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MSP #6: Improper Earned Income Tax Credit Payments

Measures the IRS Takes to Reduce Improper Earned Income Tax Credit Payments Are Not Sufficiently Proactive and May Unnecessarily Burden Taxpayers.

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #6-1

Seek a permanent exemption from the requirement that the IRS include recovered EITC payments in the EITC improper payment estimate.

IRS RESPONSE TO RECOMMENDATION: IRS does not agree to implement TAS recommendation. The IRS does not plan to pursue a permanent exemption because the requirements related to recovered EITC payments are set by law and a permanent exemption from the requirements would require a legislative change. The Improper Payments Elimination and Recovery Improvement Act of 2013 directs the Office of Management and Budget (0MB) to provide guidance to agencies that: “require[s] agencies to include all identified improper payments in the reported estimate, regardless of whether the improper payment in question has been or is being recovered.” Pub. Law No. 112-248, § 3(b)(2)(D). Further, 0MB cannot allow any exemptions to the requirements surrounding improper payments reporting unless they are specifically authorized by law.

CORRECTIVE ACTION: N/A

TAS RESPONSE: Because the IRS does not appear to object to excluding recovered amounts from the improper payment estimate, the National Taxpayer Advocate is perplexed by the response. The Office of Management and Budget (OMB) has in fact exempted the IRS from the requirement to exclude recoveries in the improper payment rate in the past, and there have been no changes in the law that would affect OMB’s authority to do so. Thus, it is not clear why the IRS believes OMB cannot allow any exemptions unless they are specifically authorized. Rather than merely anticipating how OMB might respond to such a request, the IRS should request the exemption.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #6-2

Collaborate with TAS to identify a method of identifying taxpayers who do not claim EITC but are eligible for the childless worker EITC, and automatically award the childless worker credit to those taxpayers.

IRS RESPONSE TO RECOMMENDATION: We agree with your thoughts on taxpayers eligible for the childless worker EITC. During the audit process, when the taxpayer responds that they are not eligible for the EITC with children, Correspondence Tax Examiners are required to consider and adjust taxpayer accounts for the childless worker credit without receiving a request from the taxpayer. The IRS procedures require examiners working an EITC audit to determine if the taxpayer meets the requirements. If so, they are instructed to send the taxpayer an audit report reflecting the appropriate childless worker EITC amount. This process cannot be automated due to the different legal requirements and the
research required to determine eligibility.

In February 2019, the IRS reconsidered previous proposals to eliminate the Computer Paragraph Notice 27 (CP 27), EIC Potential for T/P Without Qualifying Children, sent to taxpayers who appear to be eligible for the EITC without a qualifying child by implementing up-front systemic determination of EITC eligibility and awarding of the credit when a return is processed. However, without legislative and related policy changes, current processes do not allow for accurate determination of taxpayer eligibility for the credit at the time of filing, which may result in increasing EITC improper payments.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate does not dispute that “current processes do not allow for accurate determination of taxpayer eligibility.” However, it is unclear what “legislative and related policy changes” would, in the IRS’s view, be needed before the childless worker credit could be accurately awarded automatically, at least for some taxpayers, and why the IRS is not willing to pursue those changes. The cited Treasury Inspector General for Tax Administration (TIGTA) report does not explain what the impediments may be. The IRS already gathers most of the information it needs to identify eligible taxpayers (e.g., income, filing status, Social Security number). To the extent it needs additional information (e.g., whether the taxpayer resided in the United States for more than half of the year), the IRS should explore how that information can be reliably obtained.
The IRS has not implemented this recommendation.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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3.

TAS RECOMMENDATION #6-3

Collaborate with TAS to identify the changes to Form 1040 that would be needed, and the data gathering techniques that could be employed, to award EITC to taxpayers who are eligible for EITC with respect to a qualifying child but do not claim it on their returns.

IRS RESPONSE TO RECOMMENDATION: As part of our regular process, all forms are shared for comment and input as we consider changes. Internal stakeholders, such as Counsel, Treasury, and the Taxpayer Advocate Service (TAS), receive email circulations of draft forms and instructions early in the development cycle. Such circulations allow for a comment period, generally 30 days, to allow stakeholders to review and provide comments. In addition, Media & Publications and TAS have designated points of contacts to receive, coordinate, assign, and track TAS’s comments and recommendations. Once internal comments have been considered, Media & Publications posts draft forms and instructions to IRS.gov for outside stakeholders and the general public to review and comment. These external drafts are referred to as Early Releases, and they generally allow 30 days for the public to provide comments before releasing the final product to be used by taxpayers. Stakeholders are invited to provide recommendations to assist us in providing a better customer experience and to ensure we are consistent with tax legislation requirements. We will continue our ongoing research efforts to identify and address ways to increase participation in EITC of potentially eligible individuals.

Additionally, we agree on the importance of educating and bringing awareness to those taxpayers who may be eligible for EITC. We will continue to hold and enhance our existing outreach efforts to increase participation. For example, we host annually an “EITC Awareness Day”, which is a nationwide effort led by the IRS to help taxpayers get more information about the EITC through traditional and social media channels and to promote use of the EITC Assistant on IRS.gov. Each year, the IRS uses its available communication resources to reach the broadest range of taxpayers.

CORRECTIVE ACTION: N/A

TAS RESPONSE: On June 21, 2018, pursuant to the procedures the IRS describes above, TAS commented on the draft Form 1040, U.S. Individual Income Tax Return, as follows:

There needs to be a column, as in the prior 1040, for taxpayers to indicate they are claiming EITC. Moreover, on April 2, 2018, TIGTA recommended that the IRS modify Form 1040 to make it easier for the IRS to identify taxpayers who are eligible for EITC, including those who do not have qualifying children. That way, the IRS “could automatically refund the EITC to some eligible taxpayers who did not claim the credit instead of sending notices.” Figure 6 in the TIGTA report shows additional minor modifications to the Form 1040 that would elicit most of the information currently requested on the reminder notices. See TIGTA Ref. No. 2018-IE-R004, The Internal Revenue Service Should Consider Modifying the Form 1040 to Increase Earned Income Tax Credit Participation by Eligible Tax Filers. For example, a box that says “check here if you lived in the US for more than half the year” and a box that says, with respect to each person for whom EITC is being claimed, “check here if this person lived with you for more than half the year” would elicit information the IRS could use to automatically issue EITC refunds where the taxpayer did not claim the credit.

The IRS has not implemented this suggestion or sought to collaborate with TAS to identify ways to accomplish the recommendation.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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4.

TAS RECOMMENDATION #6-4

Collaborate with TAS Research in designing and conducting the planned study to compare prior EITC audit results to audit results of taxpayers who used affidavits to establish that they met the residency requirement.

IRS RESPONSE TO RECOMMENDATION: We appreciate the collaboration and involvement of the TAS, through the Audit Improvement Team, in reviewing audits involving the affidavits. The IRS will work with TAS Research to develop a data collection instrument that will be used to review the audits where the affidavits are applicable. In addition, IRS will work collaboratively with TAS to get input on conducting these  reviews.

Update: The Audit Improvement team, which is comprised of representatives from Taxpayer Advocate Service (TAS), Refundable Credits Program Management, and Refundable Credits Exam Operation collaborated with TAS and W&I Research to develop a data collection instrument (DCI). The DCI will be to be used to conduct the reviews on the third-party affidavit audits. On June 25, 2019, the team finalized the DCI questions and shared with W&I Strategies and Solutions (WISS) Research to ensure the questions secured the information needed. On July 30, 2019, the Audit Improvement team reached out to WISS and TAS Research to secure assistance with the development of the DCI for consistency. The team incorporated the feedback to create the DCI which was provided to W&I and TAS Research on January 21, 2020. The draft DCI was provided to W&I and TAS Research for further development and finalization. Instructions explaining how to complete the DCI were developed to ensure consistency based on feedback from TAS Research on February 27, 2020. Due to COVID-19 there was a delay in RCEO closing the 2,200 cases needed to obtain a 95 percent confidence level with a 5 percent margin based on the sample size determined by Research. The Audit Improvement team is in the process of selecting cases from this sample to review. The new expected completion date for this review is April 30, 2021. The DCI and instructions were created, reviewed and approved by Research, TAS and the Audit Improvement team which closes this Planned Corrective Action (PCA).

Update: The DCIs were reviewed and approved by W&I Operation Support, Strategies & Solutions, and National Taxpayer Advocate Research on February 27, 2020. Due to COVID-19, there was a delay in Refundable Credits Examination Operations closing the 2,200 cases needed to obtain a 95 percent confidence level with a 5 percent margin based on the sample size (328 cases) determined by Research. Due to COVID-19, the review will be conducted virtually, and staff members from Refundable Credit Program Management will scan the case documents and save to a secured Shared drive folder. The cases for the review were ordered on February 10, 2021,  March 1, 2021 and March 19,2021. As of April 22, 2021, the team has received 91 of the 400 cases ordered from Files. RCPM is working with TAS to determine if the closed case review will be terminated or delayed due to challenges being encountered to secure the closed cases and make the cases available for the review. Part of that decision is based on the adoption of providing templates for taxpayers to use in order to get the correct information to substantiate residency for EITC. In partnership with TAS, we developed three templates which are currently available for taxpayers on IRS.gov to provide to their children’s schools, doctors and/or daycare providers. This will ensure that documents provided to IRS have the appropriate information and decreases the number of additional calls and correspondence.

CORRECTIVE ACTION: The IRS will work with TAS Research to develop a data collection instrument that will be used to review the audits where the affidavits are applicable. In addition, IRS will work collaboratively with TAS to get input on conducting these  reviews.

Update: For this MSP, a joint decision was made by TAS and RCPM that we will no longer pursue the audits related to the Third Party Affidavit (Form 14086). Based on limited case reviews, it was determined that the Form 14086 (Qualifying Children Residency Statement – Third Party Affidavit) was rarely submitted by the taxpayers. When the form was submitted, it was incomplete or usually submitted with other traditional documents used to verify residency.

TAS RESPONSE: The National Taxpayer Advocate is pleased that the IRS continues to collaborate with TAS Research in evaluating the effect of accepting affidavits in EITC  audits.

Update: We recommended IRS collaborate with TAS Research in designing and conducting a planned study to compare prior EITC audit results to audit results of taxpayers who used affidavits to establish that they met the residency requirement. A joint decision was made by TAS and the Refundable Credits Program Management that they will no longer pursue the audits, so a study is no longer needed. We are closing this recommendation as adopted since a joint decision was reached.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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5.

TAS RECOMMENDATION #6-5

Revise soft notices that are sent to taxpayers advising them they may have claimed EITC in error to explain the error the taxpayer appears to have made (e.g., not meeting the residency requirement or the relationship requirement, misreporting income or deductions).

IRS RESPONSE TO RECOMMENDATION: We agree on the importance of taxpayers understanding errors they may make in filing their tax returns. The IRS’s most recent compliance study shows that income misreporting and qualifying child errors are the two most frequent errors with the largest dollar impact on overclaims. In an attempt to bring awareness to the issue and help educate our taxpayers, the IRS issued notices with language tailored to address qualifying child errors or Schedule C income errors. The language was revised to help taxpayers better understand questions regarding relationship to EIC qualifying children, age and residency tests, and Schedule C income tests for allowable income. We will continue to collaborate with impacted stakeholders, including TAS, to look for opportunities to refine our letters and notices to improve service to taxpayers.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS does not identify the specific notices or letters it describes in the response. In any event, as the IRS notes, an IRS study showed that among known errors taxpayers made in claiming EITC,  the largest amount of overclaims was caused by taxpayers claiming children who were not their qualifying children. The most frequent known error was income misreporting. In the past, the IRS  sent taxpayers Letter 5621, Help Us Confirm Your Relationship to the EIC Qualifying Children, or Letter 5621-A, Confirm Your Schedule C Income Used to Claim Earned Income Tax Credit, when these errors appear to have been made. These letters gave taxpayers the general instruction to “make  sure your children meet the criteria for claiming the Earned Income Tax Credit (EITC)” or “make sure the income and expenses you reported on your Schedule C or Schedule C-EZ are correct.” Both Letter 5621 and Letter 5621-A were designated as obsolete on May 29, 2019.

The IRS also issues CP 85-series notices, but these notices have similarly vague language and have not been revised since January 2018 (see Internal Revenue Manual (IRM) 21.5.10.4.2, Exam Soft Notices CP 85A, CP 85B, CP 85C, CP 87A, CP 87B, CP 87C, and CP 87D (Jan. 31, 2018)). For example, Notice CP 85B, which is sent to taxpayers who claimed a qualifying child for EITC that may not be correct, advises “We’re asking you to make sure that your child has met all three of the following requirements for age, relationship, and residency.” The notice does not inform the taxpayer that these requirements appear not to have been met, much less specify which of the three requirements may not have been met.

In contrast, the letters the National Taxpayer Advocate sent to taxpayers who appeared to have  made an error in claiming EITC were tailored and salient. Among other things, they explained which error appeared to have been made.

Notice CP 85C, sent to taxpayer who filed a Schedule C (Form 1040), Profit or Loss from Business, with little or no expenses and thus may not have a business, advises “We need you to confirm the income and any expenses claimed on your Schedule C,” and “we need you to confirm your income because you claimed Earned Income Credit (EIC) on your [tax year] return.” The notice does not inform the taxpayer that the IRS believes the return to contain an error, or what aspect of Schedule C is causing concern.

We are unable to find recently updated or revised soft notices sent to taxpayers who may have erred in claiming EITC. From the information available, it appears the IRS has not implemented the recommendation.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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6.

TAS RECOMMENDATION #6-6

Establish a dedicated, year-round toll-free “help line” staffed by IRS personnel trained to respond to EITC and Child Tax Credit questions.

IRS RESPONSE TO RECOMMENDATION: The IRS currently staffs a year-round toll-free telephone line in order to answer questions on EITC correspondence audits, many of which contain an audit issue for the Child Tax Credit CTC)/ Additional Child Tax Credit (ACTC). Our employees who answer these toll-free calls are trained and experienced on both issues, and best equipped to answer taxpayer telephone calls related to these potential audit issues.

In addition, the IRS continues to offer taxpayers with EITC and CTC/ACTC related inquiries multiple options for obtaining assistance from IRS employees and volunteers versed in the tax law. Options include calling the IRS toll-free telephone line, visiting a Volunteer Income Tax Assistance or Tax Counseling for the Elderly site, or making an appointment to visit the local Taxpayer Assistance Center.

We also employ several EITC educational tools, including the interactive EITC Assistant on IRS.gov that helps taxpayers determine if they’ve met the eligibility requirements for the EITC and the online Form 886-H Toolkit that helps taxpayers determine the correct documents needed if selected for an EITC audit. Our annual EITC Awareness Day promotes increased participation, decreased erroneous payments, and improved accuracy of filed returns through various media sources.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The year-round toll-free telephone line the IRS refers to above, while a useful resource, is provided only to taxpayers who are being audited. The other resources referenced above may be helpful to taxpayers who can access the internet, or who manage to meet with an IRS employee or volunteer face to face, but they do not address the needs of taxpayers seeking information about EITC or CTC from a dedicated telephone help line.

A principal cause of error in claiming EITC is the complexity of the rules for claiming the credit. The IRS should provide telephone support not only to taxpayers whose returns have been selected for audit, but also to taxpayers seeking assistance in understanding the rules for claiming the credit. As TAS’s 2017 study demonstrates, providing a toll-free number to non-audited taxpayers who appear to not have met the residency requirement is effective in averting erroneous claims. It appears the IRS has not implemented the recommendation.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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7.

TAS RECOMMENDATION #6-7

In soft notices to taxpayers advising them that they may have claimed EITC in error, include the dedicated telephone “help line.”

IRS RESPONSE TO RECOMMENDATION: When a taxpayer may have claimed the EITC in error, the IRS issues a notice explaining the error and steps the taxpayer can take if they agree with our conclusion or information they can provide if they disagree with our proposal. Each letter provides a toll-free telephone number for the taxpayer or authorized representative to call in order to resolve their account. Although this line is not solely dedicated to EITC questions, all employees are trained to answer these questions.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS does not specify which letters or notices it describes in its response. In any event, as noted above, the IRS, in the past, sent taxpayers Letter 5621, Help Us Confirm Your Relationship  to the EIC Qualifying Children, and Letter 5621-A, Confirm Your Schedule C Income Used to Claim Earned Income Tax Credit. These letters provided a telephone number for taxpayers to  call. However, as noted, these letters are no longer used. The CP 85B and 85C notices, discussed above, contain a phone number that taxpayers can call to receive automated options for checking on the status of a refund or an amended return, or for finding a specific tax topic online. There is no option to speak with an IRS assistor.

We are unable to find recently updated or revised soft notices sent to taxpayers who may have erred in claiming EITC that might contain a different telephone number for taxpayers to call. From the information available, it appears the IRS has not implemented the  recommendation.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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