Almost 20 years ago, as he signed into law the tax bill expanding the Earned Income Tax Credit, President Ronald Reagan hailed it as “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” But in today's Republican Party, President Bush sees the measure very differently. He has made it increasingly difficult for honest taxpayers to claim the tax breaks they have earned through the EITC. Wealthy taxpayers, showered with goodies by this administration, would never stand for such treatment. But the poor are forced to put up with it time and time again.
Earlier this year, the National Taxpayer Advocate reported to Congress that, since 2001, the IRS has frozen 1.6 million tax refunds without notice as part of its criminal enforcement program. Although it is intended to curb the distribution of the Earned Income Tax Credit to ineligible taxpayers, the Taxpayer Advocate's study suggests that the vast majority of those targeted -- perhaps between 60 and 80 percent -- are in fact eligible
The poor people targeted for enforcement get a raw deal that most taxpayers don't have to endure. In an ordinary audit, taxpayers receive a letter from the IRS and have 90 days to respond. If there is no response by then, the IRS sends another letter. After an additional 90 days, a third and final letter is sent. And these audits are conducted by a civil division of the IRS, not the criminal program.
The criminal enforcement program for the EITC neglected to give taxpayers basic notice. They had no chance to claim that they did nothing wrong, and no chance to show that they did, in fact, deserve their tax breaks. Although the IRS has now announced that filers targeted by the EITC enforcement program will receive notice, the IRS still has not shown that taxpayers will have any real chance to contest their refunds. Nor has the IRS made any effort to demonstrate that the program will stop blocking refunds for hundreds of thousands of taxpayers who did absolutely nothing wrong.
It is not just that EITC recipients are treated differently when they are audited. They are also more likely to be audited than wealthier taxpayers. In 2004, only about one in six tax filers claimed the EITC, but about half of all IRS individual examinations focused on EITC filers. The IRS audits 2.25 percent of EITC claims, but only 1.86 percent of individuals with business income over $100,000, and only 1.39 percent of individuals with non-business income over $100,000. The enforcement of tax law is becoming highly regressive with the largest burdens on those with the lowest incomes and the least ability to obtain legal representation. But over-auditing poor people who obey the law or freezing the refunds of taxpayers who are ultimately vindicated will not bring us closer to the goal of properly administrating the credit.
The over-auditing of taxpayers claiming the EITC is just one aspect of the current administration's kill-the-disease-by-killing-the-patient response to the EITC. EITC filers are also vulnerable to “pre-certification” and “recertification” requirements. In 2003, about 50,000 taxpayers were required to pre-certify their EITC claims by submitting information months in advance. Pre-certification saved them the hassle of being audited after they paid taxes -- by auditing them beforehand. The administration planned to expand pre-certification to more than 1 million people, but Congress has put the program on hold until the administration can show that pre-certification worked for the first group of 50,000 taxpayers.
The concept itself is amazing -- can you imagine a suburban family pre-certifying their mortgage interest deduction or pre-certifying their 2.5 kids as dependents?
Recertification occurs when an EITC filer has submitted a claim that has errors. The taxpayer cannot receive the EITC in future years until they have “recertified” their information as accurate. But the recertification program has unnecessarily burdened innocent taxpayers. In 2003, at least $21 million in future EITC claims were denied to taxpayers who were incorrectly placed in the recertification program -- even though they did not make mistakes on their tax forms.
The central trouble with the EITC is not the evil-doing of thousands of dishwashers and maids across America. The trouble is that the tax credit is too complicated. The EITC requires a 50-page instruction manual. More than 70 percent of taxpayers who claim the EITC use a tax preparer to file their return, paying an unaffordable $100 for the service (and often an additional $120 for a refund anticipation loan). IRS data indicate that tax preparers are just as prone to make EITC errors as taxpayers who file without professional help. Common sense suggests that if a tax provision confuses the tax professionals, the provision should be simplified.
There are simple steps to fix the EITC. The best would be to establish a unified credit for which the working poor would be eligible without regard to the number of children they have. As part of the president's budget, the Treasury Department has offered reforms -- but these baby steps stop far short of true simplification. They are reasonable enough ideas, like allowing separated spouses to claim the EITC. But none of these proposals will shrink that 50-page instruction manual. And it is difficult to see how even these measures can move forward unless the president makes it a priority -- and EITC simplification is not very high on the list of tax priorities.
The administration should drop punitive efforts like pre-certification that cause undeserved hardship to hundreds of thousands of Americans. When we have simplified the system and established a pattern of lower error rates, only then can we be confident that criminal investigative tactics are being used only on criminals -- not on innocent taxpayers. If we take this approach to fixing the EITC, we can cure the disease without killing the patient.
John Alexander Burton is a research associate for economic policy at the Center for American Progress.
