CHN: IRS Proposes Restrictive Changes To Earned Income Tax Credit

Pre-Certification Program Would Place Unreasonable Burden on Over 4 Million Families
The Internal Revenue Service (IRS) is considering burdensome new documentation requirements for the Earned Income Tax Credit (EITC). The IRS is planning to require certain parents/caregivers to verify their relationship to children claimed for the EITC as well as the child’s place of residence. If they do not submit the forms and documents well in advance of filing their taxes, their refund checks will be delayed or even denied.

Although the plans for this new approach have been thus far been made in secret, the IRS has decided to hold a 30-day public comment period. Advocates, members of Congress, and commercial tax preparers are already voicing their concerns.

The IRS has identified current non-custodial parents, custodial fathers, and relatives other than parents caring for children as family arrangements prone to EITC errors. They plan to begin by mailing new guidelines and two new forms to 45,000 low-income families with children after the comment period is concluded (probably in August or September), in anticipation of their filing tax forms starting in January 2004 for the 2003 tax year. The targeted families receiving the letter will have until December 31, 2003 to file their pre-certification forms with the IRS. During the following year, the IRS expects to expand the pre-certification program to over 2 million families to require pre-certification of between four and five million families over the next few years.

The rationale for these changes is high rates of improper EITC payments. Treasury Department officials estimated in a recent study that between $8.8 billion to $9.9 billion was improperly paid in 1999 under the EITC program. This study has been criticized, most notably by the Center of Budget and Policy Priorities, in part because it fails to take into account legislative changes to the EITC program enacted since 1999 that are expected to reduce errors or fraud substantially.

The new procedures as currently drafted would place an unusually (and sometimes impossibly) high burden of proof on families attempting to claim the EITC. Grandparents, aunts, uncles, and other relatives raising their relations, in addition to single fathers, stepparents, and foster parents would have to submit papers proving their relationship with the children claimed and that the child has lived with them for at least six months. (According to a GAO study, approximately 2 million children were raised by relatives with no parent present in 1997).

Marriage certificates will be needed to prove a claimant’s relationship to a child, sometimes for marriages that are decades old. Depending on the relationship, the form sometimes requires the marriage certificates of grandparents or great-grandparents, or for marriage performed outside of the United States. The IRS will only require relationship to be verified once, but will ask families to document the child’s residence annually.

Yet there are many obstacles to obtaining marriage certificates, even within the U.S. Specifically, the state of California warns that it may take as long as two to three years to issues copies of marriage certificates. Ohio does not issue copies of certificates, only “abstracts,” which would not be acceptable under the IRS procedures. In other states, such as New York, claimants would be legally prohibited from obtaining marriage certificates without written authorization from the husband and wife.

On top of complications surrounding marriage certificates, in order to prove residency, the IRS will require filers to produce school records, medical records, leases, or similar documents that specifically state the range of dates the child and claimant lived together. Unfortunately, most documents acceptable under this requirement do not contain all the information required for approval.

When documents are not available, the IRS will allow a sworn affidavit from a school official, employer, member of the clergy or landlord stating under penalty of perjury that he or she has “personal knowledge” the claimant and child have lived together during the dates cited. The drawback of the affidavit provision is that these categories of people may not have the knowledge necessary to sign such a paper, and the policies excludes categories of people most likely to have this kind of “personal knowledge” such as building managers or neighbors. This requirement is much more stringent than verification procedures in other federal programs such as the food stamp program, which regularly relies on third party statements of neighbors and building managers who are knowledgeable about living arrangements without the penalty of perjury.

Anti-poverty advocates are extremely concerned that these changes have been developed in secret, without public comments, and without a trial period for evaluation. There are currently no plans to wait until pre-certification is completed and evaluated for the first 45,000 before expanding to cover 2 million families. The burdensome new rules will greatly hamper the ability of low-income families to take advantage of the EITC. While reducing errors is important, other categories of taxpayers cost the U.S. Treasury a significantly larger amount of money in unpaid taxes, such as high-income individuals ($132 billion) and corporations ($46 billion), the IRS is not mounting a comparable campaign to audit these returns.

For more information about the IRS’ pre-certification plans, see the Center on Budget and Policy Priorities website New Materials on EITC Pre-Certification

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