signing up employees for the
    AEITC, but not including the credit in their paychecks.

    Soft Notices Have Increased Compliance in Situations Similar to AEITC, but
    Turnover and Difficulty Locating Recipients May Limit Effectiveness for AEITC

    Because IRS's enforcement resources cannot fully cover all areas of
    noncompliance, including AEITC noncompliance, the agency has tried to cost
    effectively increase voluntary compliance in some areas that involve
    relatively small amounts of money by mailing taxpayers soft notices. Soft
    notices are letters that ask taxpayers to comply with a certain
    requirement in the future or, if the notice informs them that they are not
    entitled to a benefit that they received, to file an amended return.

    ^32 IRS does not track the number of AEITC cases that are audited.

    While IRS officials said there have not been any soft notices specifically
    targeting AEITC noncompliance, we reviewed the results of three tests that
    involved taxpayers who were not filing accurately--many of whom would not
    otherwise be subject to an enforcement action. Additionally, IRS has
    modified one soft notice test that includes cost estimates. Each of the
    completed soft notice efforts show some benefits in improving compliance,
    however, they may be less effective for AEITC recipients.

    The First Soft Notice Test: The first soft notice--called the "Duplicate
    TINs" test--involved different taxpayers claiming the same, or a
    duplicate, TIN for a dependent or qualifying child in order to obtain an
    exemption, the EITC, or child tax credit benefits. In tax year 2002, IRS
    identified a total of about 2.4 million taxpayers who used a duplicate
    TIN. IRS sent soft notices to about 820,000 taxpayers.

    In November 2005, IRS reported that after receiving the soft notice, 11.4
    percent of the population amended their tax year 2002 returns.^33 Other
    results focused on taxpayers who received the notice for tax year 2002 and
    whether they repeated the use of a duplicate TIN on their tax years 2003
    and 2004 tax returns. The results were as follows:

               o 84.9 percent did not repeat their behavior in either of the
               ensuing years;
               o 7.7 percent repeated the behavior in 2003, but not again in
               2004;
               o 4.0 percent did not repeat the behavior in 2003, but did so in
               2004; and
               o 3.4 percent repeated the behavior for both ensuing years.

    Although IRS did not report the costs associated with this test, it did
    estimate the revenue that would have been lost without the soft notices.
    IRS reported that it protected a total of $218.3 million using the
    Duplicate TINs test. Due to limitations in the research design, such as
    not using a control group, IRS reported that it was uncertain whether
    these results were solely influenced by the receipt of a soft notice or if
    other factors may have contributed to the change in taxpayer behavior and
    subsequent revenue protected. IRS no longer considers this a test and
    continues to send out soft notices for Duplicate TINs issued each year.

    ^33 IRS, Wage and Investment Research Group, Soft Notice for Duplicate
    TINS for Tax Years 2002, 2003, and 2004, 6-05-12-2-030E (Nov. 29, 2005).

    The Second Soft Notice Test: The second soft notice test--called the "AUR
    Soft Notice" test--involved filers who underreported small amounts of
    certain categories of income, such as wages, unemployment insurance, or
    sales of securities. In December and January 2004 and 2005, respectively,
    IRS sent 500 soft notices to randomly selected taxpayers who underreported
    income on their tax year 2003 returns. IRS also randomly selected a
    control group of 500 taxpayers who underreported small amounts, but did
    not send notices to this group.

    An outside consultant that IRS hired to determine the effectiveness of the
    test reported in October 2005 that (1) soft notices appeared to have a
    beneficial result in reducing repeat behavior and (2) IRS resources were
    not overburdened by the notices.^34 Their conclusion was based on several
    results. First, after receiving the soft notice, 71 out of the 500
    taxpayers (14.2 percent) filed an amended return. Second, only 33
    taxpayers (6.6 percent) who received the notice repeated the
    underreporting the following year. In contrast, 174 taxpayers in the
    control group (34.8 percent) repeated their underreporting. Third, the
    consultants did not consider IRS resources to be burdened because only 45
    of 500 taxpayers (9 percent) called IRS with questions. Similarly, the
    study found there was limited undeliverable mail--only for 3 taxpayers
    (0.6 percent). An additional test was conducted for fiscal year 2006 and
    had similar positive results. IRS is in the process of determining whether
    it will send out soft notices for AUR in the future.

    The Third Soft Notice Test: The third soft notice test--called the
    "Dependent Database" test--involved cases selected for three EITC related
    issues, including qualifying child, filing status, and Schedule C, "Profit
    or Loss from Business," errors. IRS found that 2.4 million taxpayers
    appeared to have had errors on their tax returns. In November 2005, IRS
    selected about 12,500 taxpayers to determine the impact of soft notices on
    taxpayers' behavior when filing their tax year 2005 return. About another
    12,500 taxpayers were selected as a control group not to receive the
    notice.

    In its October 2006 report, IRS found that, although there was a
    difference between the test group of taxpayers who received the soft
    notice and the control group that did not, the direct relationship between
    receiving a soft notice and taxpayers' subsequent filing behavior was
    weak.^35 Specifically, the report cited that 88 percent of the test group
    and 86 percent of the control group changed their subsequent tax year
    filing behavior, including not breaking the same rule, amending the prior
    year return, or not filing a 2005 return. Specific noteworthy results
    were:

    ^34 Booz Allen Hamilton, AUR Soft Notice Test Results (Oct. 6, 2005).

               o 84 percent of the test group and 83 percent of the control group
               filed a return in the subsequent year;
               o 46 percent of the test group and 44 percent of the control group
               broke no rules at all;
               o 26 percent of the test group and 25 percent of the control group
               broke a different rule;
               o 12 percent of the test group and 14 percent of the control group
               repeated their behavior the next year by breaking the same rule;
               and
               o 1 percent of the test group and 0.4 percent of the control group
               amended their prior-year return.

    Also in October 2006, IRS modified the Dependent Database test in both the
    Wage and Investment and Small Business/Self Employed divisions to target
    notices to another population, i.e., noncustodian person(s) claiming a
    child. IRS prepared a preliminary cost analysis for this soft notice test
    based on a sample of 300,000 taxpayers. It estimated the total costs of
    sending out 300,000 soft notices to be about $533,000, which included
    $449,000 for the labor to process amended returns and answer telephone
    calls and $84,000 for mailing. Additional information, including the
    results of this test, was not available as of mid-June 2007.

    Although IRS did not develop criteria for these soft notice tests about
    what would constitute a success, such as a self-correction percentage, an
    IRS official knowledgeable about the tests said the agency considers the
    three completed tests a success, despite the few shortcomings. The first
    and second tests were considered successes because they led to noteworthy
    changes in taxpayer behavior. The third test was considered a success
    because, although taxpayer behavior did not change significantly,
    officials considered it a cost-effective way to have an enforcement
    presence among these taxpayers. Officials thought that a soft notice test
    could be beneficial for reducing AEITC noncompliance as well, particularly
    since the amount of money involved with AEITC is low and the noncompliance
    might not otherwise be addressed by IRS.

    ^35 IRS, Wage and Investment Research Group, Dependent Database Soft
    Notice Report for Tax Year 2005, 6-06-12-2-0280E (Oct. 31, 2006).

    Although soft notices may have some potential to address certain AEITC
    noncompliance, characteristics of the AEITC population might make such
    notices less effective or more costly than for the test populations for
    two reasons. First, AEITC turnover is high. In each tax year 2002 through
    2004, more than half of the individuals were first time recipients.
    Moreover, about 73 percent of first-time AEITC recipients in tax years
    2002 and 2003 did not elect the AEITC the following year and, thus, would
    not repeat noncompliance related to the AEITC.^36 Second, almost 40
    percent of AEITC recipients do not file a tax return, which means that IRS
    may not have a current address for those taxpayers. If IRS were to send
    soft notices to AEITC nonfilers using the last known address, a
    significant number of individuals may no longer reside there. This means
    IRS might not be able to locate them or it might spend additional
    resources trying.

    Federal On-Line SSN Verification Services Could Be Used to Determine AEITC
    Eligibility, but IRS and SSA Have Raised Concerns

    More than 100,000 AEITC recipients had invalid SSNs and reported receiving
    millions of dollars in total benefits for each tax year 2002 through 2004
    without any substantial check of their eligibility. Because of the
    low-dollar amounts involved per taxpayer, IRS worked on only a small
    number of these cases. IRS does not have an up-front control or procedure
    in place to require employers to verify that an employee seeking the AEITC
    has a valid SSN, which could address this noncompliance. Two federal
    on-line services have the potential to be used to implement such controls.
    Although the services could be used for this purpose, IRS and SSA
    officials raised several concerns about implementing such a requirement.

    The TIN Matching service and SSNVS are federal on-line services that some
    private organizations may use voluntarily to verify whether federal
    records show that the name and SSN provided by an individual match.^37 TIN
    Matching is a pre-return filing service offered by IRS that allows those
    payers whose income is subject to backup withholding, who submit any of
    six Form 1099 information returns (e.g., financial institutions), to match
    the TIN of the 1099 payee against IRS records.^38 It is one of several
    e-service products offered by IRS. The goal of TIN Matching is to improve
    the accuracy of Form 1099 data and reduce subsequent inappropriate
    penalties and error notices. SSNVS is a service offered by SSA that allows
    registered users (i.e., employers or, in certain instances, their
    third-party representatives) to verify the names and SSNs of employees
    against SSA records.^39 The AEITC is outside the scope of SSA's
    responsibilities, and SSNVS is a voluntary service that is currently used
    only to increase the accuracy of wage reporting on Forms W-2.

    ^36 There are different ways to calculate turnover. We considered it to be
    first time use within a 6-year period. To provide additional information,
    we also compared the number of first-time AEITC recipients who did not
    elect the advance in tax year 2003 with the total number of first-time
    AEITC recipients in tax year 2002. We made the same comparisons for the
    following year.

    IRS and SSA officials identified a number of challenges that the agencies
    and employers may face if the TIN Matching service or SSNVS were used to
    verify AEITC eligibility.

    Accuracy: Both the TIN Matching service and SSNVS are based on SSA records
    and have high rates of accuracy in terms of determining whether submitted
    names and SSNs match. Still, IRS and SSA officials had concerns about
    whether these rates were high enough for purposes of verifying AEITC
    eligibility. IRS officials told us that the TIN Matching service is about
    98 percent accurate. A December 2006 report by the SSA Office of Inspector
    General sampled more than 2,000 determinations by SSA's Numident file--the
    database upon which SSNVS is based--and found a name and SSN match
    accuracy rate of more than 99 percent.^40 Still, SSA officials said that
    if SSA records were used to verify AEITC eligibility, they might want to
    subject an employee's name and SSN to more "routines"--procedures such as
    correcting for transposed numbers that SSA uses to increase the likelihood
    of a match--than is currently done by SSNVS. IRS officials told us that
    when the agency was informally considering a proposal to charge a fee for
    using the TIN Matching service, several IRS officials knowledgeable about
    the database opposed the idea because they did not believe it was accurate
    enough that users should have to pay for it.

    ^37 The Department of Homeland Security operates a voluntary program known
    as Employment Eligibility Verification, formerly known as Basic Pilot,
    through which participating employers enter employee information, such as
    name and SSN, into the Web site to verify newly hired employees' work
    authorization status. The program then attempts to match that information
    against SSA and, if necessary, Department of Homeland Security databases.
    We did not examine Employment Eligibility Verification as part of this
    report because we have identified several weaknesses in the program's
    implementation that could adversely impact increased use. See GAO,
    Immigration Enforcement: Weaknesses Hinder Employment Verification and
    Worksite Enforcement Efforts, [35]GAO-06-895T (Washington, D.C.: June 19,
    2006).

    ^38 Financial institutions and other businesses that make certain payments
    must file a Form 1099 with IRS. Generally, these payments are not subject
    to withholding unless certain conditions exist, one of which is an invalid
    taxpayer identification number.

    ^39For the purposes of this report, SSN validity with regard to SSNVS
    includes instances where a name matches its SSN as verified by SSA
    records.

    Accuracy concerns, however, do not preclude IRS or SSA from using SSA
    records to make an initial determination about whether individuals who may
    claim credits or benefits have demonstrated that they are entitled to
    them. For example, as previously noted, IRS rejects electronically filed
    tax returns with a name/SSN mismatch and returns them to the taxpayer for
    correction. For paper returns reporting AEITC receipt that have a name/SSN
    mismatch, IRS processes the returns, but since the AEITC is reported as
    tax, it will either offset all or part of any refund due or, if no refund
    is due, require the taxpayer to pay back the full AEITC amount.

    Similarly, SSA instructs its claims representatives that if the identity
    of a claimant for Social Security benefits or Supplemental Security Income
    benefits remains questionable because the individual has not provided
    sufficient proof to establish his or her identity, the claim will be
    denied even if other factors of eligibility are met.^41

    Additional employer responsibilities: IRS and SSA officials said a major
    concern about employers using either service was whether a name/SSN
    mismatch would create new responsibilities for employers beyond informing
    the employee and denying the AEITC. IRS officials also expressed concern
    that requiring employers to use the services for AEITC would discourage
    them from promoting the AEITC and perhaps encourage them to dissuade
    employees from seeking it. Under current procedures for using the TIN
    Matching service and SSNVS, employers are not required to take any action
    based on the results they receive.

    ^40 SSA, Office of Inspector General, Accuracy of the Social Security
    Administration's Numident File A-08-06-26100 (December 2006). When SSA
    assigns an SSN to an individual, the agency creates a master record in its
    Numident file, which contains information about the number holder,
    including the person's name. Thereafter, the Numident record for each
    number holder identifies any changes to the original information provided
    by the number holder, including name changes.

    ^41 Supplemental Security Income is a federal program administered by SSA
    designed to provide cash for food, clothing, and shelter to aged, blind,
    and disabled people who have little or no income.

    IRS officials expressed concern that a June 2006 regulation proposed by
    the Department of Homeland Security could expressly list employer receipt
    of a "no match" letter from SSA as possible evidence that the employer
    knew or should have known that it was employing an individual not
    authorized to work in the United States.^42 Under the proposed regulation,
    if the employer fails to take reasonable steps to resolve the discrepancy
    after receiving the letter, the Department of Homeland Security may find
    that the employer had such knowledge and assess civil monetary penalties
    against the employer.

    The proposed Department of Homeland Security regulation describes "safe
    harbor" procedures that the employer can follow in response to the letter.
    Those steps include the employer promptly checking its records for
    clerical errors and obtaining required documentation by working with the
    employee, SSA, and the Department of Homeland Security. If the name/SSN
    mismatch cannot be resolved, the employer would have to choose between
    terminating the employee or facing the risk that the Department of
    Homeland Security may find that the employer knew that the employee was
    not authorized to work and, by continuing to employ the individual,
    violated the law.

    While the proposed Department of Homeland Security regulation covers only
    no match letters, IRS and SSA officials expressed concern that the
    regulation could be expanded to include name/SSN mismatches disclosed by
    the TIN Matching service or SSNVS. Under current law, existing and
    prospective users who are concerned that matching could be used for
    purposes beyond improving the accuracy of Form 1099 data or wage reporting
    can voluntarily cease using, or not start using, the systems. IRS and SSA
    officials noted, however, that employers would no longer have this choice
    if they were required to use one of these services to verify an AEITC
    applicant's SSN.

    ^42 As of June 2007, this proposal was still outstanding. SSA sends "no
    match" letters to employers who submit more than 10 Forms W-2 to SSA or
    when more than 0.5 percent of these wage reports consist of a name and SSN
    combination that do not match SSA records.

    In addition, existing Department of Homeland Security guidance for
    employers on the interaction between antidiscrimination laws and legal
    requirements for verifying employment eligibility states that employers
    must treat all employees in the same manner. Employers cannot set
    different employment eligibility verification standards or require that
    different documents be presented by different groups of employees. If
    mandatory verification of AEITC applicants' SSNs created additional
    employer responsibilities under employment eligibility verification
    requirements, this result could be inconsistent with efforts to ensure
    that verification procedures apply to all employees.

    SSA's position on SSNVS is that a name/SSN mismatch does not make any
    statement about an employee's immigration status and should not be a basis
    for taking any adverse action against the employee. SSA officials also
    expressed reservations about SSNVS results being used to terminate
    employees.

    Capacity and User Access: IRS and SSA officials said changes to the
    capacity and user access of the TIN Matching service or SSNVS would either
    be unnecessary or minor if employers used them to verify SSNs of employees
    seeking AEITC, although the officials said their agencies might favor
    creating a new service for this purpose instead. They told us that their
    systems have the capacity to handle the increased volume of requests that
    would result from this expanded use. Because both services already are
    used to verify SSNs, IRS and SSA said any changes to how the services are
    accessed and used would also probably not be extensive.

    Both SSNVS and TIN Matching are Web-only services.^43 To use one of the
    services, the employer designates one or more employees or third-party
    representatives to register on behalf of the employer. The initial
    registration for both the TIN Matching service and SSNVS is handled in a
    similar way and may take as long as 4 weeks:

               o Registrants go to the agency's Web site and provide information
               about themselves and their employers on a form, which they send
               electronically to the agency.
               o The agency sends the employer of the registrant a unique code.
               The letter directs the employer to provide that code to the
               registrant.
               o After receiving the code, the registrant can go back to the
               agency Web site and input the code to activate use of the service.

    ^43 Both IRS and SSA have toll-free telephone numbers listed on their Web
    sites that those looking for help with the particular service can call to
    speak with agency staff and get help.

    TIN Matching registrants who do not use it for 6 months must reregister,
    primarily to receive a new password and update any of the information
    provided during the registration. SSNVS requires registrants to change
    their password once a year to keep it from expiring, which also requires
    reregistration.

    IRS and SSA officials told us that the great majority of users of their
    respective services generally report that they are not difficult to use
    for either the registration process or ongoing use. IRS officials said
    users access TIN Matching voluntarily and that some, particularly from
    smaller organizations, appear more likely to find it burdensome than users
    from larger organizations. We found that more than half the employers that
    provided the AEITC in tax years 2002 through 2004 were small businesses or
    self- employed and about one-quarter were tax exempt and government
    entities. In addition, despite IRS's efforts to outreach to large
    employers, fewer than one-fifth were large and midsize employers (see
    table 20 in app. III). IRS officials said TIN Matching service users who
    found the registration process burdensome were generally those who
    reported to IRS that they were not use to filling out forms on-line and
    creating and using passwords. The officials also said that some TIN
    Matching users reported being uncomfortable having to provide personal
    information to register.

    SSA officials said SSNVS is used mostly by larger employers, and a
    relatively small number of them reported that they found the service
    burdensome. SSA officials did say, however, that SSA received about 89,000
    calls through June 2007 from individuals about registration. And, an SSA
    official said that small business representatives with whom he has
    recently spoken expressed frustration with the overall number of tasks
    that the federal government was already requiring them to perform and,
    therefore, might be reluctant to verify SSNs.

    IRS officials also told us that the TIN Matching service is not programmed
    to track users, which likely would be useful to IRS for enforcement
    purposes. Still, IRS officials added, that the service could be modified
    to track employers that used the services for AEITC purposes and report on
    the results. SSNVS tracks its users to determine whether the service is
    being properly used.

    Additional resources: IRS and SSA officials said that if employers were
    required to begin using their respective services to verify the SSNs of
    employees seeking the AEITC, the agencies would need additional resources.
    For example, officials from both agencies cited the need to handle
    questions from new users, particularly in the first year when all
    individuals seeking the AEITC would be required to have their names and
    SSN's matched.^44

    When we told IRS officials that our data showed that about 50,000
    employers had at least one AEITC recipient, they said such an increase in
    the number of registrants could require IRS to increase the number of
    staff available to answer user questions. But they said they could not
    estimate how many more staff would be necessary.

    IRS officials also said they were trying to make the reregistration
    process easier because they received a substantial number of calls from
    users who needed to reregister. This would be important for AEITC-related
    use of TIN Matching because employers with only one or two employees
    seeking the AEITC would only need to use the service once or twice a year,
    making it likely that they would have to reregister.

    SSA officials told us that if the agency was considering or was directed
    to make its SSN records available for the purpose of verifying AEITC
    eligibility, SSA would have to devote additional resources to conduct a
    comprehensive assessment to determine the changes necessary to SSNVS to
    properly achieve this goal, including possibly creating a different
    service for assessing AEITC eligibility and buying a new database server
    to handle the increased volume of users. Again, SSA officials could not
    estimate how many more staff would be necessary.

    New federal legislation: Enactment of federal legislation would be needed
    for employers to begin using the TIN Matching service to verify the SSNs
    of their employees seeking the AEITC.^45 In 2000, the Department of the
    Treasury recommended to the Congress that TIN verification be expanded to
    include other payers subject to an IRS reporting requirement, such as
    employers who file Forms W-2.^46

    ^44 The higher volume of questions in the first year assumes that employees
    whose name and SSN matched and who sought the AEITC from the same employer
    in a subsequent year would not be required to undergo a second match.

    It is uncertain whether IRS could require employers to use SSNVS to verify
    the SSNs of employees seeking the AEITC. SSA officials said they would
    need to determine whether SSA's disclosure of SSN data is compatible with
    the reason it collected the information and, if so, whether verifying SSNs
    via SSNVS for purposes of AEITC eligibility is consistent with SSA's legal
    obligations. Both Treasury and SSA officials said their agencies would
    strongly prefer enactment of legislation before requiring employer or any
    verification of SSNs of employees seeking the AEITC.

    Employee appeal of mismatch: One difference between using the TIN Matching
    service or SSNVS would occur when an employee claimed that a name and SSN
    mismatch was inaccurate. IRS and SSA officials said employees who
    questioned a SSN mismatch would presumably contact IRS, which would send
    them to SSA to resolve the issue because the TIN Matching service is based
    on SSA records. IRS officials said that, in contrast, employees
    questioning a name and SSN mismatch generated by SSNVS would presumably go
    directly to SSA.

    Agency mission: SSA officials also said that verifying eligibility for the
    AEITC is most appropriate for IRS because it is a tax administration issue
    and is therefore outside the scope of SSA's mission. However, it is not
    unusual for agencies to assist other federal agencies in carrying out
    their mission. SSA officials also said that, regardless of which service
    was used, IRS would have full administrative responsibility for overseeing
    a program for employers to verify AEITC applicants' SSNs.

    ^45 Internal Revenue Code Section 6103 prohibits the disclosure of
    information on tax returns, including SSNs, unless permitted by a specific
    exception. Because there is no exception for the verification of SSNs by
    employers, legislation would be needed to use the TIN Matching database
    for this purpose.

    ^46 Office of Tax Policy, U.S. Department of the Treasury, Scope and Use
    of Taxpayer Confidentiality and Disclosure Provisions October 2000. Such a
    provision was included in S. 1321, 109 Cong. Sec. 509 (2006).

    IRS Does Not Require Submission of Forms W-5 from Employers for Employees
    Seeking the AEITC

    IRS does not require employers to submit a Form W-5 when an employee
    requests receipt of the AEITC. Several advantages and disadvantages exist
    if IRS creates a Form W-5 database to use in monitoring AEITC
    noncompliance issues.

    IRS could require employers to submit a Form W-5 when an employee requests
    receipt of the AEITC. In turn, IRS could use the Forms W-5 to create a
    database to monitor the AEITC. The database could be used to ensure that
    the SSN provided on the Form W-5 is valid and that it matches the
    individual's name. Doing such a check could have prevented more than
    100,000 individuals from receiving as much as between $37 million and $39
    million each year in AEITC to which they were potentially not entitled
    because of not meeting the valid SSN requirement. Such a database could
    also allow IRS to know which individuals received the AEITC and provide
    the agency with an opportunity to send recipients a notice at the start of
    the next filing season reminding them to file a federal tax return. A
    reminder to file notice could likely reduce noncompliance for up to about
    200,000 individuals who received between $42 million and $50 million each
    year in AEITC without filing a federal tax return. Similarly, IRS
    officials could use a W-5 database to verify other AEITC requirements,
    such as ensuring that each recipient has only one Form W-5 in effect at a
    time. This check could reduce the probability that individuals would
    receive more than the yearly AEITC maximum.

    While acknowledging that potential advantages exist to developing and
    maintaining a Form W-5 database, IRS officials said that the disadvantages
    could outweigh these and any other advantages. Although IRS officials said
    it was too early in the proposal process to calculate the database's
    potential costs and subsequent return on investment, they said it very
    likely would be substantially lower than the return on investment for
    either existing or anticipated future noncompliance programs. For example,
    IRS estimates the current return on investment for EITC Examination
    noncompliance is between $17 to $1 and $19 to $1. Although these amounts
    only include labor and do not include overhead such as facilities,
    equipment, and supplies, officials felt confident that the EITC return on
    investment would far exceed that for the AEITC. Their opinion was largely
    based on the few dollars involved with the AEITC, especially compared to
    other noncompliance programs.

    In addition, IRS officials expressed concerns that employers would not
    submit Forms W-5 to IRS. Officials raised an analogy between this proposal
    and the prior Questionable W-4 program.^47 As we reported in 2003, about
    75 percent of the large employers with 1,000 or more employees in IRS's
    Large and Medium-Size Business and Small Business/Self Employed divisions
    who filed tax returns in tax year 2001 did not send IRS any questionable
    Forms W-4.^48 After our report, IRS discontinued the Questionable W-4
    program. Additionally, officials noted that requiring employers to submit
    Forms W-5 may discourage them from participating because if the employer
    was notified that the SSN on a Form W-5 was invalid or that it did not
    match the employee's name, employers would likely have a responsibility to
    discuss the matter with the employee, creating yet another new burden
    employers would not want to accept. Finally, employers may not participate
    because if the employee left the employer during the year, the employer
    would again have to contact IRS so the Form W-5 database could be updated.

    Options to Reduce AEITC Noncompliance May Be Cost Effective

    Although we do not know how successful the various options we have
    identified for improving AEITC compliance may be if implemented or what
    the full cost of implementation would be, IRS may be able to achieve a
    return on investment somewhat comparable to that for EITC examinations. We
    found an average of about $94 million a year in AEITC noncompliance for
    recipients in tax years 2002 through 2004.^49 If a compliance effort could
    reduce AEITC noncompliance by one-quarter, that is, $24 million per year,
    IRS could spend about $1.3 million each year to do so and achieve a $19 to
    $1 return on investment.^50 Alternatively, IRS estimated that it would
    cost about $533,000 to send soft notices to 300,000 taxpayers during the
    Dependent Database test. If IRS were to test sending soft notices for
    AEITC and it cost IRS about the same amount to send notices to 300,000
    noncompliant AEITC recipients, IRS would only need to reduce AEITC
    noncompliance by about 11 percent (about $10 million) to achieve a $19 to
    $1 return on investment.

    ^47 The Questionable W-4 program required employers to submit information
    to IRS on taxpayers who claimed more than 10 withholding allowances or
    exemptions.

    ^48 GAO, IRS's Questionable Form W-4 Program, [36]GAO-04-79R (Washington,
    D.C.: Nov. 6, 2003).

    ^49 The number includes AEITC amounts received by nonfilers, filers who
    misreported the amount received, and individuals with invalid SSNs.

    ^50 This estimate is illustrative only and many variables could affect how
    successful any compliance effort would be and the cost of implementing an
    effort.

    Eligible Taxpayers Could Receive Full EITC Benefits If the Advance Option Were
    Discontinued

    If the advance option were discontinued, eligible AEITC recipients could
    still receive the full benefits of the EITC as a lump sum after filing
    their tax return. In addition, improper AEITC payments to ineligible or
    noncompliant individuals would be eliminated. The exact amount of revenue
    that could be saved is not known. However, in determining an amount, IRS
    officials said they would consider the following: the amount of AEITC
    disbursed compared with the amount shown on filed tax returns, the cost of
    administering the AEITC (e.g., forms and publications, processing,
    compliance activities), and any amount currently recovered through
    compliance activities.

    Conclusions

    The AEITC has never achieved a significant participation rate, the amount
    recipients received in the period we reviewed was quite low, and
    noncompliance was high. However, policymakers may judge that the goal of
    providing funds to low-income workers during the year, as opposed to a
    lump sum that they could get as part of the EITC when filing their taxes,
    remains important and should continue to be allowed. If so, IRS needs to
    pursue potentially cost-effective measures to address AEITC noncompliance.

    Each of the three options we identified for improving AEITC
    compliance--using soft notices, having up-front verification of AEITC
    applicants' SSNs by employers, or requiring employers to submit copies of
    the Form(s) W-5 and creating a database to monitor AEITC--appears to have
    potential to improve compliance, but their full benefits and costs need to
    be evaluated and, if possible, tested. Soft notices have improved
    compliance in other tax programs but they could be somewhat less effective
    in improving AEITC compliance, in part, due to its high turnover rate. The
    TIN Matching service and SSNVS have the potential to reduce AEITC
    noncompliance by enabling employers to verify workers' SSNs before
    providing them the AEITC. Differences exist between the two services, but
    either could likely be used for AEITC SSN verification. Both services are
    based on SSA records that are already deemed accurate enough such that SSA
    and IRS make decisions based on them to disallow certain exemptions and
    credits until eligibility has been properly demonstrated. Significant
    concerns exist, however, such as the need for legislation authorizing
    either the use of TIN Matching or SSNVS for AEITC. This and other issues
    would need to be further explored as the costs and benefits of employers
    verifying employees' SSNs are fully identified. If IRS required employers
    to submit copies of the Form W-5 when an employee requests the AEITC, IRS
    could create a database to better monitor and address all three of the
    noncompliance problems we analyzed. However, imposing additional
    responsibilities on employers for both the SSN verification option and the
    Form W-5 database option have the potential to adversely affect the
    AEITC's already low participation rate if employers avoid providing the
    AEITC due to increased responsibilities on their part.

    Due to the relatively small size of the AEITC overall, combined with the
    low dollar amounts per taxpayer, IRS officials are concerned that
    addressing AEITC noncompliance may provide less return on IRS's
    enforcement efforts than would addressing other noncompliance issues.
    However, IRS may be able to achieve returns on AEITC enforcement that
    would not be significantly out of line with returns on other enforcement
    work. For example, it cost IRS about $533,000 to send soft notices to
    300,000 taxpayers in the Dependent Database test. If IRS were to test
    sending soft notices for AEITC and it cost IRS about the same amount to
    send notices to 300,000 noncompliant AEITC recipients, IRS would need to
    reduce noncompliance by about 11 percent (about $10 million) to achieve a
    $19 to $1 return on investment.

    Recommendations for Executive Action

    The Acting Commissioner of Internal Revenue should analyze whether any of
    the following options could cost effectively and significantly reduce
    AEITC noncompliance:

               o sending potentially noncompliant AEITC recipients soft notices,
               such as to nonfilers whose Forms W-2 show that they received AEITC
               and filers who misreported the amount they received or whose SSN
               and name do not match;
               o requiring employers to verify the SSN of employees seeking
               AEITC; or
               o requiring employers to submit Form W-5 to IRS and IRS creating
               and maintaining a database for these forms.

    To better identify the costs and implementation issues as well as the
    likelihood for these or other options to reduce AEITC noncompliance, where
    practical, the Acting Commissioner of Internal Revenue should test these
    options to make a more fully informed judgment about whether any would be
    worthwhile.

    If the Acting Commissioner of Internal Revenue determines that none of
    these options would be cost effective and no other remedies are viable,
    then the Treasury Secretary should inform the Congress of this and provide
    Treasury's opinion about whether the AEITC should be retained.

    Agency Comments

    The Acting Commissioner of Internal Revenue provided written comments in a
    July 18, 2007 letter. He agreed with our recommendation and outlined the
    actions IRS would take to address that recommendation, including
    conducting further analyses and possible testing of proposed options for
    reducing AEITC noncompliance. He also stated that IRS will conduct its
    cost-benefit analyses in conjunction with a congressional requirement to
    study the impact of expanding eligibility of the AEITC to all EITC
    recipients. We also provided a draft of this report to the Department of
    the Treasury and SSA and incorporated technical comments where
    appropriate. SSA emphasized that verifying eligibility for the AEITC is
    most appropriate for IRS because it is a tax administration issue and
    therefore outside the scope of SSA's mission.

    As agreed with your offices, unless you publicly announce its contents
    earlier, we plan no further distribution of this report until 30 days
    after its date. At that time, we will send copies of this report to the
    Secretary of the Treasury, the Commissioner of the Social Security
    Administration, the Acting Commissioner of Internal Revenue, appropriate
    Congressional committees, and other interested parties. This report is
    available at no charge on GAO's web site at [37]http://www.gao.gov .

    If you or your staffs have any questions, please contact me at (202)
    512-9110 or [38]brostekm@gao.gov .

    Michael Brostek
    Director, Tax Issues Strategic Issues Team

    Appendix I: IRS's Implementation of Recommendations from GAO's 1992 Report
    on the Advance Earned Income Tax Credit

    After analyzing IRS's responses to our recommendations in our 1992 Advance
    Earned Income Tax Credit (AEITC) report, we determined that IRS has
    implemented five of the six recommendations to the Commissioner of
    Internal Revenue from our 1992 report on the AEITC and partially
    implemented the remaining one (see table 8).

    Table 8: IRS Implementation of Recommendations from GAO's 1992 Report on
    the Advance Earned Income Tax Credit

    Number Recommendation                Status      IRS implementation
    1      Include information on AEITC  Implemented Developed publicity
              in employee outreach                      materials.
              materials and programs.
    2      Notify taxpayers who receive  Implemented Revised Form W-2 and
              the Earned Income Tax Credit              Notice 797 to contain
              (EITC) about the advance                  information on how to
              option.                                   apply for the AEITC and
                                                        developed radio and
                                                        television announcements
                                                        on the AEITC.
    3      Encourage employers to notify Implemented Added text to the face of
              employees who have no income              the Form W-4 instructions
              tax withheld of the advance               advising employees to
              option.                                   consider the AEITC.
    4      Clarify instructions on AEITC Implemented Clarified employers'
              in "Circular E, Employer's                responsibilities and
              Tax Guide."                               liabilities in advancing
                                                        the EITC in the 1993
                                                        "Circular E, Employer's
                                                        Tax Guide."
    5      Send, to individuals who do   Partially   Included information on
              not file tax returns, a       Implemented the AEITC in a reminder
              notice explaining their                   to file notice until 1997
              requirements to file.                     and added a separate
                                                        AEITC box on Form W-2.
    6      Explore ways to identify      Implemented Added a line on the Form
              those individuals who receive             1040 for taxpayers to
              the credit advance, but do                report AEITC received and
              not report it, so as to                   redesigned the Form W-2.
              prevent them from receiving
              the credit a second time.

    Source: GAO analysis of IRS data.

    Our first recommendation was for the Commissioner of Internal Revenue to
    include information on AEITC in employee outreach materials and programs.
    IRS implemented this recommendation primarily by developing publicity
    materials (i.e., grocery bags, milk carton art, brochures, posters) and
    distributing them to the public.

    For the second recommendation, IRS stated that it did not have the
    approximately $2 million in funding that the agency said would have been
    required to notify all taxpayers who receive the EITC, but did not elect
    the advance option. Instead, IRS took other actions including revising the
    Form W-2 in 1992 to contain information on how to apply for the AEITC and
    IRS Notice 797, "Possible Federal Tax Refund Due to the Earned Income
    Credit," to include information on how to apply for the AEITC.

    For our third recommendation, IRS noted that it could encourage employers
    to make such notifications, but that there are no statutory sanctions on
    employers who fail to do so. Beginning in 1992, IRS placed text on the
    face of the Form W-4 instructions advising employees to consider filing a
    Form W-5 with their employer to obtain the advance through lower
    withholding.

    For our fourth recommendation to clarify instructions on the AEITC in
    "Circular E, Employer's Tax Guide" IRS did so through the inclusion of new
    examples explaining to employers how they should make advance payments to
    employees and how employers can report these amounts.

    Our fifth recommendation was for the IRS Commissioner to send individuals
    who received the AEITC and do not file tax returns a notice explaining the
    requirement to file. IRS partially implemented this recommendation by
    including information on advance payment in a reminder to file notice and
    adding a separate AEITC box on Form W-2. IRS did not track the number of
    AEITC nonfilers who received the notice. The reminder to file notice was
    only sent until 1997 and IRS officials were uncertain why that notice was
    discontinued.

    The last recommendation was for exploring ways to identify those
    individuals who receive the credit in advance but do not report it. IRS
    pointed out that its systems were not geared to detecting unreported AEITC
    payments at the time the returns are processed and the best approach to
    preventing noncompliance by AEITC payment recipients is a proactive one
    that recognizes the filing of correct returns. IRS implemented this
    recommendation by providing a separate line on Form 1040 on which to
    report AEITC payments and redesigning the Form W-2, for tax year 1993,
    which it believed would increase the accuracy of the AEITC payment
    information reported on Form W-2. Our work in this report demonstrates a
    continuing need to explore additional compliance initiatives aimed at
    those who receive the AEITC, but do not report it on their tax return.

    Appendix II: Scope and Methodology

    To answer the first and second objectives:

               o how many individuals received the Advance Earned Income Tax
               Credit (AEITC) compared with the Earned Income Tax Credit (EITC)
               and how much did they receive in tax years 2002 through 2004; what
               actions, if any, have been taken to increase use since 1992; and
               what is the potential for significant increases in the future; and
               o what is the extent of noncompliance, if any, associated with the
               AEITC;

    we obtained a data file of all Forms W-2, "Wage and Tax Statement," for
    tax years 1999-2004 indicating AEITC payments as shown by an amount
    greater than $0 in box 9 of the Form W-2 from the Internal Revenue Service
    (IRS).^1 We used these tax years because they were the most current
    available at the time we started our review. The Form W-2 identified key
    information, including the AEITC recipient's name, address, Social
    Security number (SSN), and amount of AEITC dollars paid, as well as the
    employer's name and address.

    To determine the number of individuals who received the AEITC, we used
    Forms W-2 instead of tax returns, which IRS has historically used to
    estimate AEITC use. We used this alternate approach because we believe the
    Forms W-2 provide results that are more accurate and complete.^2 For
    example, using Forms W-2 would include in the population of AEITC
    recipients those who received AEITC, but did not file a return, and those
    who filed a return, but did not report any AEITC. Using tax returns would
    not capture these individuals or related noncompliance issues. In
    addition, using tax returns counts instances where both spouses receive
    the AEITC and file jointly on one return as opposed to two individuals.
    IRS's Research, Analysis, and Statistics and EITC program office officials
    agreed with our methodology.

    We performed data reliability tests on the data file to determine whether
    the data were sufficiently reliable for our intended purposes. We did this
    testing, in part, by conducting preliminary analyses, which identified
    certain data irregularities or anomalies. We identified two noteworthy
    anomalies in the data file: (1) excessive AEITC dollar amounts and (2)
    invalid AEITC recipient SSNs. First, many Forms W-2 showed that employees
    received amounts over the allowable limits. A few even showed individuals
    each receiving about $1 million in AEITC--amounts clearly above AEITC
    legal limits and which IRS officials said would be improbable, potentially
    resulting from transcription errors. Second, we also found some instances
    where the SSN and/or name on the Form W-2 were invalid, which means that
    the number was never issued by SSA or that the name and number on the Form
    W-2 did not match the listed name for that same SSN in official records
    maintained by IRS. We compared the number and name information on the Form
    W-2 to the National Account Profile to evaluate the validity of that
    information and to identify any possible subsequent corrections.^3

    ^1The AEITC amount on the Form W-2 is what an employer reported paying to
    an employee. While this is not necessarily evidence that the employee
    actually received that amount, IRS considers the Form W-2 the official
    wage and tax statement and makes adjustments to the tax return based on
    the Form W-2 when discrepancies exist.

    ^2An individual who had more than one Form W-2 reporting AEITC for a
    particular year was counted as only one individual and the amount of AEITC
    paid was totaled.

    To address these data anomalies, we separated the Form W-2 file into four
    subpopulations using the following three criteria: whether (1) the SSN on
    the Form W-2 was valid, according to Data Master File (DM-1); (2) the SSN
    and the recipient's name on the Form W-2 matched, according to DM-1; and
    (3) the amount of AEITC received was in excess of the yearly maximum.^4
    Each of the subpopulations had a unique profile, as follows:^5

               1. Valid subpopulation: This group of Forms W-2 represents all
               individuals (1) that had a valid SSN, meaning that it was a number
               issued by SSA, (2) whose name matches the SSN, and (3) that had an
               AEITC amount within the yearly maximum. More than 75 percent of
               the Forms W-2 on average during tax years 2002 through 2004 were
               in this subpopulation.
               2. Invalid name subpopulation: This group of Forms W-2 represents
               all individuals that had (1) a valid SSN (2) a SSN that did not
               match the individual's name and (3) the AEITC amount was within
               the yearly maximum. About 17 percent of the Forms W-2 fell in this
               subpopulation for each of the 3 years we reviewed.
               3. Invalid number subpopulation: This group of Forms W-2
               represents all Forms W-2 that had an invalid SSN and an AEITC
               amount that was within the yearly maximum. About 7 percent of the
               Forms W-2 during tax years 2002 through 2004 were in this
               population.^6
               4. Dollar limit subpopulation: This group of Forms W-2 represents
               all instances where the AEITC amount was above the yearly maximum,
               regardless of whether the SSN was invalid or if the individual's
               name matched the SSN. This represented less than 1 percent on
               average of all Forms W-2 in each of the 3 years we reviewed.
               Because IRS officials told us these data were likely erroneous, we
               excluded it from most of our analyses, and IRS officials agreed.

    ^3 The National Account Profile incorporates the DM-1 from SSA, which is
    the primary source file for all SSNs. The National Account Profile also
    includes additional SSN change information available to IRS to show the
    most current and complete taxpayer information.

    ^4 The AEITC maximum limits for tax years 1999-2004 were: $1,387, $1,412,
    $1,457, $1,503, $1,528, $1,563, respectively. These amounts are limited if
    two married individuals both elect the AEITC.

    ^5 While each subpopulation contains a unique set of Form W-2s, during tax
    years 2002-2004 there were 856 Form W-2s that appear in both the valid and
    invalid name subpopulations. This could occur due to variations in how the
    name is spelled or reported by the employer and/or due to timing
    differences in reporting and updating name changes to SSA.

    Table 9: Number of Forms W-2, Number of Individuals, and the Dollars for
    Each Subpopulation, Tax Years 2002 through 2004

                           Tax year 2002                    Tax year 2003                    Tax year 2004
                   Number                           Number                           Number
                       of                               of                               of
                    Forms   Number of                Forms   Number of                Forms   Number of
                      W-2 individuals      Dollars     W-2 individuals      Dollars     W-2 individuals      Dollars
    Valid         488,007     418,774 $107,230,369 463,285     398,526 $106,075,016 469,234     398,335 $111,098,330
    subpopulation
                    (74%)       (78%)        (57%)   (76%)       (79%)        (70%)   (76%)       (78%)        (68%)
    (percentage)
    Invalid name  114,819      80,524  $25,734,033 101,646      74,234  $25,480,158 101,140      77,747  $26,819,235
    subpopulation
                    (17%)       (15%)        (14%)   (17%)       (15%)        (17%)   (16%)       (15%)        (16%)
    (percentage)
    Invalid        49,432      32,501  $11,582,604  44,244      30,622  $11,650,727  43,696      31,875  $12,166,702
    number
    subpopulation    (8%)        (6%)         (6%)    (7%)        (6%)         (8%)    (7%)        (6%)         (7%)

    (percentage)
    Dollar limit    6,408       6,360  $43,703,747   2,692       2,677   $7,486,726   2,768       2,757  $12,917,134
    subpopulation
                     (1%)        (2%)        (23%)   (less        (1%)         (5%)   (less        (1%)         (8%)
    (percentage)                                      than                             than
                                                       1%)                              1%)
    Total         658,666     538,159 $188,250,753 611,867     506,059 $150,692,627 616,838     510,714 $163,001,401

    Source: GAO analysis of IRS data.

    Note: Percentages may not add due to rounding.

    ^6 Because the SSN was invalid, it is not possible to determine whether
    the individual's name matched.

    We conducted additional data reliability tests for each of the databases
    we used to obtain information about the AEITC, including IRS's Individual
    Returns Transaction File, for return and filing information, which came
    from the Compliance Data Warehouse; National Account Profile/DM-1, for
    IRS's SSN and name reference information, which also came from the
    Compliance Data Warehouse; Automated Underreporter (AUR), for IRS's
    third-party information return data; and Taxpayer Identification Number
    (TIN) Matching and SSA's Social Security Number Verification System
    (SSNVS), for alternative SSN and name reference information used by
    employers.^7 After completing our data reliability assessments, we
    determined the AEITC data to be sufficiently reliable for analysis and our
    reporting objectives.

    We also developed a comprehensive analysis plan that included our
    researchable issues, planned analysis, data sources, and limitations. We
    shared our plan with IRS and others and incorporated their feedback.
    Because IRS's workload precluded them from providing information related
    to employers/AEITC payers within our time frames, we were able to conduct
    only limited analyses of employers who paid AEITC.

    Using the analysis plan for each subpopulation, we conducted multiple
    analyses to develop relevant demographic, characteristic, and compliance
    data. Because each population had different criteria, certain
    characteristics or compliance data could not be developed or compared
    across the subpopulations. For example, the only characteristics data that
    could be developed for the invalid SSN subpopulation came from the Form
    W-2 (e.g., amount of AEITC, geographic location) because it is the only
    available source. Similarly, tax return data, such as filing status, was
    not available for those who did not file a tax return.

    All data pertaining to filed tax returns came either from returns that
    reported receipt of the AEITC on the appropriate line or from a
    "constructed tax return," which IRS officials created using the SSN on the
    Form W-2 and matching it to an SSN in the primary, secondary, or dependent
    position on a filed return. The location of the SSN in one of these
    positions is relevant due to the way IRS manages its data files. There
    could be instances when a tax return was filed but it was not detected
    using our methodology. For example, a taxpayer's SSN on the Form W-2 might
    have been incorrect and the taxpayer reported the correct number on the
    tax return (Form 1040).

    ^7 The Compliance Data Warehouse houses excerpts of data from various IRS
    systems for easy retrieval.

    To report on data pertaining to the EITC, we relied on published EITC data
    provided by IRS research and program office officials, including the EITC
    database, the EITC Database Year to Year Comparison Report, and EITC Fact
    Sheet.^8 When possible, our analysis compares individuals who received the
    AEITC with individuals who received the EITC. IRS defines EITC recipients
    by the number of federal tax returns that received EITC. In addition, EITC
    data are based upon the primary TIN of all taxpayers who received an
    amount of EITC. We determined the number of individuals who receive the
    AEITC based on the number of Forms W-2 reporting AEITC per unique SSN. IRS
    officials agreed that even though these populations are not identical, it
    is reasonable to make a comparison between them.

    We frequently consulted with IRS officials on the data and our analyses;
    they generally agreed with both the approach and the accuracy of the
    results. For the analyses that IRS conducted, we agreed with both the
    approach and the accuracy of the results.

    In addition, we reviewed legislative and IRS administrative changes to the
    AEITC since 1992 and discussed them with IRS and other officials,
    including Department of the Treasury officials. We reviewed reports on
    IRS's implementation of some of our prior recommendations pertaining to
    the EITC and discussed them with IRS officials, including the National
    EITC Director. We also coordinated this work with the Treasury Inspector
    General for Tax Administration.

    Finally, we also identified and interviewed 11 individuals we determined
    to be experts to provide us a fuller understanding on the potential for
    significant increases or improvement to AEITC use and noncompliance and
    included academics, researchers, practitioners, and individuals
    representing the areas of tax policy, low-income individual issues, and
    compliance issues.^9 We chose these individuals based on our knowledge of
    their areas of expertise and our research that indicated they were
    knowledgeable about the EITC.

    ^8 The EITC Database is an extraction of EITC data from IRS's Individual
    Returns Transaction File. The database is located on the Compliance Data
    Warehouse. These data met our reliability standards.

    To address the third objective, how well do IRS's procedures address any
    areas of noncompliance, we examined portions of IRS's Internal Revenue
    Manual and interviewed IRS Wage and Investment and Small
    Business/Self-Employed division officials to determine procedures for
    processing returns that reported receipt of the AEITC. We examined how
    IRS's enforcement procedures and operations, including Submission
    Processing, AUR, Nonfiler, Collection, Examination, Criminal
    Investigation, and Taxpayer Advocate, address certain kinds of potential
    noncompliance.

    We explored various options to improve AEITC compliance. This involved
    conducting literature searches and interviews with IRS and SSA officials.
    We reviewed and discussed the results of soft notice tests with IRS
    officials, including the National EITC Director, and discussed the
    applicability of soft notices for addressing AEITC noncompliance. We also
    reviewed and analyzed documents and reports about IRS, SSA, and Department
    of Homeland Security databases about whether they could be used by
    employers to verify the SSN of an employee seeking the AEITC before the
    employer begins paying it. We also interviewed knowledgeable officials at
    IRS and SSA about the advantages and disadvantages of such systems when
    considering the AEITC. Further, we interviewed IRS officials from various
    offices, such as EITC Program, Modernization and Information Technology
    Services, and Stakeholders, Partnership, Education and Communication,
    about the advantages and disadvantages of creating a database for the
    Forms W-5. It was not within the scope of our work to fully evaluate the
    potential cost and benefits of these options for reducing noncompliance.

    We also reviewed prior GAO, IRS, Treasury Inspector General for Tax
    Administration, and other reports on the AEITC and EITC.

    ^9We spoke with Leonard Burman, Urban Institute; Leslie Book, Villanova
    University School of Law; Jonathan Forman, University of Oklahoma College
    of Law; William Gale, The Brookings Institution; Robert Greenstein, Center
    on Budget and Policy Priorities; Teresa Hinze, Community Tax Aid, Inc.;
    Julie Kruse, Center for Economic Progress; Diana Leyden, University of
    Connecticut School of Law; David Marzahl, Center for Economic Progress;
    John Karl Scholz, University of Wisconsin Department of Economics; and
    Eugene Steuerle, Urban Institute.

    We conducted our work primarily in Washington, D.C., and Atlanta, Ga.,
    from December 2005 through July 2007 in accordance with generally accepted
    government auditing standards.

    Appendix III: Demographic Characteristics of Advance Earned Income Tax
    Credit Recipients and Their Employers

    We identified basic demographic characteristics of Advance Earned Income
    Tax Credit (AEITC) recipients and their employers in tax years 2002
    through 2004. Specifically, we identified the following 11
    characteristics: (1) number of Forms W-2 received; (2) average amount of
    AEITC received by consecutive recipients; (3) average adjusted gross
    income (AGI) for AEITC recipients; (4) average wages; (5) filing status;
    (6) age; (7) gender; (8) number of qualifying children; (9) filing method;
    (10) geographic location of AEITC recipients; and (11) employer size,
    number of employees, and number of Forms W-2 with AEITC issued to
    employees. Each of the characteristics represents an analysis and provides
    additional objective information about AEITC recipients not previously
    discussed. Where possible, we compared AEITC recipients to Earned Income
    Tax Credit (EITC) recipients. Further analyses may provide information to
    better target IRS enforcement efforts. For example, IRS's information on
    EITC associated with gender differs from our AEITC results in table 17 on
    gender.

    The characteristics are organized by a declining AEITC population size.
    For example, table 10, "Number of Forms W-2 Received by Subpopulation, Tax
    Years 2002 through 2004," includes the valid, the invalid name, and
    invalid number subpopulations, as described in the scope and methodology
    (see app. II), while table 15, "Filing Status of AEITC and EITC
    Recipients, Number and Percentage, Tax Years 2002 through 2004," includes
    only the valid and invalid name subpopulations. The invalid number
    subpopulation was not included in the table about filing status because
    that subpopulation contains only Form W-2 data and not tax return data.
    Thus, information such as filing status, which comes from the tax return,
    is not available.

    Number of Forms W-2 with AEITC that each individual received: Most
    individuals who received the AEITC only had one Form W-2 reporting its
    receipt (see table 10). Having more than one Form W-2 does not necessarily
    indicate noncompliance because an individual may have more than one job
    during the year and receive the AEITC from more than one employer. The
    data did not enable us to analyze whether any of these individuals had
    more than one Form W-5 in effect at one time. Presently, IRS's
    administrative procedures do not enable it to identify whether the
    taxpayer has more than one Form W-5 in effect at one time.

    Table 10: Number of Forms W-2 Received by Subpopulation, Tax Years 2002
    through 2004

                                            Tax year 2002
    Number of                                Invalid name       Invalid number
    Forms W-2    Valid subpopulation        subpopulation        subpopulation
    1                        370,350               59,660               22,812
    2                         35,821               13,275                6,233
    3                          8,056                4,438                1,954
    4                          2,671                1,829                  874
    5                          1,040                  704                  332
    6                            408                  327                  142
    7                            202                  138                   74
    8                            109                   65                   37
    9                             48                   32                   10
    10                            33                   18                    7
    11                            16                   11                    7
    12                             5                    8                    3
    13                             4                    7                    4
    14                             2                    1                    1
    15                             2                    3                    1
    16                             2                    0                    2
    17                             2                    2                    1
    18                             2                    1                    0
    19                             1                    1                    2
    20                             0                    1                    1
    21                             0                    0                    0
    22                             0                    0                    0
    23                             0                    0                    2
    25                             0                    1                    0
    26                             0                    0                    0
    27                             0                    1                    0
    28                             0                    0                    1
    30                             0                    0                    0
    31                             0                    0                    0
    33                             0                    1                    0
    34                             0                    0                    0
    38                             0                    0                    0
    643                            0                    0                    0

                  Tax year 2003                             Tax year 2004
                                      Invalid                                   Invalid
            Valid  Invalid name        number         Valid  Invalid name        number
    subpopulation subpopulation subpopulation subpopulation subpopulation subpopulation
          353,284        56,863        22,474       349,544        62,422        24,853
           33,440        11,599         5,424        35,518        10,515         4,776
            7,645         3,514         1,660         8,568         3,040         1,452
            2,417         1,299           600         2,735         1,078           483
              907           512           259         1,032           382           187
              394           238            94           410           149            57
              196            99            41           258            77            27
              104            38            22           107            33            13
               63            18            17            65            17             8
               33            22             6            42             8             4
               17             5             4            19             5             5
               14             6             5            19             4             1
                6             5             5             8             1             2
                5             2             3             2             0             0
                1             3             1             1             3             1
                0             3             1             1             5             0
                0             3             1             0             1             0
                0             2             0             2             1             0
                0             0             0             0             0             1
                0             0             1             2             3             1
                0             0             0             0             1             0
                0             0             0             1             0             1
                0             1             0             0             0             0
                0             0             0             1             1             0
                0             0             1             0             0             1
                0             1             0             0             0             0
                0             0             1             0             0             0
                0             1             0             0             0             0
                0             0             1             0             0             0
                0             0             0             0             0             0
                0             0             0             0             1             0
                0             0             0             0             0             1
                0             0             1             0             0             0

                                            Tax year 2002
    Number of                                Invalid name       Invalid number
    Forms W-2    Valid subpopulation        subpopulation        subpopulation
    935                            0                    0                    1
    1088                           0                    0                    0
    Totals                   418,774               80,524               32,501

                  Tax year 2003                             Tax year 2004
                                      Invalid                                   Invalid
            Valid  Invalid name        number         Valid  Invalid name        number
    subpopulation subpopulation subpopulation subpopulation subpopulation subpopulation
                0             0             0             0             0             0
                0             0             0             0             0             1
          398,526        74,234        30,622       398,335        77,747        31,875

    Source: GAO analysis of IRS data.

    Note: This table includes the valid, invalid name, and invalid number
    subpopulations. About 20 percent of the combined invalid name and invalid
    number subpopulations were noncompliant (see table 4).

    Average amount of AEITC received by consecutive recipients: About 98,000
    individuals received the AEITC consecutively during tax years 2002 through
    2004. These 98,000 individuals received a higher average amount of AEITC
    than the entire AEITC population (see fig. 6).

    Figure 6: Average Amount of AEITC Received by Consecutive and AEITC
    Recipients, Tax Years 2002 through 2004

    Note: This figure includes the valid, invalid name, and invalid number
    subpopulations.

    Adjusted gross income (AGI) for AEITC and EITC recipients: The maximum
    amount of AGI a taxpayer could have in tax years 2002 through 2004 and
    receive the AEITC and/or EITC was $34,178, $34,692 and $35,458,
    respectively. As noted in tables 11, 12, and 13, most individuals who
    received the AEITC and filed a tax return reported an AGI of $1--$20,000.
    Some taxpayers had an AGI above the allowable limits. However, because an
    individual's personal circumstance may have changed during the year, for
    example the individual may have gotten a higher paying job, as long as the
    same amount of AEITC received as shown on the Form W-2 was reported on the
    tax return, AGI outside the limit for AEITC recipients is permissible and
    the taxpayer is considered compliant. By reporting the correct amount on
    the tax return, the AEITC would increase the tax due or reduce any refund.

    Table 11: AGI for AEITC and EITC Recipients, Number, Average, and Sum, for
    Tax Year 2002

                                                       Tax year 2002
                                         AEITC                                             EITC
                  Valid subpopulation         Invalid name subpopulation
    Adjusted
    Gross
    income    Number Average            Sum Number  Average            Sum     Number  Average              Sum
    Less       2,328 -$4,602   -$10,713,330    851 -$38,560   -$32,814,646    135,881 -$40,267  -$5,471,560,820
    than or
    equal to
    $0^a
    $1        97,641  $5,459   $533,029,760  7,946   $5,363    $42,617,768  7,360,626   $5,905  $43,461,774,192
    -$10,000
    $10,001   92,795 $14,768 $1,370,422,047  9,236  $14,920   $137,799,876  7,238,561  $14,676 $106,230,907,584
    -$20,000
    $20,001   51,787 $24,053 $1,245,652,310  7,867  $24,847   $195,471,529  5,395,193  $24,549 $132,448,552,653
    -$30,000
    Greater   38,765 $56,298 $2,182,391,376 33,625  $88,847 $2,987,478,924    788,562  $31,806  $25,081,179,444
    than
    $30,000
    Total    283,316 $18,780 $5,320,782,163 59,525  $55,952 $3,330,553,451 20,918,823  $14,425 $301,750,853,053

    Source: GAO analysis of IRS data.

    aNegative dollar amounts are possible with an AGI less than or equal to $0
    because these returns likely have eligible deductions (such as alimony
    payments) that exceed the AGI amount, thus resulting in a negative AGI.
    This table includes the valid and invalid name subpopulations.

    Table 12: AGI for AEITC and EITC Recipients, Number, Average, and Sum, for
    Tax Year 2003

                                                        Tax year 2003
                                         AEITC                                             EITC
                  Valid subpopulation         Invalid name subpopulation
    Adjusted
    gross
    income    Number Average            Sum Number  Average            Sum     Number  Average               Sum
    Less       1,402 -$8,980   -$12,589,922    790 -$82,807   -$65,417,790    159,145 -$37,491   -$5,966,471,268
    than or
    equal to
    $0^a
    $1        89,053  $5,485   $488,423,673  7,115   $5,369    $38,201,515  7,497,336   $5,895   $44,194,704,408
    -$10,000
    $10,001   86,420 $14,768 $1,276,286,596  8,436  $14,899   $125,687,374  7,340,828  $14,611 $1,072,555,29,694
    -$20,000
    $20,001   50,197 $24,168 $1,213,157,369  7,290  $24,794   $180,748,114  5,498,853  $24,634  $135,457,333,696
    -$30,000
    Greater   38,894 $57,039 $2,218,488,004 30,991  $94,505 $2,928,794,298    935,215  $31,988   $29,915,739,209
    than
    $30,000
    Total    265,966 $19,490 $5,183,765,720 54,622  $58,731 $3,208,013,511 21,431,377  $14,505  $107,255,529,694

    Source: GAO analysis of IRS data.

    aNegative dollar amounts are possible with an AGI less than or equal to $0
    because these returns likely have eligible deductions (such as alimony
    payments) that exceed the AGI amount, thus resulting in a negative AGI.
    This table includes the valid and invalid name subpopulations.

    Table 13: AGI for AEITC and EITC Recipients, Number, Average, and Sum, for
    Tax Year 2004

                                                        Tax year 2004
                                         AEITC                                              EITC
                   Valid subpopulation         Invalid name subpopulation
    Adjusted
    gross
    income    Number  Average            Sum Number  Average            Sum     Number  Average              Sum
    Less         641 -$22,631   -$14,506,202    686 -$61,661   -$42,299,493    177,820 -$28,625  -$5,090,160,585
    than or
    equal to
    $0^a
    $1        86,180   $5,578   $480,670,518  6,988   $5,391    $37,671,007  7,497,833   $5,896  $44,206,887,726
    -$10,000
    $10,001   83,792  $14,716 $1,233,045,113  8,270  $14,914   $123,334,680  7,355,688  $14,562 $107,113,059,413
    -$20,000
    $20,001   49,165  $24,204 $1,189,979,660  7,139  $24,846   $177,374,704  5,519,610  $24,710 $136,390,977,111
    -$30,000
    Greater   34,225  $54,623 $1,869,459,016 32,638 $101,396 $3,309,361,834  1,170,267 $32, 204  $37,687,855,307
    than
    $30,000
    Total    254,003   12,735 $4,758,648,105 55,721  $64,705 $3,605,442,732 21,721,218  $14,746 $320,308,618,972

    Source: GAO analysis of IRS data.

    aNegative dollar amounts are possible with an AGI less than or equal to $0
    because these returns likely have eligible deductions (such as alimony
    payments) that exceed the AGI amount, thus resulting in a negative AGI.
    This table includes the valid and invalid name subpopulations.

    Wages for AEITC and EITC recipients: The yearly wage limits for AEITC and
    EITC recipients were $34,178 for tax year 2002, $34,692 for tax year 2003,
    and $35,458 for tax year 2004. The average wages for AEITC recipients in
    the valid subpopulation were about $18,000, while they were about $47,000
    for the invalid name subpopulation.^1 This compares with about $13,000 for
    EITC recipients (see table 14). Some wages are outside the allowable
    limits. However, because an individual's personal circumstance may have
    changed during the year, for example, the individual may have gotten a
    higher paying job, as long as the same amount of AEITC received as shown
    on the Form W-2 was reported on the tax return, wages outside the limit
    are permissible and the taxpayer is considered compliant. By reporting the
    correct amount on the tax return, the AEITC would increase the tax due or
    reduce any refund.

    ^1 The large difference in wages between the AEITC valid and invalid name
    subpopulations could be a result of women who married during the year and
    changed their name with their employer, but not SSA. These women likely
    reported combined wages with their spouse.

    Table 14: Wages Reported for AEITC and EITC Recipients, Number, Wage
    Amount, and Average Dollars Received for Tax Years 2002 through 2004

                                    AEITC                                            EITC
              Valid subpopulation        Invalid name subpopulation
    Tax
    year  Number    Wage amount Average Number    Wage amount Average     Number      Wage amount Average
    2002 283,316 $4,926,169,548 $17,388 59,525 $2,696,220,392 $45,296 20,918,823 $273,167,081,421 $13,058
    2003 265,966 $4,829,307,231 $18,158 54,622 $2,545,765,228 $46,607 21,431,377 $280,828,962,882 $13,104
    2004 254,003 $4,409,967,145 $17,362 55,721 $2,759,417,493 $49,522 21,721,218 $290,119,218,681 $13,356

    Source: GAO analysis of IRS data.

    Notes: This table includes the valid and invalid name subpopulations.

    Filing status of AEITC and EITC recipients: As shown in table 15, about
    half of AEITC recipients in the valid subpopulation and most individuals
    who received the EITC used the Head of Household filing status. This
    compares to AEITC recipients in the invalid name subpopulation who most
    frequently used the Married Filing Jointly filing status. About 2 percent
    of the tax returns that reported receiving AEITC used the Married Filing
    Separate filing status, which is not allowed. However, an individual's
    personal circumstance may have changed during the year, for example the
    individual may have separated from their spouse. As long as the same
    amount of AEITC received as shown on the Form W-2 was reported on the tax
    return, this situation is permissible and the taxpayer is considered
    compliant. By reporting the correct amount on the tax return, the AEITC
    would increase the tax due or reduce any refund.

    Table 15: Filing Status of AEITC and EITC Recipients, Number and
    Percentage, Tax Years 2002 through 2004

                                                    Tax year 2002
                                                 AEITC                  EITC
                                              Valid   Invalid name
                                      subpopulation  subpopulation
    Head of household                    140,021         11,180     11,326,654

                                              (49%)          (19%)          (54%)
    Single                                77,347         13,457      4,495,201

                                              (27%)          (23%)          (21%)
    Married filing jointly                60,153         33,837      5,068,608

                                              (21%)          (57%)          (24%)
    Married filing separate                5,546            988          3,042

                                               (2%)           (2%) (less than 1%)
    Widow(er) with children                  180             40         25,318

                                     (less than 1%) (less than 1%) (less than 1%)
    Married filing separate (with             69             23            N/A
    spouse not required to file)
                                     (less than 1%) (less than 1%)
    Total                                283,316         59,525     20,918,823

                   Tax year 2003                          Tax year 2004
                  AEITC               EITC               AEITC               EITC
               Valid  Invalid name                    Valid  Invalid name
    subpopulation subpopulation            subpopulation subpopulation
             133,985        10,255 11,532,582       134,964        10,551 11,659,521

               (50%)         (19%)      (54%)         (53%)         (19%)      (54%)
              68,795        12,355  4,681,467        63,685        12,606  4,914,789

               (26%)         (23%)      (22%)         (25%)         (23%)      (23%)
              58,133        31,043  5,190,469        51,053        31,633  5,119,517

               (22%)         (57%)      (24%)         (20%)         (57%)      (24%)
               4,815           903          0         4,052           862          0

                (2%)          (2%)       (0%)          (2%)          (2%)       (0%)
                 187            42     26,859           193            52     27,391

          (less than    (less than (less than    (less than    (less than (less than
                 1%)           1%)        1%)           1%)           1%)        1%)
                  51            24        N/A            56            17        N/A

          (less than    (less than               (less than    (less than
                 1%)           1%)                      1%)           1%)
             265,966        54,622 21,431,377       254,003        55,721 21,721,218

    Source: GAO analysis of IRS data.

    Notes: EITC totals are the number of taxpayers who received EITC. N/A
    means not applicable. This table includes the valid and invalid name
    subpopulations.

    Age of AEITC and EITC recipients:  Most individuals who received the
    AEITC, as well as most EITC recipients, were between the ages of 26 and 64
    (see table 16). IRS officials noted that recipients whose age fell into
    the `Over 100' category are the result of a probable error, such as a
    transcription error. Alternatively, an AEITC recipient in this category
    may have used a SSN of a deceased individual.

    Table 16: Age of AEITC and EITC Recipients, Tax Years 2002 through 2004

                                            Tax year 2002
                                         AEITC                          EITC
                                                      Invalid name
                     Valid subpopulation             subpopulation
    Age 25 and                 82,810                    29,010      3,259,332
    under
                                   (20%)                     (36%)          (16%)
    Age 26 to 64              333,519                    31,202     17,345,338

                                   (80%)                     (39%)          (83%)
    Age 65 to 100               2,409                    14,275        242,838

                                    (1%)                     (18%)           (1%)
    Over 100                       35                     6,037         71,315

                          (less than 1%)                      (8%) (less than 1%)
    Total                     418,773                    80,524     20,918,823

                   Tax year 2003                          Tax year 2004
                  AEITC               EITC               AEITC               EITC
               Valid  Invalid name                    Valid  Invalid name
    subpopulation subpopulation            subpopulation subpopulation
              78,215        26,035  3,289,587        77,096        26,499  3,348,578

               (20%)         (35%)      (15%)         (19%)         (34%)      (15%)
             317,997        29,300 17,613,301       318,683        31,908 17,844,506

               (80%)         (40%)      (82%)         (80%)         (41%)      (82%)
               2,278        13,033    261,347         2,514        13,270    274,428

          (less than         (18%)       (1%)          (1%)         (17%)       (1%)
                 1%)
                  35         5,866    267,142            42         6,070    253,706

          (less than          (8%)       (1%)    (less than          (8%)       (1%)
                 1%)                                    1%)
             398,525        74,234 21,431,377       398,335        77,747 21,721,218

    Source: GAO analysis of IRS data.

    Notes: This table includes the valid and invalid name subpopulations. IRS
    calculated age by subtracting the birth year from the analysis year.
    Neither IRS nor GAO could identify why the tax years 2002 and 2003 AEITC
    valid Forms W-2 SSN total is one below the total number of individuals who
    received a Form W-2 reporting AEITC.

    Gender of AEITC and EITC recipients: More males than females received the
    AEITC during tax years 2002 through 2004. In contrast, more females than
    males received the EITC during this same period (see table 17).

    Table 17: Gender of AEITC and EITC Recipients, Number and Percentage, Tax
    Years 2002 through 2004

                                       Tax year 2002
                                   AEITC                           EITC
               Valid subpopulation Invalid name subpopulation
    Female              165,694                     36,805     11,087,655

                             (40%)                      (46%)          (53%)
    Male                252,922                     39,908      9,822,392

                             (60%)                      (50%)          (47%)
    Unknown                 158                      3,811          8,776

                    (less than 1%)                       (5%) (less than 1%)
    Total               418,774                     80,524     20,918,823

                            (100%)                     (100%)         (100%)

                   Tax year 2003                          Tax year 2004
                  AEITC               EITC               AEITC               EITC
               Valid  Invalid name                    Valid  Invalid name
    subpopulation subpopulation            subpopulation subpopulation
             159,681        34,019 11,277,324       165,480        35,904 11,525,243

               (40%)         (46%)      (53%)         (42%)         (46%)      (53%)
             238,683        36,762 10,148,364       232,690        38,472 10,190,319

               (60%)         (50%)      (47%)         (58%)         (49%)      (47%)
                 162         3,453      5,689           165         3,371      5,656

          (less than          (5%) (less than    (less than          (4%) (less than
                 1%)                      1%)           1%)                      1%)
             398,526        74,234 21,431,377       398,335        77,747 21,721,218

              (100%)        (100%)     (100%)        (100%)        (100%)     (100%)

    Source: GAO analysis of IRS data.

    Notes: This table includes the valid and invalid name subpopulations. We
    reported gender information only for individuals who filed a federal tax
    return. Percentages may not add due to rounding.

    Number of qualifying children for AEITC and EITC recipients: About half of
    the individuals who reported receiving the AEITC had two qualifying
    children. Results were similar for EITC recipients. However, about 8
    percent of this population did not report having any qualifying children,
    which is not allowed (see table 18). However, an individual's personal
    circumstance may have changed during the year, for example, the individual
    may have separated from their spouse or divorced. As long as the same
    amount of AEITC received as shown on the Form W-2 was reported on the tax
    return, the taxpayer is considered compliant. By reporting the correct
    amount on the tax return, the AEITC would increase the tax due or reduce
    any refund. In contrast, most individuals who received the EITC also had
    two qualifying children. There is no qualifying child requirement to
    receive the EITC.

    Table 18: Number of Qualifying Children for AEITC and EITC Recipients,
    Number and Percentage, Tax Years 2002 through 2004

                           Tax year 2002      Tax year 2003      Tax year 2004
                           AEITC       EITC   AEITC       EITC   AEITC       EITC
    Number of           7,946  3,765,072   7,456  4,022,684   7,786  4,181,382
    taxpayers with no
    qualifying           (8%)      (18%)    (7%)      (19%)    (8%)      (19%)
    children
    (percentage)
    Number of          43,066  8,198,533  43,129  8,269,050  40,379  8,354,539
    taxpayers with 1
    qualifying child    (41%)      (39%)   (41%)      (39%)   (40%)      (38%)
    (percentage)
    Number of          53,721  8,955,218  55,558  9,139,643  52,448  9,185,297
    taxpayers with 2
    qualifying          (51%)      (43%)   (52%)      (43%)   (52%)      (42%)
    children
    (percentage)
    Total             104,733 20,918,823 106,143 21,431,377 100,613 21,721,218
    (percentage)
                          (100%)     (100%)  (100%)     (100%)  (100%)     (100%)

    Source: GAO analysis of IRS data.

    Note: This table is based on the number of tax returns in the EITC
    database that had AEITC greater than $0 and zero, one, or two qualifying
    children.

    Filing method of AEITC and EITC recipients: As noted in table 19, most tax
    returns that showed receiving an amount of AEITC were filed
    electronically, as were most tax returns which reported receipt of the
    EITC. For both AEITC and EITC, about 70 percent of recipients filed
    electronically for the 3 years we examined.

    Table 19: Filing Method of AEITC and EITC Recipients, Number and
    Percentage, Tax Years 2002 through 2004

                    Tax year 2002      Tax year 2003      Tax year 2004
                    AEITC       EITC   AEITC       EITC   AEITC       EITC
    Electronic  93,291 14,030,564 100,085 15,322,251  98,592 16,269,437

                    (68%)      (67%)   (72%)      (71%)   (78%)      (75%)
    Paper       44,477  6,888,259  38,885  6,109,126  28,228  5,451,781

                    (32%)      (33%)   (28%)      (29%)   (22%)      (25%)
    Total      137,768 20,918,823 138,970 21,431,377 126,820 21,721,218

                   (100%)     (100%)  (100%)     (100%)  (100%)     (100%)

    Source: GAO analysis of IRS data.

    Note: Tax years 2002 and 2003 include 5 and 4 duplicate Taxpayer
    Identification Numbers (TIN), respectively. The AEITC totals shown above
    do not equal the total number of individuals who filed a federal tax
    return for that year. This table only includes the number of tax returns
    that had an AEITC amount greater than $0. IRS did not identify the filing
    method used by individuals who filed a tax return but failed to report
    receipt of the AEITC. The total number of individuals who filed a federal
    tax return was 338,942, 316,959, and 307,251, for tax years 2002 through
    2004 respectively. The EITC total represents the total number of taxpayers
    claiming EITC.

    Geographic location of AEITC recipients in the valid subpopulation: Of the
    individuals in the valid subpopulation, use of the AEITC varied widely
    across the country. In all 3 tax years, Florida and Illinois had the most
    AEITC recipients (see fig. 7).

    Figure 7: Geographic Location of AEITC Recipients in the Valid
    Subpopulation, Tax Years 2002 through 2004

    Note: AEITC geographic location is based upon information reported on the
    tax return. This figure includes the valid subpopulation.

    aThese geographic locations had at least 1 but fewer than 10 individuals
    who received the AEITC.

    bU.S insular areas include the three major U.S. territories, which are the
    U.S. Virgin Islands, American Samoa, Guam, and the two Commonwealths,
    which are the Commonweath of Puerto Rico and the Commonwealth of Northern
    Mariana Islands.

    cOther includes Federated States of Micronesia, Marshall Islands, Palau,
    and Armed Forces mostly located outside the U.S.

    dMissing refers to instances where the geographic location was not
    available.

    Employer size, number of employers, number of forms W-2 employers issued
    to AEITC recipients and Total AEITC Dollars Reported on Forms W-2:
    Slightly more than 50,000 employers reported paying at least one employee
    AEITC in each tax years 2002 through 2004. Most of these employers were
    classified by IRS as small business/self employed and they issued more
    than half of all the Forms W-2 with AEITC (see table 20).

    Table 20: Employer Size, Number of Employers, Number of Forms W-2
    Employers Issued to AEITC Recipients and Total Dollars Reported on Forms
    W-2, Tax Years 2002 through 2004

                           Tax Year 2002                  Tax Year 2003                  Tax Year 2004
                              Number                         Number                         Number
                                  of                             of                             of
                               Forms                          Forms                          Forms
                                 W-2  Total AEITC               W-2  Total AEITC               W-2  Total AEITC
                              issued      Dollars            issued      Dollars            issued      Dollars
                   Number of    with  Reported on Number of    with  Reported on Number of    with  Reported on
    Employer size  employers   AEITC    Forms W-2 employers   AEITC    Forms W-2 employers   AEITC    Forms W-2
    Small             30,004 368,112  $72,779,073    29,562 347,942  $73,120,770    30,296 351,710  $77,689,921
    business/self
    employed           (57%)   (56%)        (50%)     (57%)   (57%)        (51%)     (59%)   (57%)        (52%)
    Tax exempt and    13,416  62,869  $29,103,769    12,976  57,856  $25,830,428    12,609  45,301  $24,715,548
    government
    entities           (26%)   (10%)        (20%)     (25%)   (10%)        (18%)     (24%)    (7%)        (16%)
    Large and          9,058 227,029  $42,551,520     8,715 202,459  $43,615,497     8,517 219,684  $47,612,524
    midsize
    business           (17%)   (35%)        (29%)     (17%)   (33%)        (30%)     (17%)   (36%)        (32%)
    Unknown or            89     656     $112,644       174   3,610     $639,206        72     143      $66,274
    unidentifiable
                       (less   (less   (less than     (less    (1%)   (less than     (less   (less   (less than
                    than 1%)    than          1%)  than 1%)                  1%)  than 1%)    than          1%)
                                 1%)                                                           1%)
    Totals            52,567 658,666 $144,547,006    51,427 611,867 $143,205,901    51,494 616,838 $150,084,267

    Source: GAO analysis of IRS data.

    Note: Employers are defined by unique Employer Identification Numbers
    (EIN) and the classification of employer size is based on IRS criteria.
    Number of employers includes the valid, invalid name, and invalid number
    subpopulations. Number of Forms W-2 issued with AEITC includes all Forms
    W-2 issued that year reporting an amount of AEITC. Percentages may not add
    due to rounding.

    Appendix IV: Administrative and Legislative Changes to the Advance Earned
    Income Tax Credit Since 1990

    IRS has made several administrative changes to the Advance Earned Income
    Tax Credit (AEITC) since the beginning of 1990 (see table 21). IRS
    described these changes in responses to recommendations in our 1992 AEITC
    report and a 2003 Treasury Inspector General for Tax Administration
    report.^1

    Table 21: Administrative Changes to the AEITC since 1990

    Year      Change
    1990      Added separate lines to the 1990 Forms 1040 and 1040A for
                 reporting AEITC received.
    1991      Revised Form W-4 to advise employees of the availability of the
                 AEITC and to refer them to the Form W-5.
    1991-1992 Revised Form W-2 and IRS Notice 797 to contain information on
                 how to apply for the AEITC.
    1992      Developed publicity materials and distributed them to the
                 public; provided credit information in the Small Business
                 Taxpayer Education Program; and increased outreach speaker
                 seminar efforts, in cooperation with federal, state, and local
                 officials and private organizations.
    1992      Developed print and audiovisual products to inform the public
                 about the AEITC.
    1992      Expanded instructions on AEITC in "Circular E, Employer's Tax
                 Guide."
    1992      Added examples to "Circular E, Employer's Tax Guide," explaining
                 how to advance the EITC to employees and how to report amounts
                 in advance.
    1992      Clarified employer's responsibilities and liabilities in
                 advancing the Earned Income Tax Credit (EITC) in the 1993
                 "Circular E, Employer's Tax Guide."
    1993      Expanded 1993 Form W-2 instructions concerning AEITC.
                 Specifically, revised the Form W-2 to place a bold outline
                 around the AEITC box of the employee's copy.
    2003      Updated instructions that require tax examiners to compare the
                 amount of AEITC shown on the tax return to the amount listed as
                 AEITC on the Form W-2 and adjust the amounts when needed.
    2004      Created an error condition in return processing when the amount
                 of AEITC reported exceeds the maximum allowed for the year.
    2005      Created an error condition in return processing for whenever
                 AEITC is listed on the return without a corresponding entry for
                 the EITC.

    Source: GAO analysis.

    ^1 [39]GAO/GGD-92-26 and Treasury Inspector General for Tax
    Administration, Taxpayers Were Assessed Additional Tax for Advance Earned
    Income Credit Payments Not Received, 2003-40-126 (June 2003).

    Notes: Changes made between 1990 and 1993 were a result of GAO's 1992
    report and changes between 2003 and 2005 were a result of the Treasury
    Inspector General for Tax Administration's 2003 report. Some of the
    changes made between 1990 and 1993 occurred before our report was issued.

    There have been two laws enacted since our 1992 report that include
    specific changes to the AEITC.^2 First, the Omnibus Budget Reconciliation
    Act of 1993 (OBRA '93), did the following.

               1. Limited the amount of advance payment allowable in a taxable
               year to 60 percent of the maximum credit available to a taxpayer
               with one qualifying child.
               2. Directed the IRS to notify taxpayers with qualifying children
               who receive a refund on account of the EITC that the credit may be
               available on an advance basis. The conference report accompanying
               OBRA '93 stated that after these notifications had been made for 2
               taxable years, the Treasury Secretary was directed to study their
               effect on utilization of the advance payment mechanism and, based
               on the results of the study, the Secretary may recommend
               modifications to the notification program.^3

    Second, the U.S. Troop Readiness, Veteran's Care, Katrina Recovery, and
    Iraq Accountability Appropriations Act of 2007, which was enacted in late
    May 2007, calls for a study of AEITC use.^4 The study is to be conducted
    by the Secretary of the Treasury for the Congress and is to include the
    benefits, costs, risks, and barriers to workers and to businesses (with a
    special emphasis on small businesses) if the AEITC included all recipients
    of the EITC (i.e., individuals without qualifying children). It also asks
    what steps would be necessary to implement such an inclusion.

    ^2 We only included laws that made specific changes to the AEITC or its
    administration that were independent of changes to the EITC. Thus, we did
    not include laws whose only change to the AEITC occurred because of
    changes to the broader EITC program, such as changes in EITC benefit
    amounts or eligibility rules.

    ^3 H.R. Conf. Rep. No. 103-213 (1993).

    ^4 Pub. L. No. 110-28.

    Appendix V: Additional Analyses of Advance Earned Income Tax Credit
    Noncompliance

    We identified additional areas of noncompliance for AEITC recipients
    during tax years 2002 through 2004. We also examined demographic
    characteristics of our noncompliant subpopulations, including the invalid
    name, invalid number, and dollar limit subpopulations. Our analyses
    revealed the following: (1) some consecutive AEITC recipients had an
    invalid SSN, (2) most consecutive AEITC recipients filed a tax return, but
    did not report the correct AEITC amount on the tax return, (3) AEITC
    recipients with an invalid SSN received little money, (4) most AEITC
    recipients with an invalid SSN received one to two Forms W-2, (5) AEITC
    recipients in the invalid subpopulations lived in various geographic
    locations, and (6) AEITC was paid in excess of yearly maximum limits. As
    with the data in Appendix III, further analyses of this data may provide
    information on noncompliance characteristics potentially useful for IRS
    enforcement efforts.

    Each of the tables provides additional information about AEITC recipients
    not previously discussed. Where possible, we compared AEITC recipients to
    EITC recipients. The characteristics are organized by a declining AEITC
    population size, similar to the organization in appendix III. Most
    analyses include the invalid name and invalid number subpopulations. The
    subpopulations are described in the scope and methodology section (see
    app. II).

    Some consecutive AEITC recipients had an invalid SSN: About 98,000
    individuals received the AEITC consecutively in each of the 3 years, tax
    years 2002 through 2004, and received an average of about $56 million.
    About a quarter of these individuals had an invalid SSN and received an
    average of approximately $16 million in AEITC. Additionally, nearly 15
    percent of consecutive users had an invalid SSN and did not file a federal
    tax return, receiving an average of about $9 million in AEITC (see table
    22).

    Table 22: Number of Individuals and AEITC Dollars Received by AEITC
    Recipients and Individuals Who Elected the AEITC Consecutively Using an
    Invalid SSN and an Invalid SSN and Not Filing, Tax Years 2002 through 2004

                        Tax year 2002            Tax year 2003            Tax Year 2004
                   Individuals      Dollars Individuals      Dollars Individuals      Dollars
    AEITC              531,799 $144,547,006     503,382 $143,205,901     507,957 $150,084,267
    recipients
    AEITC               97,998  $53,272,152      97,998  $60,849,730      97,998  $52,698,947
    consecutive
    recipients^a         (18%)        (37%)       (19%)        (42%)       (19%)        (35%)
    AEITC               23,175  $14,837,041      23,175  $17,217,171      23,175  $14,798,025
    consecutive
    recipients           (24%)        (28%)       (24%)        (28%)       (24%)        (28%)
    with invalid
    SSN
    (percentage)^b
    AEITC               13,181   $8,593,857      13,153   $9,972,631      13,348   $8,722,592
    consecutive
    recipients           (13%)        (16%)       (13%)        (16%)       (14%)        (17%)
    with invalid
    SSN and did
    not file
    federal tax
    return
    (percentage)^b

    Note: The number of AEITC consecutive recipients represents the total
    number of individuals who received the AEITC over each of the 3 years. The
    associated dollars represent the amount those individuals received each
    year.

    aPercentage is out of AEITC recipients and dollars. This analysis includes
    the valid, invalid name, and invalid number subpopulations.

    bPercentage is out of AEITC consecutive recipients and dollars. This
    analysis includes the invalid name and invalid number subpopulations.

    Most consecutive AEITC recipients filed a tax return, but did not report
    the correct AEITC amount on the tax return: About 98,000 individuals
    received the AEITC consecutively in each of the 3 tax years, 2002 through
    2004. More than half of these individuals filed a tax return. Of those who
    filed, about half reported the same AEITC amount on the tax return as
    shown on the Form W-2 (i.e., matched). Of the mismatches, the majority did
    not report receipt of the AEITC (see table 23).

    Advance Earned Income Tax Credit Advance Earned Income Tax Credit Advance
    Earned Income Tax Credit Advance Earned Income Tax Credit Advance Earned
    Income Tax Credit Advance Earned Income Tax Credit Advance Earned Income
    Tax Credit Advance Earned Income Tax Credit Advance Earned Income Tax
    Credit Advance Earned Income Tax Credit Advance Earned Income Tax Credit
    Advance Earned Income Tax Credit Advance Earned Income Tax Credit Advance
    Earned Income Tax Credit Advance Earned Income Tax Credit Advance Earned
    Income Tax Credit Advance Earned Income Tax Credit Advance Earned Income
    Tax Credit

    Table 23: Number of AEITC Consecutive Recipients with Matches and
    Mismatches between Forms W-2 and Filed Tax Returns, Tax Years 2002 through
    2004

                           Tax year 2002      Tax year 2003      Tax year 2004
                         Number     Dollars Number     Dollars Number     Dollars
    Number of         65,864 $42,750,223 63,189 $43,205,414 60,257 $36,916,220
    consecutive AEITC
    recipients who
    filed federal tax
    returns
    Number of returns 29,017 $21,611,779 29,606 $24,369,871 28,478 $20,706,538
    that matched the
    Form(s) W-2 AEITC  (44%)       (51%)  (47%)       (56%)  (47%)       (56%)
    amount for
    consecutive
    recipients

    (percentage)^a
    Number of         36,847 $21,138,444 33,583 $18,835,543 31,779 $16,209,682
    mismatches
    between Form(s)    (56%)       (49%)  (53%)       (44%)  (53%)       (44%)
    W-2 and filed tax
    returns for
    consecutive
    recipients

    (percentage)^a
    Number of         34,400 $19,751,401 31,035 $17,182,551 29,675 $14,922,931
    mismatches due to
    nonreporting of     (93%       (93%)  (92%)       (91%)  (93%)       (92%)
    AEITC for
    consecutive
    recipients

    (percentage)^b
    Number of          1,567    $956,176  1,688  $1,164,494  1,352    $843,205
    mismatches due to
    underreporting of   (4%)        (5%)   (5%)        (6%)   (4%)        (5%)
    AEITC for
    consecutive
    recipients

    (percentage)^b
    Number of            880    $430,867    860    $488,498    752    $443,546
    mismatches due to
    overreporting       (2%)        (2%)   (3%)        (3%)   (2%)        (3%)
    AEITC

    (percentage)^b

    Source: GAO analysis of IRS data.

    Note: Percentages may not add due to rounding. This table includes
    individuals who filed a tax return in the valid and invalid name
    subpopulations.

    aWe considered a match to be anything plus or minus a dollar on the Form
    W-2 in order to allow for taxpayer rounding. We tested the sensitivity of
    this result by using a difference between the AEITC reported on the Form
    W-2 and the tax return of up to $100 and the results were similar.
    Percentage is of number of consecutive AEITC recipients who filed federal
    tax returns.

    bPercentage is of number of mismatches due to nonreporting of AEITC for
    consecutive recipients and number of consecutive AEITC recipients who
    filed federal tax returns.

    AEITC recipients with an invalid Social Security number (SSN) received
    little money: Most AEITC recipients who had a Form(s) W-2 with an invalid
    SSN obtained $100 or less of AEITC (see table 24). These data are
    consistent with the overall AEITC population, as previously noted, where
    about half of all recipients received less than $100 and 80 percent
    received $500 or less for the year.

    Table 24: Amount of AEITC Received Per Invalid Form W-2, Number and
    Percentage, Tax Years 2002 through 2004

                              Tax year 2002     Tax year 2003     Tax year 2004
    AEITC amount         Count(percentage) Count(percentage) Count(percentage)
    $1- $100                        14,004            12,658            13,292

                                        (43%)             (41%)             (42%)
    $101- $200                       4,075             3,818             3,817

                                        (13%)             (12%)             (12%)
    $201 - $300                      2,651             2,471             2,605

                                         (8%)              (8%)              (8%)
    $301- $400                       2,006             1,888             1,881

                                         (6%)              (6%)              (6%)
    $401 - $500                      1,521             1,360             1,433

                                         (5%)              (4%)              (4%)
    $501- $600                       1,172             1,147             1,218

                                         (4%)              (4%)              (4%)
    $601- $700                         952               953               929

                                         (3%)              (3%)              (3%)
    $701- $800                         848               809               891

                                         (3%)              (3%)              (3%)
    $801- $900                         820               727               804

                                         (3%)              (2%)              (3%)
    $901- $1,000                       705               718               710

                                         (2%)              (2%)              (2%)
    $1,001 - $1,100                    649               690               691

                                         (2%)              (2%)              (2%)
    $1,101 - $1,200                    657               634               624

                                         (2%)              (2%)              (2%)
    $1,201 - $1,300                    634               665               652

                                         (2%)              (2%)              (2%)
    $1,301 - $1,400                    621               709               731

                                         (2%)              (2%)              (2%)
    $1,401 - yearly                    577               955             1,242
    maximum
                                         (2%)              (3%)              (4%)
    Above maximum ^a                   609               420               355

                                         (2%)              (1%)              (1%)
    Total                           32,501            30,622            31,875

    Source: GAO analysis of IRS data.

    Note: This table includes the invalid number subpopulation.

    aAbove the maximum is possible because this table presents aggregated
    Forms W-2 and if an individual received more than one Form W-2, the total
    received could be above the yearly maximum.

    Most AEITC recipients with an invalid SSN received 1 to 2 Forms W-2: Most
    recipients who had an invalid SSN received 1 to 2 Forms W-2 reporting
    AEITC. For example, in tax year 2002, 6,223 individuals received two Forms
    W-2 that reported AEITC. These resulted in a total of 12,466 Forms W-2
    equaling $3,261,327 in AEITC, with an average of $262 in AEITC per Form
    W-2 (see tables 25, 26, and 27).

    Table 25: Number of Individuals Receiving a Form(s) W-2, Total Number of
    Form(s) W-2 Reporting AEITC, Total Associated and Average Dollars Received
    Relative to Number of Form(s) W-2 Reporting AEITC for AEITC Recipients
    with an Invalid SSN on the Form(s) W-2, Tax Year 2002

                  A                    B             C            D         E
                                      Number of
                                    individuals Total number       Total  Average
    Number of Forms W-2 an     receiving the of Forms W-2  associated  dollars
    individual received      number of Forms    reporting  dollars on per Form
    reporting AEITC                      W-2      AEITC^a   Forms W-2    W-2^b
    1                                 22,812       22,812  $5,588,671     $245
    2                                  6,233       12,466  $3,261,327     $262
    3                                  1,954        5,862  $1,290,955     $220
    4                                    874        3,496    $689,595     $197
    5                                    332        1,660    $287,912     $173
    6                                    142          852    $138,384     $162
    7                                     74          518     $84,688     $163
    8                                     37          296     $46,962     $159
    9                                     10           90     $15,429     $171
    10                                     7           70      $9,601     $137
    11                                     7           77     $12,577     $163
    12                                     3           36      $6,073     $169
    13                                     4           52     $11,805     $227
    14                                     1           14      $6,246     $446
    15                                     1           15      $5,156     $344
    16                                     2           32      $8,271     $258
    17                                     1           17      $3,893     $229
    19                                     2           38     $10,695     $281
    20                                     1           20      $6,978     $349
    23                                     2           46      $8,101     $176
    28                                     1           28      $6,074     $217
    935                                    1          935     $83,211      $89
    Total Forms W-2 with              32,501       49,432 $11,582,604     $234
    invalid SSNs

    Source: GAO analysis of IRS data.

    Note: This table includes the invalid number subpopulation.

    aThis number is derived by multiplying column A by column B.

    bThis amount is derived by dividing column D by column C.

    Table 26: Number of Individuals Receiving a Form(s) W-2, Total Number of
    Form(s) W-2 Reporting AEITC, Total Associated and Average Dollars
    Received, Relative to Number of Form(s) W-2 Reporting AEITC for AEITC
    Recipients with an Invalid SSN on the Form(s) W-2, Tax Year 2003

                  A                    B             C           D          E
                                      Number of
                                    individuals Total number      Total   Average
    Number of Forms W-2 an     receiving the of Forms W-2 associated   dollars
    individual received      number of Forms    reporting dollars on per Forms
    reporting AEITC                      W-2      AEITC^a  Forms W-2     W-2^b
    1                                 22,474       22,474 $6,787,458      $302
    2                                  5,424       10,848 $2,689,186      $248
    3                                  1,660        4,980 $1,076,219      $216
    4                                    600        2,400   $478,420      $199
    5                                    259        1,295   $222,288      $172
    6                                     94          564   $107,704      $191
    7                                     41          287    $46,869      $163
    8                                     22          176    $32,510      $185
    9                                     17          153    $30,123      $197
    10                                     6           60    $14,293      $238
    11                                     4           44     $9,769      $222
    12                                     5           60    $14,794      $247
    13                                     5           65    $20,860      $321
    14                                     3           42    $10,857      $259
    15                                     1           15     $1,798      $120
    16                                     1           16     $4,378      $274
    17                                     1           17    $10,284      $605
    19                                     0            0         $0        $0
    20                                     1           20     $4,468      $223
    22                                     0            0         $0        $0
    23                                     0            0         $0        $0
    26                                     1           26     $8,584      $330
    28                                     1           28     $9,513      $340
    31                                     1           31     $9,404      $303
    38                                     0            0         $0        $0
    643                                    1          643    $60,948       $95
    935                                    0            0         $0         0
    1,088                                  0            0         $0         0
    Total                             30,622       44,244 11,650,727      $263

    Source: GAO analysis of IRS data.

    Note: This table includes the invalid number subpopulation.

    aThis number is derived by multiplying column A by column B.

    bThis amount is derived by dividing column D by column C.

    Table 27: Number of Individuals Receiving a Form(s) W-2, Total Number of
    Form(s) W-2 Reporting AEITC, Total Associated and Average Dollars
    Received, Relative to Number of Form(s) W-2 Reporting AEITC for AEITC
    Recipients with an Invalid SSN on the Form(s) W-2, Tax Year 2004

                  A                    B             C            D         E
                                      Number of
                                    individuals Total number       Total  Average
    Number of Forms W-2 an     receiving the of Forms W-2  associated  dollars
    individual received      number of Forms    reporting  dollars on per Form
    reporting AEITC                      W-2      AEITC^a   Forms W-2    W-2^b
    1                                 24,853       24,853  $7,602,238     $306
    2                                  4,776        9,552  $2,663,173     $279
    3                                  1,452        4,356  $1,022,262     $235
    4                                    483        1,932    $385,252     $199
    5                                    187          935    $178,214     $191
    6                                     57          342     $72,679     $213
    7                                     27          189     $47,036     $249
    8                                     13          104     $30,029     $289
    9                                      8           72     $15,628     $217
    10                                     4           40      $9,060     $227
    11                                     5           55      $9,027     $164
    12                                     1           12      $3,178     $265
    13                                     2           26      $9,049     $348
    14                                     0            0          $0       $0
    15                                     1           15      $5,077     $338
    16                                     0            0          $0       $0
    17                                     0            0          $0       $0
    19                                     1           19      $5,604     $295
    20                                     1           20      $9,567     $478
    22                                     1           22      $5,076     $231
    23                                     0            0          $0       $0
    26                                     1           26      $6,837     $263
    28                                     0            0          $0       $0
    31                                     0            0          $0       $0
    38                                     1           38      $9,575     $252
    643                                    0            0          $0       $0
    935                                    0            0          $0       $0
    1,088                                  1        1,088     $78,141      $72
    Total                             31,875       43,696 $12,166,702     $278

    Source: GAO analysis of IRS data.

    Note: This table includes the invalid number subpopulation.

    aThis number is derived by multiplying column A by column B.

    bThis amount is derived by dividing column D by column C.

    AEITC recipients in the invalid subpopulations lived in various geographic
    locations: Use of the AEITC varied widely across the country for
    individuals in the invalid number and invalid name subpopulations. For the
    invalid name subpopulation, in all 3 tax years, California and Illinois
    had the most Forms W-2 reporting AEITC and for the invalid number
    subpopulation, in all 3 tax years, Florida and Illinois had the most (see
    figs. 8 and 9).

    Figure 8: Geographic Location of AEITC Recipients in the Invalid Name
    Subpopulation, Tax Years 2002 through 2004

    Note: AEITC geographic location is based upon information reported on the
    tax return. This figure includes the invalid name subpopulation.

    aThese geographic locations had at least one but fewer than 10 individuals
    who received the AEITC.

    bU.S insular areas include the three major U.S. territories, which are the
    U.S. Virgin Islands, American Samoa, Guam, and the two Commonwealths,
    which are the Commonweath of Puerto Rico and the Commonwealth of Northern
    Mariana Islands.

    cOther includes Federated States of Micronesia, Marshall Islands, Palau,
    and Armed Forces mostly located outside the U.S.

    dMissing refers to instances where the geographic location was not
    available.

    Figure 9: Geographic Location of AEITC Recipients in the Invalid Number
    Subpopulation, Tax Years 2002 through 2004

    Note: AEITC geographic location is based upon information reported on the
    tax return. This figure includes the invalid number subpopulation.

    aThese geographic locations had at least 1 but fewer than 10 individuals
    who received the AEITC.

    bU.S insular areas includes the three major U.S. territories, which are
    the U.S. Virgin Islands, American Samoa, Guam, and the two Commonwealths,
    which are the Commonweath of Puerto Rico and the Commonwealth of Northern
    Mariana Islands.

    cMissing refers to instances where the geographic location was not
    available.

    AEITC was paid in excess of yearly maximum limits: A total of almost
    12,000 Forms W-2, reporting about $64 million, showed AEITC paid above the
    yearly maximum between tax years 2002 through 2004 (see figs. 10 and 11).
    Specifically, in tax year 2002 there were 6,408 Forms W-2 above the yearly
    maximum reporting almost $44 million; 2,690 in tax year 2003, reporting
    over $7 million; and 2,768 in tax year 2004, reporting almost $13 million.
    As noted in figure 10, most Forms W-2 above the yearly maximum were
    between $1 above the limit and $5,000. An individual receiving the AEITC
    was eligible to obtain a maximum yearly amount of $1,503 in tax year 2002,
    $1,528 in tax year 2003, and $1,563 in tax year 2004.

    Figure 10: Number of Forms W-2 Received with Amounts above the Yearly
    AEITC Maximum, Tax Years 2002 through 2004

    Note: This excludes 2 Forms W-2 in 2003 that when totaled, reported about
    $1 billion paid in AEITC. This figure includes the dollar limit
    subpopulation.

    Figure 11: AEITC Dollars Reported on Form W-2s above the Yearly AEITC
    Maximum, Tax Years 2002-2004

    Note: This excludes 2 Forms W-2 in 2003 that when totaled, reported about
    $1 billion paid in AEITC. This figure includes the dollar limit
    subpopulation.

    Appendix VI: Comments from the Internal Revenue Service

    Appendix VII: GAO Contacts and Staff Acknowledgments

    GAO Contacts

    Michael Brostek, (202) 512-9110 Libby Mixon, (404) 679-1900 Joanna
    Stamatiades, (404) 679-1900

    Acknowledgments

    In addition to those named above, Blake Ainsworth, Frances Cook, James
    Cook, Rebecca Gambler, Evan Gilman, George Guttman, Donna Miller, Cheryl
    Peterson, Michael Rose, Steve Sebastian, Daniel Schwimer, Richard Stana,
    James Ungvarsky, Michael Volpe, and Paul Wright made key contributions to
    this report.

    (450619)

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    Highlights of [47]GAO-07-1110 , a report to the Chairman and Vice Chairman
    of the Joint Committee on Taxation

    August2007

    ADVANCE EARNED INCOME TAX CREDIT

    Low Use and Small Dollars Paid Impede IRS's Efforts to Reduce High
    Noncompliance

    The Advance Earned Income Tax Credit (AEITC) allows individuals to receive
    a portion of the Earned Income Tax Credit (EITC) in their paychecks,
    instead of receiving all of it when filing their year-end tax return.
    Limited research has been conducted on the AEITC since GAO last examined
    it in the early 1990s.

    GAO was asked to determine

    (1) how many individuals received the AEITC compared with the EITC in tax
    years 2002 through 2004, what actions, if any, have been taken to increase
    use, and the potential for increases in use in the future; (2) the extent
    of noncompliance, if any, associated with the AEITC; and (3) how well the
    Internal Revenue Service's (IRS) procedures address the areas of
    noncompliance. To address these questions, GAO analyzed Forms W-2 and tax
    return data and interviewed IRS and Social Security Administration (SSA)
    officials.

    [48]What GAO Recommends

    GAO recommends that the Acting Commissioner of Internal Revenue analyze
    options to reduce AEITC noncompliance such as implementing a "soft notice"
    test. If these options are deemed ineffective, and no other options are
    viable, the Treasury Secretary should provide an opinion to the Congress
    as to whether the AEITC should be retained. IRS agreed with our
    recommendation and outlined the actions IRS plans to take.

    AEITC use was low--only about 3 percent of EITC recipients potentially
    eligible for the advance received it in tax years 2002 through 2004, or
    about 514,000 of the 17 million potentially eligible individuals each
    year. About half of all recipients received $100 or less in AEITC and 75
    percent received $500 or less for the year, with a total benefit paid of
    about $146 million each year. Several efforts have been aimed at
    increasing use over the last approximately15 years, such as sending
    notices to individuals informing them that they were potentially eligible
    for the AEITC and making changes to IRS forms. Despite these efforts, use
    did not substantially increase and, for several reasons, it may be
    difficult to increase it in the future. For example, IRS officials, other
    experts, and prior GAO work suggests that individuals often do not elect
    the AEITC because they prefer receiving the entire EITC as a lump sum
    after filing their tax return.

    As many as 80 percent of AEITC recipients did not comply with at least one
    of the program requirements GAO reviewed, and some were noncompliant with
    more than one during the 3 years we reviewed. In tax years 2002 through
    2004, about 20 percent, or more than 100,000 AEITC recipients, may not
    have been eligible for the AEITC because they had an invalid Social
    Security number (SSN). These individuals received a total of $37 million
    to $39 million each year. Almost 40 percent (about 200,000 recipients) did
    not file the required tax return; these individuals received $42 million
    to $50 million each year. Of the about 60 percent (more than 300,000)
    AEITC recipients who did file a return, about two-thirds misreported the
    amount received.

    AEITC Use, Dollars, and Compliance in Tax Years 2002-2004

    IRS's procedures have limited effectiveness in addressing AEITC
    noncompliance. For example, Automated Underreporter (AUR) staff worked on
    only a fraction of AEITC cases because of resource constraints and
    criteria limiting case selection. IRS could address AEITC noncompliance by
    sending "soft notices" to recipients, requiring employers to verify
    employee SSNs before providing the AEITC, or creating a Forms W-5, "EITC
    Advance Payment Certificate," database. Each of these options have
    advantages, however, they also have potential disadvantages that could
    limit their effectiveness.

    References

    Visible links
      33. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-92-26
      34. http://www.gao.gov/cgi-bin/getrpt?GAO-05-92
      35. http://www.gao.gov/cgi-bin/getrpt?GAO-06-895T
      36. http://www.gao.gov/cgi-bin/getrpt?GAO-04-79R
      37. http://www.gao.gov/
      38. mailto:brostekm@gao.gov
      39. http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-92-26
      40. http://www.gao.gov/
      41. http://www.gao.gov/
      42. http://www.gao.gov/fraudnet/fraudnet.htm
      43. mailto:fraudnet@gao.gov
      44. mailto:JarmonG@gao.gov
      45. mailto:AndersonP1@gao.gov
      46. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1110
      47. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1110
    *** End of document. ***