NCPA - National Center for Policy Analysis

Error Rate High For Earned Income Tax Credit

April 25, 2003

The Earned Income Tax Credit (EITC) was instituted in 1975 as a sort of rebate of payroll taxes to the working poor. It has since expanded into an income support program for low-income families, and is one of the federal government's most expensive entitlements.

Income tax filers claim the credit on their return and receive a lump-sum "refund" check. Just as the U.S. income tax system is said to rest on "voluntary compliance," the EITC may be thought of as a voluntary self-entitlement: the tax filer assesses his eligibility, and in effect writes himself a check on the U.S. Treasury.

Unsurprisingly, there is a high rate of fraud and error in EITC claims.

  • The average EITC check was $1,976 for households with children in 2001, and the maximum amount they can receive is between $4,000 and $5,000.
  • The annual cost of EITC claims was $30.4 billion fiscal year 2000, and Treasury officials estimate that $6.5 billion to $10 billion is lost to improper payments each year.
  • That means the error rate is roughly 20 to 30 percent.

By contrast, the average food stamp benefit for households with children in 2001 was $2,904 -- but food stamps would be much easier to qualify for than the EITC under the IRS's proposed rules. Households with earned income of up to $34,692 are eligible.

Under new rules that may be published in July, over the next few years the IRS will ask up to four million of the EITC claimants to provide proof of eligibility. A Treasury official points out the overpayments can continue year after year until each minor child listed on a false claim turns 18.

Source: Mary Williams Walsh, "I.R.S. to Ask Working Poor for Proof on Tax Credits," New York Times, April 25, 2003.


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