This week Representative Cory Gardner (R-CO) will introduce a bill called the EARN act. This bill seeks to reduce the number of improper payments in the Earned Income Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (EITC) and use the savings to expand the credit for eligible taxpayers.
One of the biggest issues with the EITC is its high rate of error. From fiscal years 2003 to 2013, the rate of error—the percent of payments that were made to people not eligible, or overpayments to those who are eligible—accounted for around 21 to 30 percent of all payments. This has cost the Treasury an additional $136 to $163 billion over the past ten years.
As a basis for comparison, the SNAP program (food stamps), had an error rate of just under 3.5 percent in 2012.
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Estimated EITC Improper Payments for Fiscal Years 2003 Through 2013 |
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|
Year |
Minimum Improper Payments Percentage |
Maximum Improper Payments Percentage |
Minimum Improper Payments, 2013 Dollars (Billions) |
Maximum Improper Payments, 2013 Dollars (Billions) |
|
2003 |
25% |
30% |
$12.07 |
$14.61 |
|
2004 |
22% |
27% |
$10.58 |
$13.16 |
|
2005 |
23% |
28% |
$11.42 |
$13.57 |
|
2006 |
23% |
28% |
$11.37 |
$13.46 |
|
2007 |
23% |
28% |
$11.65 |
$13.78 |
|
2008 |
23% |
28% |
$11.99 |
$14.15 |
|
2009 |
23% |
28% |
$12.21 |
$14.50 |
|
2010 |
24% |
29% |
$16.37 |
$19.69 |
|
2011 |
21% |
26% |
$14.25 |
$17.37 |
|
2012 |
21% |
25% |
$11.72 |
$13.74 |
|
2013 |
22% |
26% |
$13.30 |
$15.60 |
There are two reasons for these high rates of error. First, since this is essentially a spending program with a number of rules determining eligibility, it is likely that people are making errors in regard to whether they are eligible and how much they are eligible for.
The second reason for the errors are fraud, either by the taxpayer themselves, or by a taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. preparer misrepresenting their income or other information in order to receive a larger credit.
Representative Gardner’s bill seeks to reduce errors by approaching both fraud and waste. It will expand what is called “math error authority” for the EITC. This allows the IRS to correct math errors on the part of the taxpayer that causes them to claim credits that are too large or too small. The bill also increases the penalties for fraud including high monetary penalties and a longer disallowance period.
Assuming that the math error authority works and the penalties are sufficient enough to prevent fraud, the bill will use the saved money to expand the EITC for eligible taxpayers, though it is not yet clear exactly how much will be available or how much the expansion will be per taxpayer.
The EITC isn’t perfect and its high level of error is concerning. Reducing error—as this bill aims to do—is a positive thing. It will increase the efficiency of the program and makes sure the tax dollars are going to those they were meant to reach.
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