FROM THE OFFICE OF PUBLIC AFFAIRS

The Treasury Department and the Internal Revenue Service on Friday announced three new administrative initiatives intended to detect and reduce instances of erroneous Earned Income Tax Credit (EITC) claims. The Treasury Department also announced new legislative proposals to improve taxpayer compliance with the EITC.

"The EITC plays a vital role in rewarding work and lifting families out of poverty," said Treasury Secretary Lawrence H. Summers. "It has helped hundreds of thousands of parents move from welfare to work and has helped millions of others to provide for their families. It is critical that we take steps to preserve the integrity of the EITC and better ensure that only eligible families are receiving the credit."

Created in 1975, the EITC provides a tax credit to low- and moderate-income working families, thus reducing the burden of payroll and income taxes. It provides crucial assistance to taxpayers who might otherwise be dependent on welfare. According to one study, more than 60 percent of the recent increase in the employment of single mothers has been due to expansions of the EITC. The EITC also lifted 4.3 million people out of poverty in 1998.

About 20 million people claimed more than $30 billion in earned income tax credits on their 1997 tax returns. A new IRS report indicates that an estimated $7.8 billion in EITC claims for 1997-or 25.6 percent of total EITC claims-were erroneously paid. However, since that time, the IRS has launched a variety of additional initiatives to improve EITC compliance.

The administrative initiatives announced today would further improve compliance. They include:

• sending notices to noncustodial parents who claimed the EITC on their 1999 tax returns, warning these taxpayers that they do not appear to be eligible to claim the EITC;
• expanding efforts to educate paid tax return preparers about the EITC eligibility rules, and penalizing preparers who fail to exercise due diligence when preparing EITC claims; and,
• expanding the use of existing authority to deny certain EITC claims, including cases where a taxpayer's spouse does not have a valid social security number.

The legislative proposals announced today are designed to enhance the IRS's ability to correct EITC errors and to make complying with the credit easier for taxpayers. The proposals would:

• give the IRS the authority to deny certain questionable EITC claims filed by noncustodial parents during returns processing, before refunds are paid;
• simplify the rule for married taxpayers who have separated from their spouses; and,
• simplify the rule for taxpayers who live with their children and with other low-income persons.

In addition, Treasury continues to urge Congress to pass two simplification proposals included in the Administration's Fiscal Year 2001 Budget. These include:

• conforming the definition of earned income for the EITC to that used for the rest of the individual income tax, by eliminating the use of nontaxable earned income in calculating the EITC; and,
• modifying the definition of a dependent child so that it conforms more closely to the simpler definition used for the EITC.