NCPA - National Center for Policy Analysis

Low-Income Tax Cheaters

December 20, 1999

David Cay Johnston, who covers the IRS for the New York Times, has written several articles over the past year quoting disgruntled IRS agents, who moan about how taxpayers are getting away with murder because they can no longer be intimidated and audited to death.

Now Johnston reports of complaints that IRS auditing resources are increasingly being channeled away from the rich to those with low incomes. The startling truth is that the poor are among the biggest tax evaders, owing to the Earned Income Tax Credit. The credit is refundable for low income workers with no tax liability, so that they get a check from the government. Such checks can be very large. For a worker making $9,540 and with two children, the check will come to $3,816 or 40 percent of income.

  • Because the credit is based on earned income, people are encouraged to report income even if they made none.
  • And because the credit relates to the number of children one has, it encourages people to report children they do not have as well.
  • The latest IRS study found that at least $4.4 billion was falsely claimed for EITC payments in 1994 because of such factors, a 26 percent error rate.

EITC fraud is encouraged by tax preparers who make loans to low income taxpayers in anticipation of refunds. These preparers take advantage of the IRS's electronic filing system, which makes it harder to detect fraud. In 1993, 43 percent of returns identified as fraudulent were filed electronically, and 92 percent of those involved preparers making refund anticipation loans. A high percentage of these involved the EITC.

With total EITC payments estimated to equal $30 billion next year, fraudulent payments may equal $7.8 billion, assuming a 26 percent error rate.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, December 20, 1999.


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