Detailed Information on the
Internal Revenue Service Earned Income Tax Credit Compliance Assessment

Improve program performance by conducting 500,000 examinations of EITC returns per year based on enhanced case selection systems. Fall 2008 Update: IRS completed key compliance activities in FY 2008 including 500,000 audits, 375,000 underreporter cases, and 425,000 math error notices, protecting revenue of $3.2 billion. As a result of the June 2008 meeting to analyze effectiveness of current scoring and case selection models, IRS adjusted the 2009 selection model to affect identified enhancements. For FY 2009 the IRS will deliver its annual base EITC compliance programs including processing approximately 400,000 math errors, conducting 500,000 examinations and reviewing 350,000 underreporter cases to protect over $3.2B annually, while continuing to improve case selection methodologies.

Improve program performance by identifying paid tax return preparers with high EITC error rates and using education and enforcement procedures to improve their performance. Fall 2008 Update: IRS continues EITC CONOPs implementation. IRS completed FY 2008 preparer due diligence visits and recommended over $570,000 in penalties. The preparer educational visits were also completed. Further analysis is underway on both tests. For FY 2009, improvements were made to both programs. Planning and implementation is currently underway. Also, final preparation is underway for the new first time paid preparer treatments which include educational and compliance notices and phone calls to a sample of paid preparers who file EITC returns on behalf of their clients for the first time. The joint IRS/EITC Software Developers Working Group issued a report on suggested best practices to enhance tax preparation software to help preparers minimize EITC errors and meet due diligence requirements. A survey of tax software companies conducted through several tax software organizations showed that over 85% of the companies were likely or very likely to implement the recommendations and that over 80% would do so for tax year 2008.

EITC overclaim estimates are currently measured through prior year National Research Program (NRP) study results and economic modeling to account for tax law changes. Starting in 2009, the IRS's new multi-year NRP studies, with EITC-specific components, will yield annual estimates of EITC error beginning with TY 2006 and provide detailed information regarding areas of error to allow for more directed compliance treatments. Fall 2008 Update: Over 70% of the EITC TY 2006 cases are closed and the remaining cases are expected to close by the end of May 2009. The data from the closed cases passed an initial set of data validation tests and were uploaded to the study database. The data will undergo further perfection before being included in the final study database. For the TY 2007 study, sample selection will continue through the end of the 2008; however some cases have already been classified and sent to the field to work. The examiner TY 2007 NRP training was rolled out in September 2008.

IRS will delay refunds on returns deemed to be high risk for filing status or income errors while agents take action to resolve cases. High-risk returns will be identified by researching taxpayer historical compliance and by requiring new information on EITC returns.

IRS will require high-risk EITC applicants to pre-certify that the children claimed on their return are really qualifying children under EITC. Incorrectly claimed qualifying children have been a major source of EITC error. High risk applicants will be identified through databases such as the Federal Case Registry (information on child custody) and by focusing on taxpayers with characteristics linked to high error rates in compliance studies (e.g., relatives other than parents who claim a child for EITC purposes). Fall 2008 Update: The completed cumulative technical report and addendum on the results of the three year EITC certification test are being circulated through IRS leadership for review/approval.

Improve program performance by preventing $270 million in incorrect refunds in 2006 by detecting and correcting errors during return processing.

Marked as completed. Created in error and duplicative of action #5 - Needs to be removed from the system.

Measure: Percent of EITC dollars paid that should not have been paid IRS measures EITC error every few years based on random audits. 2001 is the latest available data.

Explanation:

Measure: Revenue protected, i.e., dollars incorrectly claimed by taxpayers that IRS either did not pay or later recovered ($ in billions) -- IRS chose not to use revenue protected as a performance measure.

Explanation:

Measure: EITC returns audited -- IRS chose not to use returns audited as performance measure.

Explanation:

Measure: Percent of eligible taxpayers who file for EITC (new measure added in FY 2006)

Explanation:This metric is based on Census Current Population Survey data compared to IRS data on EITC claimants.

Is the program purpose clear?

Explanation: The EITC Compliance Initiative was authorized in 1997 to reduce high rates of error in EITC payments.

Evidence: In P.L. 105-33 the Congress authorized an EITC compliance appropriation for expanded customer service and public outreach programs, strengthened enforcement activities, and enhanced research efforts to reduce EITC overclaims and erroneous filings associated with the EITC.

Does the program address a specific interest, problem or need?

Explanation: The Initiative was authorized in response the evidence of high rates of error in EITC payments. The latest data shows that error rates remain unacceptably high. Of the $31 billion in EITC claimed by taxpayers for TY 1999, IRS estimates that, even after its enforcement efforts, $8.5 to $9.9 billion (27 to 32 percent) was paid to ineligible taxpayers.

Evidence: These estimates are from IRS's tax year 1999 compliance study published in February 2002.

Is the program designed to have a significant impact in addressing the interest, problem or need?

Explanation: The EITC program seeks to educate taxpayers and prevent or recover erroneous payments.

Evidence:  

Is the program designed to make a unique contribution in addressing the interest, problem or need (i.e., not needlessly redundant of any other Federal, state, local or private efforts)?

Explanation: As noted above, IRS is the only entity enforcing EITC compliance.

Evidence:  

Is the program optimally designed to address the interest, problem or need?

Explanation: There is no conclusive evidence that an alternative design would be more efficient/effective. However, Treasury is studying alternative program designs that might reduce high EITC error rates.

Evidence: With the release of the Tax Year 1999 EITC Compliance Study in February 2002, showing a high rate of noncompliance, the IRS and Treasury established a joint task force to thoroughly examine the complexity and compliance issues identified. The task force was directed to recommend options for improving compliance without adversely impacting participation.

Does the program have a limited number of specific, ambitious long-term performance goals that focus on outcomes and meaningfully reflect the purpose of the program?

Explanation: While IRS has measured EITC compliance in the past, they have not set goals for improvements. In 1997, Treasury did set an EITC goal of $5 billion in revenue protected/collected over ten years. However, this goal was not ambitious and has not been repeated in documents since 1997.

Evidence: IRS plans to set goals for overall tax compliance once its National Research Program has developed baselines for filing compliance, payment compliance and reporting compliance. Treasury's $5 billion goal was set in an August 15, 1997 letter from Secretary Rubin to Speaker Gingrich.

Does the program have a limited number of annual performance goals that demonstrate progress toward achieving the long-term goals?

Explanation: Starting in FY 2002, IRS's internal performance plan began including several measures of EITC outputs and quality. These are used to manage the program and understand the level of effort put towards enforcement.

Evidence: EITC measures include number of returns examined, case quality (not EITC specific), cycle time, and closures per FTE (staff year).

Do all partners (grantees, sub-grantees, contractors, etc.) support program planning efforts by committing to the annual and/or long-term goals of the program?

Explanation: IRS does not work with partners to enforce EITC compliance.

Evidence:  

Does the program collaborate and coordinate effectively with related programs that share similar goals and objectives?

Explanation: IRS is the only entity enforcing EITC compliance.

Evidence:  

Are independent and quality evaluations of sufficient scope conducted on a regular basis or as needed to fill gaps in performance information to support program improvements and evaluate effectiveness?

Explanation: IRS conducted three studies of EITC compliance in the 1990s. In addition, GAO and the Tax IG periodically publish audits of either the EITC program or IRS functions involved in EITC compliance.

Evidence: IRS' most recent study of tax year 1999 returns was published in February 2002. IRS plans to measure EITC compliance as part of its National Research Program (overall compliance measurement) on a three year cycle.

Is the program budget aligned with the program goals in such a way that the impact of funding, policy, and legislative changes on performance is readily known?

Explanation: IRS has a separate appropriation for EITC and can project changes in outputs based on funding changes. However, IRS's current financial system cannot accurately determine costs per activity. Instead, IRS managers link outcomes to FTE levels. IRS is in the process of modernizing its financial systems.

Evidence: IRS's internal performance plans link funding to EITC program outputs.

Has the program taken meaningful steps to address its strategic planning deficiencies?

Explanation: IRS has a robust planning and budgeting process. In addition, Treasury has initiated a high level task force to explore options for improving EITC compliance. However, IRS has not yet developed long term performance goals for EITC.

Evidence:  

Does the agency regularly collect timely and credible performance information, including information from key program partners, and use it to manage the program and improve performance?

Explanation: IRS has periodically studied EITC compliance and plans to include EITC compliance in its new overall compliance measurement effort. IRS also captures a variety of output statistics on this program and has used this data to improve program management. However, past compliance studies have been completed several years after the end of the tax year studied. This has limited their usefulness.

Evidence: IRS used non-compliance data to identify paid preparers as a significant source of erroneous returns. IRS then crafted an initiative to educate preparers and, where necessary, enforce due diligence requirements. Treasury used compliance data to develop legislative changes to simplify EITC rules and reduce unintentional erroneous filings.

Are Federal managers and program partners (grantees, subgrantees, contractors, etc.) held accountable for cost, schedule and performance results?

Explanation: IRS has linked its personnel evaluations to its goals and measures. However, individuals are not evaluated on quantitative goals, but on qualitative factors helping IRS reach its goals. Note: IRS is prohibited by law from evaluating any employee on "measures of enforcement results."

Evidence: IRS managers are evaluated based on achieving "commitments" outlined in their individual plans. These commitments are actions designed to move the bureau towards its goals.

Are all funds (Federal and partners') obligated in a timely manner and spent for the intended purpose?

Explanation: In the past, IRS has had trouble obligating the full balance of this appropriation by the end of the fiscal year. However, in FY 2001 their lapse was in line with reasonable levels for salaries and expenses accounts.

Evidence: In FY 2001, IRS lapsed about 1.5% of the EITC appropriation. In FY 1999, IRS lapsed roughly 5.5%.

Does the program have incentives and procedures (e.g., competitive sourcing/cost comparisons, IT improvements) to measure and achieve efficiencies and cost effectiveness in program execution?

Explanation: IRS's internal performance plan includes efficiency and timeliness measures for EITC examinations. These are used by managers to maximize efficiency.

Evidence: IRS uses "closures per FTE" and cycle time to measure EITC efficiency. However, IRS's use of productivity measures is limited because IRS is prohibited by law from evaluating any employee based on "measures of enforcement results."

Does the agency estimate and budget for the full annual costs of operating the program (including all administrative costs and allocated overhead) so that program performance changes are identified with changes in funding levels?

Explanation: Reviewers cannot determine the full cost of the EITC program from IRS's annual Congressional Justification because not all EITC costs are captured in the EITC appropriation.

Evidence: IRS makes an effort to capture costs of the EITC program in the EITC appropriation. However, program managers face serious challenges due to weaknesses in IRS financial management systems (e.g., no cost accounting). For example, EITC rental costs are paid from IRS's Processing Assistance and Management appropriation.

Does the program use strong financial management practices?

Explanation: EITC has a serious erroneous payments problem. In addition, IRS has a number of ongoing financial management weaknesses which effect EITC as well as other programs.

Evidence: Of the $31 billion in EITC claimed by taxpayers for TY 1999, IRS estimates that, even after its enforcement efforts, $8.5 to $9.9 billion (27 to 32 percent) was paid to ineligible taxpayers.

Has the program taken meaningful steps to address its management deficiencies?

Explanation: In response to high rates of EITC non-compliance, the Secretary has formed a high level task force to recommend solutions. In addition, IRS has a robust internal planning, budgeting and performance management process.

Evidence: As noted, Treasury is currently studying efforts to improve the EITC compliance program. In the past the Department has recommended legislative changes to ease administration and explored different tactics to improve performance (e.g., targeting education efforts on paid preparers).

Has the program demonstrated adequate progress in achieving its long-term outcome goal(s)?

Explanation: The latest data (tax year 1999) shows no progress on reducing erroneous payments and IRS has set no long-term goal for this program. However, while erroneous EITC payments remain unacceptably high, there is evidence that they would be higher without the compliance program.

Evidence: Without IRS compliance efforts (revenue protected below), an additional 4% of EITC payments would have been made erroneously.

Does the program (including program partners) achieve its annual performance goals?

Explanation: IRS projects that it will fall short in two of its three FY 2002 EITC specific performance goals set in its internal performance plan.

Evidence: FY 2002 is the first year where IRS has set specific performance goals for EITC. Before 02, EITC performance was captured as part of the overall IRS performance plan.

Does the program demonstrate improved efficiencies and cost effectiveness in achieving program goals each year?

Explanation: IRS measures EITC productivity through cases closed per FTE. Cases close have trended down over the past three years.

Evidence: Cases closed per FTE: 2000 = 249, 2001 = 315, 2002 = 224 (2002 target = 167)

Does the performance of this program compare favorably to other programs with similar purpose and goals?

Explanation: IRS is the only Federal entity enforcing EITC compliance.

Evidence:  

Do independent and quality evaluations of this program indicate that the program is effective and achieving results?

Explanation: The latest data (tax year 1999) shows no progress on reducing erroneous payments. However, without IRS compliance efforts an additional $1.169 million (or 4% of EITC payments) would have been made erroneously.

Evidence: Of the $31 billion in EITC claimed by taxpayers for TY 1999, IRS estimates that, even after its enforcement efforts, $8.5 to $9.9 billion (27 to 32 percent) was paid to ineligible taxpayers. The previous study, for TY 1997, estimated that $7.2 to $7.8 billion (24 to 26 percent) of EITC claims should not have been paid.