EITC Snapshot: Overclaims and Commercial Preparer Usage

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I have come across newer information that relates to the statistics I referred to in my post last month OMB and EITC Overclaims: Loving and a Few Other Issues. Here is the snapshot: first, for FY 2013 Treasury estimates an increase in the amount and rate of EITC overclaims. Second, EITC claimants’ use of commercial preparers over the past few years is declining, though it still exceeds the rate that the overall non-EITC claimant taxpayer population uses commercial preparers.  In this post, I will provide the updated statistical information. In a follow-up post, I will discuss more implications of these statistics and integrate important Congressional testimony that the National Taxpayer Advocate gave last week on improper payments and refundable credits.

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Overclaims

The most recent Treasury Financial Report (issued in December 2013) updates the estimates of EITC overclaims.  It does so in response to federal improper payments legislation, which requires federal agencies to report on and monitor issues where there are “significant improper payments.” As I observed in EITC: Do Attitudes on Redistribution Fuel a Particular Focus on Errors, despite other issues susceptible to relatively high error rates, Treasury only reports on EITC under this federal legislation. For FY 13, Treasury estimated the level of improper overclaims to range between 22.1 percent (lower bound) to 25.9 percent (upper bound) of approximately $60.3 billion in total program payments. That equates to $13.3 to $15.6 billion of improper payments.

As to how it comes up with its numbers, see below:

The estimates are based primarily on information from the IRS’s National Research Program (NRP) reporting compliance study of individual income tax returns for tax year 2009—the most recent year for which compliance information from a statistically valid, random sample of individual tax returns is available.

Under the tax year 2009 NRP reporting compliance study, which reviewed individual income tax returns filed during calendar year 2010 for tax year 2009, approximately 2,400 of the returns in the regular NRP sample were EITC claimants randomly selected for examination.

The Treasury Report has a detailed discussion of its methodology, at pages 206-07.

The December Treasury Report offers a little more information on the errors than typically found in TIGTA’s studies. For example, it breaks the errors down into what it refers to as authentication and verification errors (at page 207):

Authentication – It is estimated that 70 percent or $10.15 billion in improper payments are from authentication errors. They include errors associated with the inability to authenticate qualifying child eligibility requirements, mainly relationship and residency requirements, filing status, when married couples file as single or head of household, and eligibility in nontraditional and complex living situations. Authentication is completed on a portion of this error category during pre-refund examinations.

Verification – It is estimated that 30 percent or $4.35 billion in improper payments are from verification errors. These errors relate to improper income reporting which allows claimants to fall within the EITC income limitations and qualify for EITC. The errors include both underreporting and overreporting of income by both wage earners and taxpayers who report that they are self-employed.

Despite a lot of information, the Treasury breakdown is not nearly detailed enough. I would think that the sum of what it calls the verification and authentication errors should equal a midpoint between the sum of the low-range and high-range estimates for total FY 2013 EITC overclaims; I do not think it does. In addition, there is no information detailing error rates among differing types of preparers, or distinguishing error rates between self-prepared and commercially prepared returns. Nor is there an attempt to categorize errors according to intentional versus inadvertent mistakes.

Treasury in its most recent fiscal year report does describe a great deal of its compliance efforts—including its preventing about $ 4 billion in claimed EITC, with about half of that coming through correspondence exams and the balance through math error and document matching. See Treasury Report, pages 207-08.

I hope that Treasury reveals more about its study relating to the EITC. Over a decade ago, IRS did release more detailed studies of EITC compliance. See for example, its 2002 study on the 1999 EITC compliance estimates. In last week’s Congressional testimony I referred to in the introduction to this post, NTA Nina Olson provides additional insight into the estimates and distinguishes error rates among differing types of unlicensed preparers. That testimony will be the subject of a follow up post later this week.

Decline in Use of Commercial Preparers

My prior post discussed that EITC claimants use paid preparers at a close to 70% rate. That was true a few years ago. In fact, there is a steady decline in the use of paid preparers among EITC claimants, while the rate of paid preparer usage overall has remained fairly steady.  The following table comes from a letter H&R Block submitted to the Ways & Means Committee in connection with IRS Commissioner Koskinen’s testimony last month.

IRS Data Showing Trends in Return Preparation Method Overall

 

Tax Season

2008

2009

2010

2011

2012

Paid-Preparer

86,515,114

(58%)

82,817,612

(60%)

81,040,615

(60%)

81,527,629

(59%)

82,192,985

(58%)

Self-Prepared

61,820,528

(42%)

55,149,802

(40%)

54,726,080

(40%)

56,659,609

(41%)

59,256,931

(42%)

 

 

 

 

 

 

IRS Data Showing Trends in EITC Return Preparation Method

 

 

Tax Season

2008

2009

2010

2011

2012

Paid-Preparer

16,834,793

(72%)

16,635,464

(70%)

17,586,140

(67%)

17,176,689

(65%)

16,959,699

(62%)

Self-Prepared

6,628,802

(28%)

7,226,606

(30%)

8,712,391

(33%)

9,405,107

(35%)

10,264,882

(38%)

 

 

 

 

 

 

 

The decline in paid preparer use among EITC claimants is likely due to a number of factors, including the due diligence requirements that requires taxpayers to reveal more information to preparers than when a return is self-prepared and greater comfort with software and access to internet among the EITC-claiming population. In addition, it seems likely as well that the prevalence of ghost preparers, or preparers who prepare the return but fail to sign the return, is rising, as preparers may wish to avoid due diligence obligations or otherwise remain out of sight.

I am not sure what IRS can do to remedy the problem of ghost preparers. I do agree with the letter Block submitted to Ways and Means where it suggested that taxpayers who self-prepare returns should likewise be expected to submit additional information along the lines that commercial preparers do with the due diligence worksheet. Treasury’s report on EITC overclaims shows that the money issue in EITC overclaims is qualifying children eligibility. Increasing visibility of that issue on the Schedule EITC that taxpayers themselves complete will likely reduce taxpayer over claims.  In my follow up post on this issue, I will discuss some of the suggestions the NTA made in her congressional testimony.

 

 

 

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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