FROM THE OFFICE OF PUBLIC AFFAIRS

Treasury on Wednesday announced eight new initiatives toreduce Earned Income Tax Credit errors, in response to anInternal Revenue Service study of compliance. The study foundthat $4.4 billion, or 25.8 percent of total EITC claimed,exceeded the amount to which taxpayers were eligible on taxreturns filed between January 1995 and April 1995.

IRS enforcement practices in effect during the 1995 filingseason reduced the estimated net error rate to 23.5 percent. Withthe tighter procedural tools put in place by last year’swelfare reform act, the net error rate would have been reducedfurther, to 20.7 percent.

"The eight initiatives put forward today are importantsteps in lowering EITC error rates," Treasury SecretaryRobert Rubin said. "The EITC is critical in lifting familiesout of poverty, but it should only be going to those families whoare eligible."

While EITC noncompliance remains at unacceptably high levels,the study’s results do show significant improvement sincethe late 1980s, the last time that the IRS examined a comparablegroup of taxpayers. In the 1988 Taxpayer Compliance MeasurementProgram (TCMP), the IRS determined that 35.4 percent of theamount of the EITC claimed exceeded the amounts for whichtaxpayers were eligible. The improvement in EITC compliance since1988 reflects certain legislative changes and a concerted effortby the Treasury Department and the IRS to crack down on EITCerrors. Since 1993, the Administration has taken 17 steps toensure that only those who are qualified and deserving of theEITC receive it.

A summary of Treasury's eight initiatives put forward today isattached. We urge Congress to support these efforts to improveEITC compliance.

Legislative Proposals

· Reckless or intentional disregard and fraud will be punished with denial of EITC eligibility in the future. In addition to enforcing the current civil and criminal penalties, the IRS would automatically deny for ten years the EITC claims of those who are found to have claimed the credit fraudulently. If an EITC error is due to reckless or intentional disregard, the taxpayer would be ineligible for the credit for the next two years.

· New recertification procedures for taxpayers whose EITC claims have been denied in the past. If the IRS denies an EITC claim after an examination, the taxpayer would not be automatically eligible for the EITC in the future. Taxpayers must be recertified as eligible by the IRS in order to claim the credit again.

· Improve debt collection. The IRS would be able to place liens and execute levies on a portion of unemployment compensation, welfare benefits, and other types of assistance in order to collect outstanding tax liabilities and penalties.

· New penalties on preparers. Like many other taxpayers, a large number of EITC claimants -- about half -- turn to tax preparers to help them complete their tax returns. Under this legislation, the responsibilities of paid preparers would be clarified. Preparers who do not fulfill certain due diligence requirements would be subject to penalties ranging from $50 to the full amount of EITC overclaim.

· Reduce unintentional taxpayer errors. The definition of a qualifying child can be confusing to both taxpayers and the IRS. The Treasury legislation will provide simpler and clearer guidance on children qualifying for the EITC.

· Test new systems of verifying EITC claims. The Treasury Department would seek legislation permitting it to select four states to experiment with alternative ways of providing the EITC throughout the year. States would be required to verify eligibility for the EITC before paying out the credit. Effects on advance payment participation and compliance would be studied by Treasury.

Administrative Actions

· Aggressive action to prevent erroneous EITC claims. Using the results of the EITC compliance study and other pilot projects, the IRS will develop new profiles of potentially erroneous EITC claimants to select for pre-refund audits. During the 1998 filing season, the IRS is earmarking substantial resources for this intensified EITC compliance effort

· Expand taxpayer access to volunteer services. In 1996, 1.9 million low-income taxpayers receive assistance from over 47,000 volunteers in IRS-sponsored Volunteer Income Tax Assistance (VITA) sites. The Treasury Department is contacting businesses and tax professional organizations to make sure that they are aware of the need for volunteers and computers at these sites. Improving access to free taxpayer assistance and electronic filing will help reduce the risk of unintentional errors.