Wednesday, March 01, 2006

IRS: Only One of Five Eligible Claims EITC

The earned income tax credit, used by an estimated 21 million taxpayers to reduce taxes by a cumulative $40 billion last year, is almost certainly being underused according to the Internal Revenue Service. The IRS has started several initiatives to increase awareness of the credit; these include a Connecticut slogan saying: If you have income of less than $38,000; come in to our offices for assistance". A major problem with the EITC is complexity: many of the taxpayers not claiming the credit appear to be unaware that the credit is refundable and provides a refund even if the taxpayer does not owe; additionally, some taxpayers WITHOUT children qualify. Additionally, the EITC appears to an audit magnet--the infamous "frozen refund" program appeared to many to target taxpayers claiming the EITC and there have been some fraud problems--particularly misstatement of income and indicating an incorrect marital status.

The EITC has long been praised by both Democrats and Republicans as an effective use of the tax code for accomplishing social goals. It is important to find a way to make this credit easier to understand.

2 Comments:

Blogger Jay Wiedwald said...

While there are certainly some EITC-eligible households who fail to claim it, the idea that only 20% do fails when doing the math. It implies that 84 million additional households, a total 105 million or 80% of all tax filers, are EITC-eligible. Authoritative estimates of the median American household income (including that from non-EITC-eligible sources) range between $35k-$45k so 80% is WAY too high.
Add that workers or family members without valid Social Security numbers (typical of "undocumented workers", most retirees, and childless households with earned income above ~$14k are not eligible and the number of eligible households dwindles dramatically.

2:16 PM  
Blogger Dan Meyer said...

Jay: I think that your point is probably valid and that the proportion overlooking is probably closer to 20-50%. I am not sure where IRS came up with the original percentage. Nevertheless, it is appropriate to promote the credit at this time of year.

2:46 PM  

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