No Surprise: The Overly Complex EITC is Plagued with Billions of Dollars in Improper Payments

April 23, 2013

 

In a report released on Monday, the Treasury Department found that the IRS overpaid between $11.6 billion and $13.6 billion through the Earned Income Tax Credit program in fiscal year 2012:

“The IRS has reported an EITC improper payment rate above 20 percent since Fiscal Year 2003. While the estimated EITC improper payment rate has declined over the years, the estimated payments made in error have increased from at least $9.5 billion in Fiscal Year 2003 to at least $11.6 billion in Fiscal Year 2012.”

This is a one-year overpayment rate of 25 percent (!) and a total of about $132.6 billion since Fiscal Year 2003.

Even more, the report states that the IRS has yet to establish annual goals to reduce improper payments below 10 percent, violating an Obama-era law to reduce improper payments.

The Earned Income Tax Credit is a refundable credit which families can claim if they have earned income and are under a certain income threshold. For tax year 2012, the maximum income limit for a single parent with two children was $41,952 with a maximum benefit of $5,236. The program is designed to increase the credit’s value as your income increases, and then gradually phase-out to zero once your income hits a maximum threshold. In fiscal year 2012, the program cost the government about $59 billion and covered 27 million people; one of the largest welfare programs by reach and cost.

Theoretically and empirically, the claim is that this design will increase labor force participation compared to classic welfare programs and the minimum wage, while giving extra income for low-income families. For this reason, it is popular on both sides of the aisle; Right and Left.

However, the EITC is still haunted by the fact that it is extremely complex. With a 60-page handbook and rules that are anything but simple, a lot of this error could be attributed to this complexity. The IRS itself has made this connection, stating that “EITC complexity leads to improper claims by taxpayers—some intentional but many inadvertent—and to improper denials by the IRS.” Even worse, the population for which the EITC is meant for is even less likely to understand complex rules or speak English.

However, as popular as the program is, or as effective as it may be, the amount of error caused by its complexity is concerning. Just because the program is popular, and considered effective, does not mean it is immune from criticism. Another program that covers millions of Americans and was plagued with payment error for many years was the Food Stamp Program. In 1998, the error rate was over 10 percent nationwide. But due to a series of reforms that greatly simplified the program, the error rate is now 3.8 percent as of Fiscal Year 2012 even in the face of record caseloads.

If a 25 percent error rate, costing more than $11 billion per year does not indicate a need for reform, I don’t know what does. Lawmakers, regardless of their view on the EITC, need to take a serious look at this program. If they are truly concerned with helping those in need and think the EITC will help, the first thing to fix is the program’s immense complexity.

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