It’s time to revamp the Earned Income Tax Credit, tax professionals say -– though they don’t necessarily agree on how.
At first blush, the credit sounds like a good, or at least a kind, idea: “The EITC is a benefit that low-income workers can receive when their income falls below a certain threshold,” reads a post on the blog IRS Problem Solver. “The EITC was created to help ease the burden of low-income families who are still working.”
Trouble is, the entry continued, “Some feel the program has turned into a huge cash-entitlement anti-poverty program that no longer seems to be encouraging poor individuals to look for work.
EITC filings hit a record high in 2013 and returned a record amount of $68 billion to filers. Yet the credit pops up a lot in improper filings, if not outright fraud. H&R Block, which has been lobbying to increase the complexity of the ETIC form (critics claim the prep-chain giant is trying to drive more taxpayers to use paid preparers), pointed out that the Treasury Department estimated that $16 billion to $19 billion in improper EITC payments were paid out in 2014.
“I don’t have a problem with tax benefits for low-income citizens, but the amount of EITC fraud is unacceptable,” said Oklahoma-based CPA and Enrolled Agent Peggy Johnson.
“Curtail the fraud by stopping refunds to foreign addresses,” suggested preparer Roger Lubiens of RS Tax Service in Folsom, Calif.
The EITC “should be overhauled at the very least,” said Laurie Ziegler, an EA
at Sass Accounting LLC in Saukville, Wis. “Over the years I’ve seen clients truly shocked as they didn’t realize they qualified for it. The rest, however, expect it, and I have even had some asking where the sweet spot is. I always try to stress that they should earn as much as they can without regard to the EITC.”
“The other reason it needs to be addressed is the high incidence of fraud,” she continued. “I was totally blown away when I was at an IRS Stakeholder Liaison meeting once and learned that tax franchise owners were dealing with clients coming in and actually saying they had self-employment when they didn’t so that they could claim EITC. It just boggles my mind that these people are smart enough to play the system but not smart enough to understand the concept of working for what you get.”
“Not eliminated, but certainly modified,” Bill Stewart, an EA at San Juan Financial Ltd. in San Juan Capistrano, Calif. “Today, it promotes people not getting married and straight out lying. [It’s] not fair at all and extremely hard to manage so that only the ones it was designed for get it.”
“The EITC should be eliminated,” said EA Arlene Rheinfelder, at Prescott Tax & Paralegal in Prescott, Ariz. “Any time there’s a refundable credit, it is accompanied by increased fraud.”
‘Phantom deductions and borrowed dependents’
“The EITC is a political program, not a tax program,” said EA Bill Nemeth, a partner at Tax Audit Guardian in Atlanta, who also noted IRS estimates that 25 percent of the returns filed early in the season with EITC are fraudulent.
Both use and abuse of the EITC might stem from how intimidated many Americans are by their taxes. “Many taxpayers who qualify for EITC are aware that filing their return is the biggest single financial transaction they will ever get involved in each year,” Nemeth said. “For this reason, it appears that an inordinate number of these taxpayers employ a paid preparer to make sure it’s done correctly. Some of these paid preparers charge unconscionable fees – $600 for a 1040A with one W-2 and two dependent children is not unusual. And the IRS will accept a taxpayer’s return and calculate the correct amount of EITC at no charge.”
“I’m unable to offer a solution to prevent the use of phantom income, phantom deductions and borrowed dependents,” Johnson admitted, “but if the IRS is unable to reduce the fraud then an alternative should be considered. We should not send a $6,143 check to a family that earned only $12,800 annually. Instead, the EITC refund should be prorated over 12 months and sent to the family monthly via their checking account or a debit card. By receiving a monthly refund, the family will more likely use the money to improve their general standard of living, rather than spending it impulsively over a short time.”
Any suggestion of changing the EITC – which was first signed into law by Republican President Gerald Ford and later expanded by GOP icon Ronald Reagan – seems to come freighted with implications of making taxpaying harder or pricier for the poor.
Earlier this fall, the Senate Appropriations Committee was looking to increase the length of the Schedule EIC, requiring taxpayers to include much the same information on self-prepared returns that paid tax preparers are required to ask on the EITC due-diligence checklist.
The proposed changes are aimed at reducing the high improper payments rate for EITC claims, but they could also have the effect of discouraging many low-income working taxpayers from filing the form. The requirements would reportedly increase the size of the EITC form from one page to four or five pages with additional questions to verify eligibility for the credit.
Critics also say that H&R Block’s lobbying to increase the complexity of the ETIC form is an attempt drive more taxpayers to use paid preparers. “This is not about competitive business interests,” the prep-chain giant countered in a statement. “It’s about reducing fraud and protecting the future of the EITC. Anyone who says differently is not really committed to fixing a gaping hole in EITC eligibility or to reducing the billions of dollars in improper EITC payments that occur every year.”
Las Vegas-based EA Shirley Callahan teaches EITC due diligence, “and if you want to rile up preparers, just tell them what the IRS requires,” she said. “No one really wants to do what IRS requires, and I believe few preparers even know.” She proposes mandatory EITC testing. “Want to prepare EITC returns? Take an annual EITC due-diligence exam.” Callahan added that such a test is already operational from the IRS.
“I don’t think tax preparers are qualified to discuss the welfare issues of the nation,” she added, “but I do believe we are more than qualified to tell you that we don’t like being the ones to [dispense] EITC government-issued welfare while facing $500 penalties every time we do. We love doing taxes; that’s what we signed up for. Let the politicians and the talking heads decide the future of EITC.”
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