NCPA - National Center for Policy Analysis

Why Are There So Many Errors in the EITC Program?

September 10, 2014

Government reports have chronicled the problem of payment errors within the Earned Income Tax Credit (EITC) program. A full quarter of EITC payments in a single year can be the product of errors, costing taxpayers $14 billion annually.

Why does this happen? Kyle Pomerleau, economist at the Tax Foundation, writes that the two most common explanations are fraud (purposely misrepresenting one's finances to qualify for the EITC or increase the size of one's EITC payment) and mistake on the part of filers (for example, a divorced couple might each claim their child as a dependent).

A recent study by the IRS looked into the issue of errors, and while it did not pinpoint the exact cause of the problem, Pomerleau points out some of the important aspects of the IRS report:

  • Fifty-eight percent of all errors involved filers misreporting income, with an average cost of $800 per hour. Looking at dollar value, income misreporting added up to just 35 percent of all errors.
  • Twenty-one percent of all errors involved filers claiming children as dependents when, in fact, they were not. Dollar-wise, these errors added up to 38 percent of overpayment costs.
  • Nine percent of errors involved filers who misreported their income and incorrectly claimed children, costing $2,451 per filing.
  • Twelve percent of errors involved invalid Social Security numbers and similar issues, costing $1,447 per error.

Pomerleau notes that individuals claiming the EITC were more likely to use tax preparers than those who did not (at a rate of 68 percent compared to 55 percent). Of taxpayers using tax preparers, just 6 percent of EITC claimers used a CPA, compared to 16 percent of non-EITC taxpayers. However, he notes that error rates were similarly high regardless of the type of person who prepared the filer's taxes: 47 percent of self-prepared returns had EITC errors, while 51 percent of paid preparer returns had errors.

Source: Kyle Pomerleau, "IRS Releases More Detail on EITC Over-Payments," Tax Foundation, September 8, 2014. 

 

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