Tax Administration: Earned Income Credit Noncompliance (Testimony,
05/08/97, GAO/T-GGD-97-105).

GAO discussed issues surrounding earned income credit (EIC)
noncompliance.

GAO noted that: (1) EIC noncompliance has been a concern for a number of
years and is a major factor underlying GAO's designation of filing fraud
as one of the federal program areas at high risk because of
vulnerability to waste, fraud, abuse, and mismanagement; (2) through
design changes and administrative actions, noncompliance, expressed as a
percentage of total EIC dollars paid out, has been reduced since 1988
but, because of increases in the number of claimants and changes in
credit amounts over the past few years, the amount of dollars
erroneously paid out has increased dramatically; (3) a root cause of EIC
noncompliance is the self-determination of eligibility by taxpayers
combined with the Internal Revenue Service's (IRS) limited ability to
verify eligibility before the refund is issued; (4) IRS has undertaken,
with some success, a variety of efforts to reduce EIC noncompliance in
recent years; (5) while the impact of IRS' efforts cannot be precisely
quantified, it is reasonable to expect that recent declines in the
noncompliance rate were in part the result of IRS' efforts; (6) how much
further it can be reduced with available resources is uncertain; (7) it
will not be easy to significantly reduce EIC noncompliance because of
the nature of the credit and the design of IRS' systems; (8) Treasury
has announced eight proposals, six of which would involve legislation,
to reduce EIC noncompliance; (9) those proposals provide a starting
point for deliberations on what can reasonably be done to address this
difficult problem; and (10) various questions need to be answered in
assessing those proposals, the most significant being whether they get
at the real causes of noncompliance.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-GGD-97-105
     TITLE:  Tax Administration: Earned Income Credit Noncompliance
      DATE:  05/08/97
   SUBJECT:  Tax administration
             Tax credit
             Fraud
             Tax returns
             Social security number
             Eligibility determinations
             Personal income taxes
             Tax refunds
IDENTIFIER:  Earned Income Tax Credit
             IRS Taxpayer Compliance Measurement Program
             IRS Questionable Refund Program
             GAO High Risk Program
             
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Cover
================================================================ COVER


Before the Committee on Ways and Means, House of Representatives

For Release
on Delivery
Expected at
10:00 a.m.  EDT
Thursday, May 8, 1997

TAX ADMINISTRATION - EARNED INCOME
CREDIT NONCOMPLIANCE

Statement of Lynda D.  Willis, Director, Tax Policy and
Administration Issues, General Government Division

GAO/T-GGD-97-105

GAO/GGD-97-105T


(268803)


Abbreviations
=============================================================== ABBREV

  AFDC - Aid to Families With Dependent Children
  AGI - Adjusted Gross Income
  EIC - Earned Income Credit
  IRS - Internal Revenue Service
  OBRA - Omnibus Budget Reconciliation Act
  TCMP - Taxpayer Compliance Measurement Program
  SSN - Social Security Number

TAX ADMINISTRATION:  EARNED INCOME
CREDIT NONCOMPLIANCE
==================================================== Chapter Statement

Mr.  Chairman and Members of the Committee

We are pleased to be here today to participate in the Committee's
inquiry into noncompliance surrounding the Earned Income Credit
(EIC)--a refundable tax credit available to low-income, working
taxpayers.  As used in connection with the EIC, "noncompliance"
occurs when persons either claim credits to which they are not
entitled or claim credits in excess of the amount to which they are
entitled.  This statement is based on our past work on the EIC,\1 a
review of limited data on the results of IRS' study of EIC filers for
tax year 1994,\2 and a review of various Department of the Treasury
proposals to reduce EIC errors. 

Our statement makes the following points: 

  EIC noncompliance has been a concern for a number of years and is a
     major factor underlying our designation of filing fraud as one
     of the federal program areas at high risk because of
     vulnerability to waste, fraud, abuse, and mismanagement.\3

Through design changes and administrative actions, noncompliance
(expressed as a percentage of total EIC dollars paid out) has been
reduced since 1988 but, because of increases in the number of
claimants and changes in credit amounts over the past few years, the
amount of dollars erroneously paid out has increased dramatically.  A
root cause of EIC noncompliance is the self-determination of
eligibility by taxpayers combined with IRS' limited ability to verify
eligibility before the refund is issued. 

  IRS has undertaken, with some success, a variety of efforts to
     reduce EIC noncompliance in recent years.  While the impact of
     IRS' efforts cannot be precisely quantified, it is reasonable to
     expect that recent declines in the noncompliance rate were in
     part the result of IRS' efforts.  How much further it can be
     reduced with available resources is uncertain. 

  It will not be easy to significantly reduce EIC noncompliance
     because of the nature of the credit and the design of IRS'
     systems.  Treasury has announced eight proposals, six of which
     would involve legislation, to reduce EIC noncompliance.  Those
     proposals provide a starting point for deliberations on what can
     reasonably be done to address this difficult problem.  Various
     questions need to be answered in assessing those proposals, the
     most significant being whether they get at the real causes of
     noncompliance. 


--------------------
\1 A list of related GAO products is at the end of this testimony. 

\2 We did not assess IRS' study methodology or the reliability of its
reported results. 

\3 High-Risk Series:  IRS Management (GAO/HR-97-8, Feb.  1997). 


   BACKGROUND
-------------------------------------------------- Chapter Statement:1

Congress established the EIC in 1975 to (1) offset the impact of
Social Security taxes on low-income families and (2) encourage
low-income families to seek employment rather than welfare. 

EIC eligibility depends on taxpayers' amount of earned income\4 or,
in some cases, adjusted gross income (AGI).\5 Credit amounts depend
on the number of qualifying children who meet age, relationship, and
residency tests.  The credit gradually increases with increasing
income (the phase-in range), plateaus at a maximum amount (the
plateau range), and then gradually decreases until it reaches zero
(the phase-out range).  Taxpayers with earned income or AGI exceeding
the maximum qualifying income level are not eligible for the credit. 
Taxpayers with AGI falling in the credit's phase-out range receive
the lesser amount resulting from using their earned income or AGI in
calculating the credit. 

EIC coverage and benefit rules have been modified several times since
1990.  In the Omnibus Budget Reconciliation Act (OBRA) of 1990,
Congress made two major changes to the EIC that took effect in tax
year 1991.  These changes (1) adjusted the credit structure to grant
different credit amounts to taxpayers with one qualifying child and
taxpayers with two or more qualifying children and (2) added two
supplemental credits--one for taxpayers with a child under 1 year of
age and another for taxpayers who paid health insurance premiums on
policies covering their children.  OBRA 1990 also allowed taxpayers
with a filing status of single to claim the credit, as long as they
had a qualifying child, and specified a general increase in credit
rates that was to be phased-in over 4 years (the planned increase for
1994, however, was superseded by 1993 legislation). 

OBRA 1993 made two changes in the credit's structure that went into
effect in tax year 1994.  First, to simplify EIC filing, the act
repealed the supplemental young child and health insurance credits. 
Second, the act expanded EIC eligibility to include certain taxpayers
without qualifying children or "childless adults."\6 OBRA 1993 also
increased, over a 3-year period beginning in tax year 1994, the
maximum credit for families with children. 

The maximum basic credit amount for EIC families with two or more
children was $953 in tax year 1990, $1,511 in tax year 1993
(reflecting OBRA 1990), and $3,556 in tax year 1996 (reflecting OBRA
1993).  The maximum credit for childless adults in tax year 1996 was
$323. 

The Personal Responsibility and Work Opportunity Reconciliation Act
of 1996 made three additional changes to the EIC.  First, beginning
with tax year 1996 returns, the act made taxpayers with certain
investment income greater than $2,200 ineligible for the EIC,
regardless of their earned income or AGI.  Second, the act created a
"modified AGI" to be used in calculating the credit.  Modified AGI
disregards certain losses from investments and businesses.  And
third, the act denied the EIC to filers without valid Social Security
Numbers (SSN).\7 Taxpayers were already required to provide valid
SSNs for qualifying children. 

As shown in figure 1, both the number of taxpayers claiming the
credit and EIC program costs (in 1996 dollars) increased steadily
from tax years 1990 through 1994.  In large part, this growth
reflects the impact of either eligibility or benefit expansions
implemented in tax years 1991 and 1994, as discussed earlier. 

   Figure 1:  EIC Costs and Number
   of Claims, Tax Years 1990
   Through 1994

   (See figure in printed
   edition.)

Source:  GAO analysis of IRS Statistics of Income data. 


--------------------
\4 Earned income for calculating the EIC includes both taxable and
nontaxable earned income.  For the EIC, taxable earned income
includes (1) wages, salaries, and tips; (2) union strike benefits;
(3) long-term disability benefits received prior to minimum
retirement age; and (4) net earnings from self-employment. 
Nontaxable earned income includes (1) voluntary salary deferral such
as 401(k) plans or the federal thrift savings plan, (2) pay earned in
a combat zone, (3) basic quarter and subsistence allowances from the
U.S.  military, (4) housing allowances or rental value of a parsonage
for the clergy, and (5) excludable dependent care benefits. 

\5 In addition to taxpayers' taxable earned income, AGI includes
their taxable income from other sources such as investments, alimony,
and unemployment compensation.  Beginning in tax year 1996, taxpayers
are to use a newly defined "modified AGI" that excludes certain
losses to determine EIC eligibility and to calculate the credit. 

\6 Although referred to as "childless adults," these taxpayers may be
noncustodial parents or may live with a child who, for some reason,
cannot be claimed as an EIC qualifying child. 

\7 A valid SSN is one that matches Social Security Administration
records. 


   EIC NONCOMPLIANCE AND IRS'
   EFFORTS TO CONTROL IT
-------------------------------------------------- Chapter Statement:2

Despite efforts over time to change design and administration of the
EIC, it is still a major source of noncompliance.  That continuing
noncompliance is one reason why refund fraud remains on our list of
high-risk federal program areas. 

IRS' study of tax year 1994 EIC filers showed that of $17.2 billion
in EIC claimed, 25.8 percent ($4.4 billion) was overclaimed.  While
that percentage of noncompliance is an improvement over the level
identified in the 1988 Taxpayer Compliance Measurement Program
(TCMP), the dollars involved have increased significantly.\8 The 1988
TCMP showed that about $1.9 billion, or 34 percent of the total EIC
paid out, was awarded erroneously. 

The lower rate of noncompliance since 1988 may be due, at least in
part, to legislative changes since the 1988 TCMP.  In that regard,
IRS data indicated that taxpayers who claimed the wrong filing status
were the most frequent source of EIC error in the 1988 TCMP. 
Legislative action in 1990 simplified the rules for qualifying for
the credit by eliminating different eligibility rules for different
filing statuses.  Even with that change, eligibility-related
compliance issues remain.  For claimants of the credit for families
with children, eligibility for the credit is still self-determined by
the taxpayer using a three-part test based on the relationship of the
child to the taxpayer, the length of time the child lived with the
taxpayer, and the child's age. 

Congress has long been concerned about the high level of EIC
noncompliance.  However, reducing it to more acceptable levels will
be difficult.  Many of the noncompliance problems identified by IRS
are the result of a process whereby taxpayers self-determine their
eligibility for the credit and/or the amount of credit they are due. 
These erroneous claims frequently related to qualifying children or
choosing the wrong filing status.\9 In both instances, IRS faces
difficulty in verifying the information on the return without using
field resources to determine taxpayer eligibility in a fashion
similar to that used by organizations administering welfare programs. 

The reported level of EIC noncompliance is much higher than the
reported level of noncompliance in some other federal outlay programs
but those other programs also have much higher administrative costs. 
For example, according to the Committee on Ways and Means 1996 Green
Book, about 6.1 percent of the dollars paid out under the Aid to
Families With Dependent Children (AFDC) program was overpaid in
fiscal year 1993 and 7.3 percent of the dollars paid out in the Food
Stamp program was overpaid in fiscal year 1995.  As we noted in June
1995 testimony before the Senate Finance Committee, those programs
not only have lower noncompliance rates than the EIC program but also
have administrative costs that likely are many times higher than
those of the EIC program.\10 Data available at that time showed AFDC
and Food Stamp administrative costs of about 12 percent of total
program expenditures in 1993.  In comparison, we estimated EIC
administrative costs to be about 1 percent of EIC program costs.\11


--------------------
\8 Before IRS' study of tax year 1994 EIC filers, the 1988 TCMP
provided the most current comprehensive data on EIC noncompliance. 
IRS did a study of tax year 1993 EIC filers, but that study only
covered returns filed electronically during the last 2 weeks of
January 1994. 

\9 A change in filing status, per se, will not necessarily disqualify
a taxpayer from claiming the EIC.  Only taxpayers who use the
married-filing-separately status are ineligible for the credit. 
However, reporting an incorrect filing status has implications for
correctly reporting income.  For example, taxpayers who file as a
head of household when they should have filed as married may
underreport income, by excluding their spouse's income, and thus
overclaim, in whole or in part, the EIC. 

\10 Earned Income Credit:  Noncompliance and Potential Eligibility
Revisions (GAO/T-GGD-95-179, June 8, 1995). 

\11 This estimate is for return and refund processing costs only and
does not include the cost of IRS enforcement efforts related to EIC
noncompliance. 


      CAUSES OF EIC NONCOMPLIANCE
------------------------------------------------ Chapter Statement:2.1

Before deciding on how to reduce EIC noncompliance, it is important
to know the major causes of that noncompliance.  Data IRS made
available on the results of its study shed little light on that
question.  According to an analysis of IRS' study by Treasury's
Office of Tax Analysis, however, the three most common causes were
(1) taxpayers claiming qualifying children who did not reside with
them for over half the year, (2) taxpayers claiming the wrong filing
status, and (3) complicated living arrangements involving more than
one custodial caregiver. 

It seems clear that a major share of the problem can be traced back
to the nature of the credit, as explained by an IRS consultant in
1993.  According to the consultant, the EIC, and other tax credits,
have historically caused problems for IRS because IRS' systems were
designed and, for the most part, are operated with the overriding
objective of enabling anyone who wants to pay their taxes to do it. 
The distribution of EIC is philosophically different from the
issuance of traditional refunds, where the government returns the
taxpayer's own money after excess withholding.  The consultant noted
that payment of the EIC has much more in common with government
distribution of welfare benefits through other agencies but that the
standards of proof required to prove eligibility for EIC are not
comparable to the standards of proof required for receipt of welfare
benefits.  As he pointed out, establishing eligibility for benefits
delivered through other agencies normally requires the claimant to
deal with government employees face to face; to produce proof of
identification; and to prove the existence of, and relationship with,
any relevant dependents.  These types of controls are foreign to
traditional IRS modes of operation. 

A Treasury Task Force on Tax Refund Fraud made similar observations
in 1994.  According to the Task Force, (1) every refundable credit
provides some incentive for the filing of problematic returns, and
the incentive rises as the amount of the refundable credit rises and
(2) the incentive to file problematic returns is likely to increase
as IRS' capability to verify information on the return decreases. 
With the EIC, there are various important pieces of information, such
as filing status and the existence of qualifying children, that IRS
cannot easily verify.  The relationship between verifiable
information and compliance is not unique to the EIC.  Throughout the
tax system, noncompliance tends to be higher whenever there is an
absence of easily verifiable data. 


      IRS EFFORTS TO CONTROL EIC
      NONCOMPLIANCE
------------------------------------------------ Chapter Statement:2.2

IRS took several steps in the past few years to combat EIC
noncompliance, with some success.  Although the impact of IRS'
efforts cannot be precisely quantified, it is reasonable to assume
that those efforts contributed to the recent decline in the rate of
EIC noncompliance. 

Improved verification of SSNs was a key objective of IRS' recent
efforts.  For electronic returns, IRS increased the number of
automated filters that are designed to identify and reject
submissions that involve missing, invalid, or duplicate SSNs. 
Through those filters, IRS identified 4.1 million SSN problems on tax
year 1994 returns, 1.3 million of which involved the EIC.  This year,
as of April 24, the filters identified about 3.2 million SSN
problems, of which 1.1 million involved the EIC. 

IRS also emphasized SSN verification on paper returns.  For tax year
1994, it identified 3.3 million paper returns with missing or invalid
SSNs (how many involved EIC returns is unknown) and followed up on 1
million of those cases (it did not have sufficient resources to
follow up on all 3.3 million).  IRS continued that effort, but at a
reduced level, for tax year 1995 paper returns.  According to IRS,
these verification efforts resulted in recommended changes to
taxpayers' refunds or tax liabilities of about $900 million in fiscal
year 1996.  Starting with tax year 1996 returns filed this year, IRS
was authorized to treat missing or invalid SSNs on filed returns as
math errors.  As such, IRS can automatically reduce or deny the
taxpayer's EIC claim, if there is any. 

Also for tax year 1994, IRS (1) improved the Questionable Refund
Program, (2) strengthened the process for checking the suitability of
persons applying to participate in the electronic filing program

as return preparers or transmitters, and (3) eliminated the direct
deposit indicator.\12

Despite the various changes discussed above, IRS' study of tax year
1994 EIC filers indicates that much more needs to be done.  For
example, even with the many electronic filing filters, which are
intended to keep erroneous returns from being submitted
electronically, the percent of tax year 1994 electronic returns with
EIC overclaims, according to IRS' data, was almost as high as the
percent of paper returns (25.3 compared with 26.1).  Also, IRS
determined that even if its study results were adjusted to reflect
the impact of its enforcement efforts in 1995 and the new math-error
procedure being used this year, the overall noncompliance rate would
still be about 21 percent. 

It is also interesting to note, as shown in table 1, that the number
of fraudulent returns detected by the Questionable Refund Program has
declined since 1994, with a dramatic decrease in 1996. 



                                Table 1
                
                  Questionable Refund Program Data for
                           1993 Through 1996

                                              Amount of     Percent of
                               Number of     fraudulent     fraudulent
                              fraudulent        dollars   returns that
                                 returns   detected (in   involved the
Calendar year                   detected      millions)            EIC
-------------------------  -------------  -------------  -------------
1993                              77,840         $136.8             98
1994                              77,781          160.5             91
1995                              62,309          131.7             73
1996                              24,919           82.5             72
----------------------------------------------------------------------
Source:  IRS data. 

According to program officials, a major reason for the decline in
fraudulent returns and dollars detected in 1996 was a staffing
reduction from 553 full-time equivalent staff in 1995 to 379
full-time equivalent staff in 1996. 


--------------------
\12 The direct deposit indicator gave return preparers a quick signal
from IRS that a taxpayer was going to receive a refund check and was
relied on by providers of Refund Anticipation Loans.  IRS' objective
in eliminating the indicator was to give providers of Refund
Anticipation Loans greater incentive to check the eligibility of EIC
claimants before approving the loans. 


   WHAT MORE CAN BE DONE? 
-------------------------------------------------- Chapter Statement:3

It will not be easy to significantly reduce EIC noncompliance without
somehow addressing the basic underlying problem--the
self-determination of eligibility by taxpayers and IRS' limited
ability to verify that eligibility before issuing the refunds.  On
April 23, 1997, Treasury announced eight proposals, six of which
would require legislation, that it believes will help reduce
noncompliance. 

The six proposals requiring legislation would (1) deny future EIC
claims from persons who are found to have claimed the EIC
fraudulently or through reckless or intentional disregard of the
rules and regulations; (2) require taxpayers who have had an EIC
claim denied after an audit to prove their eligibility to IRS before
being allowed future credits; (3) allow IRS to place liens and
execute levies on a portion of unemployment compensation, welfare
benefits, and other types of assistance in order to recapture EIC
claims that were found to be erroneous after IRS had paid them; (4)
penalize preparers who did not meet certain due diligence
requirements; (5) clarify the definition of a foster child; and (6)
conduct state tests of new ways to provide the EIC and to verify
eligibility.  The other two proposals would (1) increase IRS'
enforcement efforts and (2) expand access to volunteer return
preparation services. 

There are not enough details in IRS' study and Treasury's
announcement to identify the major causes of EIC noncompliance or to
assess the costs, benefits, and administrability of Treasury's
proposals.  However, based on available information as well as our
past work on the EIC specifically and tax administration in general,
we have identified several issues that Congress needs to consider in
deliberating on those proposals. 

The most important issue is whether the various proposals get at the
real causes of noncompliance.  According to IRS' data, for example, a
disproportionate segment of the noncompliant returns involved
incorrect filing status.  However, IRS' report provides no
information that helps explain what it is about those claims that
made them noncompliant, and none of Treasury's proposals directly
addresses that issue. 

On the other hand, three Treasury proposals address issues that do
not seem, on their face, to be major causes of noncompliance.  Those
proposals call for (1) clarifying the definition of a foster child;
(2) testing alternate ways to provide advance EIC payments and, at
the same time, to verify the eligibility of persons receiving the
advance payments; and (3) increasing the availability of volunteer
return preparation assistance.  Although each of those actions
probably has some merit, IRS' report and Treasury's proposals provide
no evidence that the benefits, in terms of reducing EIC
noncompliance, would be of any consequence. 

Specifically,

  IRS' report provides no information on the extent to which
     noncompliance can be traced back to confusion over the
     definition of a foster child or even how many EIC claims involve
     foster children,

  only about 1 percent of all EIC recipients have historically used
     the advance payment option, and

  IRS has provided no data comparing the noncompliance rate for
     returns done without the help of a preparer and those done by
     preparers, much less volunteer preparers. 

A second issue relates to administrability.  Much more information is
needed on the proposals and how they will be implemented in order to
determine if they can be easily administered.  The proposals that
most need attention in this regard, because they would apparently
involve major operating changes, are the ones that would (1)
automatically deny the EIC for several years to anyone who is found
to have claimed the credit fraudulently or due to reckless or
intentional disregard of the rules and regulations, (2) require
taxpayers who had an EIC claim denied after an audit to prove their
eligibility for future credits, and (3) penalize preparers who did
not meet certain due diligence requirements. 

To assess the administrability of the preparer penalty proposal, for
example, we would want to know what preparers would have to do to
demonstrate due diligence and what IRS would have to do enforce those
requirements.  Our interest in this proposal is heightened by the
results of our past work on preparer penalties.  In a 1991 report, we
said that IRS' examiners and supervisors were reluctant to pursue
return preparer penalties because of the low dollar amounts of the
penalties.\13 We wonder whether the new penalties proposed by
Treasury would be viewed similarly. 

In assessing administrability, it is also important that Congress
consider whether the action being proposed is the most appropriate
given the facts.  In explaining its proposal that certain EIC claims
be automatically denied, for example, Treasury says that "existing
civil penalties do not appear to be an effective deterrent against
ineligible taxpayers repeatedly claiming the [EIC]." We saw nothing
from IRS' study related to the effectiveness of penalties.  Nor have
we seen any information on the extent to which IRS, in the past, has
asserted available civil and criminal sanctions for fraudulent or
reckless EIC claims and the extent to which penalized parties have
submitted fraudulent claims afterwards.  Such information would help
determine if the answer lies in better administering existing
procedures or establishing new procedures. 

A third issue surrounding Treasury's proposals involves the need to
ensure that any legislative or administrative change include adequate
controls to protect taxpayer rights.  For example, Treasury is
proposing that IRS be allowed to place liens and execute levies on a
portion of unemployment compensation, welfare benefits, and other
types of assistance in order to recapture EIC claims that were found
to be erroneous after IRS had paid them.  Those types of income are
now exempt from levy.  It is for Congress to decide whether there is
now sufficient reason to revise those exemptions.  But, it is
important in doing so that any such change include adequate controls
to protect taxpayers' rights. 

A final issue involves tradeoffs.  It is important that concern about
EIC noncompliance not become so encompassing that other areas of
noncompliance are neglected.  In that regard, one of Treasury's
proposals calls for aggressive IRS action to prevent the payment of
erroneous EIC claims.  While we support the first part of that
proposal--the development of new profiles to help IRS better target
its enforcement efforts--we cannot support the second
part--earmarking substantial resources for an intensified EIC
compliance effort--without knowing the tradeoffs.  IRS, like most of
the federal government, is facing stagnant or declining resources
through 2002.  Consequently, knowing where the resources will come
from is critical.  Equity and financial concerns have already been
raised about IRS reducing its audit coverage of high income
individuals in order to target EIC returns. 

To assess tradeoffs, it is important to know what the return on
investment is for EIC-related enforcement efforts compared with other
programs.  In fiscal year 1995, for example, all examinations done by
tax auditors (those IRS staff who would normally do EIC-related
audits) resulted in average additional recommended taxes of about
$3,500 per return, compared to the average EIC refund that year of
less than $1,500. 

Finally, as IRS becomes more and more involved in determining whether
taxpayers are eligible to receive the EIC, the benefits of delivering
income assistance to low income taxpayers through the tax code may
erode.  Specifically, administrative costs will increase and
participation rates may fall.  In addition, IRS employees will be
faced with new job responsibilities traditionally more related to
welfare programs than tax administration. 


--------------------
\13 Tax Administration:  Effectiveness of IRS' Return Preparer
Penalty Program Is Questionable (GAO/GGD-91-12, Jan.  7, 1991). 


------------------------------------------------ Chapter Statement:3.1

In conclusion, Mr.  Chairman, many questions remain about EIC
noncompliance and the most effective ways to reduce it.  IRS efforts
have reduced the level of noncompliance but it still remains above 20
percent, with several billion dollars in overclaimed credits
annually.  How much further it can be reduced with available
resources is uncertain. 

As I noted earlier, it will not be easy to significantly reduce EIC
noncompliance without somehow addressing the basic underlying
problem--the self-determination of eligibility by taxpayers and IRS'
limited ability to verify that eligibility. 

Treasury's proposals provide a starting point for deliberations on
what can reasonably be done to address this difficult problem.  Much
more information is needed on the proposals and IRS' study findings
before any overall judgment can be made on how much the proposals
will contribute to reducing noncompliance. 

It is important, in further deliberations on Treasury's proposals or
those made by others, that Congress and the administration consider
whether (1) the actions being proposed are feasible; (2) potential
benefits justify expected costs, especially in light of tighter
budgets and other compliance problems facing IRS; and (3) adequate
procedures are built in to protect taxpayers' rights. 

That concludes my statement.  We welcome any questions that you may
have. 

PAST GAO PRODUCTS RELATING TO THE EIC

Earned Income Credit:  IRS' 1995 Controls Stopped Some Noncompliance,
But Not Without Problems (GAO/GGD-96-172, Sept.  18, 1996)

Earned Income Credit:  Profile of Tax Year 1994 Credit Recipients
(GAO/GGD-96-122BR, June 13, 1996). 

Earned Income Credit:  Noncompliance And Potential Eligibility
Revisions (GAO/T-GGD-95-179, June 8, 1995)

Earned Income Credit:  Targeting to the Working Poor
(GAO/T-GGD-95-136, Apr.  4, 1995). 

Earned Income Credit:  Targeting to the Working Poor
(GAO/GGD-95-122BR, Mar.  31, 1995)

Tax Administration:  Earned Income Credit--Data on Noncompliance and
Illegal Alien Recipients (GAO/GGD-95-27, Oct.  25, 1994). 

Tax Policy:  Earned Income Tax Credit:  Design and Administration
Could Be Improved (GAO/GGD-93-145, Sept.  24, 1993). 

Earned Income Tax Credit:  Advance Payment Option Is Not Widely Known
or Understood by the Public (GAO/GGD-92-26, Feb.  19, 1992). 

The New Earned Income Credit Form Is Complex and May Not Be Needed
(GAO/T-GGD-91-68, Sept.  17, 1991). 

*** End of document. ***