TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
Management Advisory Report: Improvements Are Needed to Assess the Use and Impact of the Earned Income Credit Appropriation
Reference No. 2001-40-064
The Earned Income Tax Credit (EIC) is a refundable credit created in 1975 to offset the impact of Social Security taxes on low-income families and encourage them to seek employment rather than welfare. The Congress assigned responsibility to the Internal Revenue Service (IRS) to administer the EIC. The IRS defined this role as ensuring the efficient administration of the law; achieving full participation of eligible taxpayers; and reducing overclaims and fraud, waste, and abuse.
The EIC is technically treated as a payment and is refundable even if no tax liability exists. This has led to significant compliance problems. An IRS study using Tax Year (TY) 1994 tax returns estimated taxpayers overclaimed $4.4 billion in EIC, or 25.8 percent of the total EIC amount claimed in TY 1994. The Congress has been concerned with the effectiveness of the IRS to both achieve full participation by taxpayers who qualify for the credit and reduce EIC overclaims. In 1997, the Congress provided the IRS with a special 5-year, $716 million appropriation for the improved application of the EIC. The objective of this audit was to determine if the IRS had an effective process to assess the use and impact of the EIC appropriation.
The IRS needs to improve its process for reporting on the use and measuring the impact of the $297 million already spent and the remaining EIC appropriation funds it plans to spend on initiatives designed to improve EIC compliance. However, we found that the IRS has implemented some initiatives aimed at improving compliance and established a process to track the expenditure of funds from the EIC appropriation. The IRS also created the EIC Program Office in May 1998 to coordinate its EIC compliance initiatives.
Inadequate Validation of Information Causes Inaccurate Reporting of the Use of Earned Income Credit Appropriation Funds to the Congress
The IRS does not have procedures to validate the accuracy of the information it provides quarterly to the Congress. Specifically, the EIC Program Office does not validate the information it receives from other IRS functions to ensure it is accurate and reliable.
The information reported on workload results in the IRS Tracking Earned Income Tax Credit Appropriation Annual Report - FY 1999 was inaccurate and unreliable. Without validating the accuracy and reliability of the information, IRS management cannot reasonably assure the information reported to the Congress is complete, accurate, and reliable for assessing how the IRS is spending the EIC appropriation funds or for making future budget decisions.
Incomplete Measurement of Initiative Results Leaves the Internal Revenue Service Unable to Determine Its Impact on Compliance
The Congress directed the IRS to measure the effect of the expenditure of funds on improving EIC compliance and report quarterly on the rate of change. The IRS has conducted several studies to measure EIC compliance, but none has established a reliable baseline. The IRS is currently developing a baseline using TY 1997 returns and has begun a compliance study on TY 1999 returns.
As of April 2000, the IRS was unable to measure improvements in EIC compliance for the approximately $297 million it had spent on improving the application of the EIC. It can report results only on the amount of revenue protected or collected and workload completed. Without a process to assess the impact of EIC initiatives, neither the IRS nor the Congress can determine if the IRSí use of the $716 million EIC appropriation is improving EIC compliance.
Some Compliance Initiatives and a Process to Track the Spending of Funds Have Improved the Application of the Earned Income Credit
The IRS has implemented several initiatives aimed at improving the application of the EIC. These efforts include improving taxpayersí awareness of EIC eligibility and continuing efforts to identify and stop inappropriate EIC claims before refunds are issued.
The IRS tracks the expenditures for EIC-related work in various information systems. The expenditure data are rolled up monthly to the IRSí financial system and are included in the IRSí quarterly report to the Congress. During our review of the expenditures reported by the IRS to the Congress for the first quarter of FY 2000, we found a $9 million discrepancy between the expenditures reported and those posted to the AFS as of January 31, 2000. IRS management was aware of the discrepancy, which was caused by a delay in posting due to modifications being made to the AFS. These expenditures were eventually posted to the AFS. While there was no apparent negative impact caused by this delay in posting EIC expenditures to the AFS, future delays in posting of expenditures could result in the IRS making poor financial management decisions.
Summary of Recommendations
The Wage and Investment Division should measure the impact of EIC initiatives in improving EIC compliance and ensure the information reported to the Congress is complete, accurate, and reliable.
Managementís Response: IRS management agreed with our recommendations and concurred with the outcome measures presented in Appendix IV. In its response, the IRS pointed out that the then-pending IRS reorganization last fiscal year made it difficult to manage the multi-functional, cross-divisional EIC program. In response to our recommendation to establish a process to ensure workload results reported to the Congress are complete, accurate, and reliable, the IRS plans to require and review supporting documentation from all functions for all workload results reported. Because several studies and reports have been completed relative to the EIC filing population since the end of our work on this audit, and one of these studies is a series intended to measure changes in filing behavior, the IRS does not plan to take additional corrective action to our second recommendation (that it should effectively measure the impact of the EIC initiatives on improving EIC compliance).