Unequal Burdens in EITC Compliance

Minnesota Journal of Law & Inequality Minnesota Journal of Law & Inequality

Unequal Burdens in EITC Compliance Unequal Burdens in EITC Compliance

Karie Davis-Nozemack

Article 2

Unequal Burdens in EITC Compliance

Karie Davis-Nozemackt

Lower income means harsher treatment from the government for taxpayers who claim the Earned Income Tax Credit (EITC). EITC claimants are audited more often than any taxpayers other than the very wealthy. More concerning, however, is that the IRS in a audits EITC claimants by correspondence examination manner that unduly burdens access to this refundable tax credit: a credit that often keeps lower income workers out of poverty.

Improper payment law brings increased scrutiny to federal programs that issue erroneous payments. Because the EITC is alleged to have substantial improper payments, it is subject to federal improper payment law, which adds administrative burdens in hopes of diminishing erroneous payments. While other scholars have noted the relationship between improper payment law and the EITC, this Article takes the unique view that improper payment law, instead of burdening EITC administration, can provide relief to the Service's onerous EITC compliance methods.

Introduction

For the last three decades, income disparity within the U.S. has been widening.' After the Occupy Wall Street protests, the nation is undoubtedly conscious of this growing disparity.2 It is unlikely, however, that the nation is conscious of the compliance income burden disparity experienced by taxpayers. For taxpayers claiming the EITC, lower income brings

low and moderate

with it harsher treatment by the government.'

In chasing increased efficiency while broadening audit coverage, the Internal Revenue Service (Service) has dramatically increased its use of correspondence examinations, nearly tripling their usage since FY 2000.' While sophisticated taxpayers with representation can navigate correspondence examinations with minimal difficulty,' in EOTC examinations, ninety-eight percent of taxpayers are unrepresented.' Moreover, successful application for EITC is often complex and can require atypical documentation for nontraditional family living arrangements.! This would make EITC compliance ill-suited for the correspondence examination process and results in the Service's declarations of ineligibility for to eligible EITC claimants.!

The Service has struggled

successfully administer EITC for thirty years;' however, seeking examination the EITC procedures is not a good answer. Administering the EITC in this manner burdens benefit distribution to low-income taxpayers.'o

compliance under

correspondence

This is particularly true when the Service fails to offer basic support services for EITC correspondence exams. For example, the Service only answers approximately seventy percent of taxpayer phone calls it receives." Callers to the EITC phone line may find a phone line that is not staffed, and for those who leave a voicemail message, anecdotal evidence suggests that they may not receive a return phone call." While this is frustrating and undoubtedly makes navigating the credit more difficult, perhaps it is fortuitous that taxpayer needs are not adequately addressed by phone; correspondence examination cases are only assigned to an examiner after correspondence is received from a taxpayer." Accordingly, the taxpayer must correspond in writing with the Service to extricate himself or herself from an otherwise wholly automated system." Unfortunately, even if an EITC taxpayer writes the Service, the correspondence may be lost, incorrectly matched, or experience significant delay before it is logged into the Service's system, which could trigger the automated system to send inaccurate correspondence in response." An EITC taxpayer facing examination may experience some or all of these barriers before even attempting to provide the required document-intensive proof to verify his or her entitlement to the credit.

Adding another layer of challenge to EITC administration is that EITC has been branded as a social benefit riddled with fraud." The Service reports,"' between twenty-three and twenty-

eight percent of EITC payments are improperly made.19 This report is likely inaccurate,20 but it forms the basis of subjecting EITC to heightened scrutiny under federal improper payment laws.1 While other commentators have noted the effect of this Article improper payment laws on aspects of the EITC,2 takes the unique view that improper payment law, instead of burdening EITC administration, could provide relief to the Service's onerous EITC compliance methods.

examinations,

Correspondence

Executive Order 13520 contributes to the landscape of federal improper payment law, but it could provide relief to EITC and its claimants. Executive Order 13520 requires federal agencies with programs representing the highest improper payments to submit plans to reduce these improper payments, but the plans may not "unduly [burden] program access and participation by eligible beneficiaries."23 and more specifically the manner in which they are conducted, unduly burden access to EITC, and this contravenes the Executive Order 13520 requirement to refrain from an undue burden for program access. This Article is divided into six Parts to address the collision of EITC and the correspondence examination process with Executive Order 13520 and its kindred improper payment laws. In Part I, this Article discusses improper payment laws, including Executive Order 13520. Part II identifies the alleged EITC overpayment rate and comments on the trigger of improper payment program requirements. Part II also highlights the fact that EITC is the only Department of Treasury or Service program subject to such scrutiny, even though EITC comprises only five percent of the tax gap.24 Part III discusses how the Service the executes correspondence examination process, and Part IV offers evidence that the correspondence examination process often impedes legitimate claimant access to EITC. Part V concludes that the Service's use of correspondence examinations unduly burdens access to EITC in contravention of Executive Order 13520. Finally, in Part VI, the Article examines possible solutions, including previous and current Service Pilot projects.

compliance mission

function via

its

I. Accountability Via Improper Payment Law

The U.S. faces burgeoning spending, debt levels, and lower revenue receipts due, at least in part, to the recent recession and sluggish national growth.25 In addition, there is heightened

political rhetoric calling, in many cases, for smaller government and, at the very least, more efficient government.26 One way to control spending and to reform governmental administration is to to third closely monitor and control governmental payments parties.

It is not difficult to find political support for limiting and monitoring improper payments by the federal government.27 en couched in terms of merely requiring the federal government to properly execute its duties and refrain from abetting activities that sound like fraud, improper payment legislation garners near unanimous support.28 Congress passed and the president signed President improper payment legislation in 2002 and 2010.29 Obama added more processes to the minimization of improper two payments with Executive Order 13520 legislation and in 2010.30 presidential memoranda manifestation of executive administrative power creates a more systematic identification, measurement, planning, and reporting. What follows is a brief to overview of the legislative and presidential contributions improper payment law. While each offers contribution to the improper payment landscape, it is Executive Order 13520 that provides the possible opportunity for change in EITC compliance.

improper payment

in 2009 and

framework

This

A. Improper Payments Act of 2002

Prior to the passage of the Improper Payments Act of 2002 (IPIA), there was no universal federal agency requirement to the federal report or analyze wrongly made payments by government." The IPIA began the process by requiring executive branch agencies "to review annually all programs and activities they administer and identify those which may be susceptible to significant erroneous payments."3 2 A program is at "significant" risk with $10 million of improper payments.". If an agency has improper payments greater than the $10 million trigger IPIA requires the agency to estimate annual improper payments and these improper payment report on its actions for reducing estimates.

To comply with IPIA, federal agencies typically report their findings in their agency performance and accountability reports (PARs), annual financial reports (AFRs), or annual reports." The IPIA's process and reporting demands have, at the very least, increasingly allowed comprehensive picture of the universe of improper payments."6 It appears that the IPIA's effect has not been short lived. Every year since IPIA was implemented in 2004, federal agencies have identified new programs or activities as riskconsistently susceptible and reported estimated improper payment amounts.37

federal government

to have an

IPIA and its implementation were not without their critics. After its passage, the Office of Management and Budget (OMB) In its issued guidance for agencies implementing the IPIA." guidance, the OMB augmented the IPIA's statutory requirements. The guidance departed from the express IPIA provisions in two

ways: dollar amount trigger and timing of reporting.9 Whereas IPIA requires reporting programs with improper payments exceeding $10 million, OMB guidance states that reporting is only required for programs meeting the $10 million threshold and improper payments amounting to at least 2.5% of total program payments.40 Critics noted that the addition of the 2.5% threshold exempted a number of programs from IPIA requirements that would have met the statutory trigger. OMB guidance also faced criticism because it enabled programs with substantial improper payments, so long as they were under the technical thresholds to improper to regard risk assessment planning with avoid the purpose of the payments, which, of course, defeated legislation.4

In other words, critics suggested that there was too little process when an agency's improper payments were less than $10 OMB guidance went even further by million and 2.5%. IPIA required augmenting the IPIA reporting time periods. annual reporting; however, OMB guidance allowed for reporting every three years for "low risk" programs.' While OMB's guidance drew criticism, OMB was somewhat vindicated when the Improper Payments Elimination and Recovery Act of 2010 (IPERA) codified OMB guidance."

B. Executive Order 13520 & Subsequent Presidential

Memoranda

While the IPIA served to highlight the problem of agency improper payments to federal agencies and the public, the law itself, as well as OMB's guidance, failed to capture significant improper payments in the processes and provided only a very basic In late framework for agency consideration of these payments. 2009, President Obama signed Executive Order 13520 to extend the IPIA by providing more processes for reporting on improper payments. Specifically, Executive Order 13520 requires:

* OMB

to identify federal programs with the highest

improper payments;

* OMB to set reduction targets for those programs, and

Agencies to designate an official accountable for meeting the OMB reduction targets "without unduly burdening program access and participation by eligible beneficiaries,";

* Agencies to report to their inspector generals regarding measuring improper payments and the agency's plan to meet the reduction targets without unduly burdening program access."

It should be noted that Executive Order 13520 has a different trigger than the IPIA. Under Executive Order 13520, an agency's "highest" improper payments trigger the process, as opposed to the IPIA's dollar and percentage triggers. Because Executive Order 13520 does not change the IPIA and only adds another layer of process, its trigger subjects more agencies and programs to improper payment law.

Most significant for the purposes of this Article, however, is Executive Order 13520's recognition that an agency should not minimize improper payments in manners that unduly burden beneficiary access to, and participation in, federal programs. This requirement was missing from both the IPIA and also the later IPERA.

In addition to Executive Order 13520, President Obama also issued two presidential memoranda aimed at reducing improper payments. On March 10, 2010, the President issued Memorandum on Finding and Recapturing Improper Payments, which expanded the use of payment recapture audits.47 On June 18, 2010, President Obama issued Memorandum on Enhancing Payment Accuracy Through a "Do Not Pay List," which required federal agency cross-checking before making payments.

The Improper Payments Elimination and Recovery Act of 2010 (IPERA). codified some of OMB's extra-statutory IPIA for guidance."o identifying, estimating, and reporting improper agency payments, and added a recovery audit piece as well as consequences for agency noncompliance." Most significantly, IPERA requires the

increased process requirements

IPERA also

head of each Federal agency to review all the agency's programs and identify activities that may be susceptible to significant improper payments ($10 million and 2.5% or $100 million), at least once every three years." This is the same trigger that OMB guidance suggested under IPIA." Because IPERA's provisions became effective in fiscal year 2011, results for measuring its effectiveness are not yet available.'

As explained above, federal improper payment law is drawn from two federal statutes, an executive order, and two presidential memoranda, but to what end? Currently, OMB uses these to require a formal process for decreasing unnecessary and wasteful expenditures." These procedures certainly create additional work for federal agencies by requiring new processes as well as monitoring and reporting. This is new bureaucracy, but it appears to be working. According to OMB, agencies payout $2-3 trillion annually to third parties.56 From fiscal year 2009 to 2010, there was a drop in the improper payment rate from 5.65% to 5.49%, although the 2010 rate was still above the targeted 5.3% .These rates do not include the provisions of IPERA, which becomes effective in fiscal year 2011.

Despite only modest improvements in improper payment

rates, a review of agency annual reports and agency inspector general reports illustrates that most agencies appear to be publicly reporting (and perhaps by extension, paying more attention) to the level of improper payments.' With implementation of IPERA in progress, the addition of more specific and mandatory processes should decrease improper payments. It is possible, however, that these processes could initially have the opposite effect by flagging previously unknown improper payments. This could, at least temporarily, increase the number of known improper payments and give the impression that this improper payment regime is not successful.9

II. EITC & Improper Payments

While Part I offered an overview of improper payment law, Part II will briefly examine the EITC to lay a foundation for identifying and explaining the alleged level of EITC overpayments. Significant scholarship examining the EITC is available from a number of sources."0 Accordingly, this Article only provides enough EITC information to advance an understanding of the EITC's intersection with improper payment law.

A. What is the EITC?

The EITC provides a refundable tax credit to low-income taxpayers.61 A refundable credit is one that not only offsets a taxpayer's tax liability but can also result in a cash payment in excess of tax liability.62 EITC increases with the amount of earned income a taxpayer reports, thereby functioning as an incentive to work." Its design, as part direct payment and part tax offset, is

consistent with its dual purpose as part social assistance payment and part work incentive." An attempt to make the EITC serve dual masters is at least partially responsible for its complex rules and administration.65

Most EITC claimants must prove, among other things, three primary items: earned income, relationship of qualifying children, and minimum residency of qualifying children.' EITC is available to claimants without children but increases dramatically when a qualifying child resides with a claimant for more than half of the tax year.6 ' EITC further increases with the number of "qualifying children" who reside with the claimant." Prior to 2009, EITC payments plateaued for claimants with two qualifying children.6 9 In other words, a claimant did not receive any additional EITC for three (or more) children than for two children. Pursuant to the Tax Relief Act of 2010, EITC increased for claimants with three children." The third-child expansion is temporary for two years, which is in addition to the original two-year expansion under the American Recovery and Reinvestment Act of 2009.n There has been discussion opining that the previous two-child maximum created an incentive for larger families to improperly allow others to claim their other children."

B. Consequences for Improperly Claiming the EITC

Taxpayers who are found

Like many social assistance programs, the EITC contains severe penalties for claims made fraudulently, recklessly, or with to have intentional disregard." fraudulently claimed the EITC may not receive it for ten years, even if they are otherwise eligible." EITC claims that are made recklessly, or with intentional disregard of the rules, render a taxpayer unable to claim EITC for two years, even if they are reckless, or otherwise eligible." than intentionally penalties for fraud in other social assistance programs.76 Benefits under Temporary Assistance for Needy Families (TANF) may be denied for an entire family for a month due to noncompliance, and repeated noncompliance may result in denial for up to six In these months." Food stamp programs have similar sanctions. other benefits programs, repeated abuse only garners sanctions for months, whereas comparable actions garner sanctions lasting years under EITC.

improper EITC claims are more severe

for fraudulent,

Penalties

There are, of course, civil penalties for non-EITC reckless or fraudulent violations of the Internal Revenue Code." Non-EITC penalties, however, pale in comparison to the EITC civil penalties, and they do not bar future use of any code section for which a taxpayer is otherwise eligible.0 Indeed, with respect to EITC sanctions, "[t]here are no analogous sanctions applicable to other tax returns."' improper positions Penalties for EITC abuse, criminal or civil, are significantly harsher than sanctions for other tax violations or other social benefit abuse. These heavier penalties are consistent with the

taken on federal

C. Improper EITC Payment Rates

There certainly exists an impression of significant EITC fraud, and many interpret the government's improper payment numbers to support this theory." The Treasury Department estimates total EITC program payments for FY 2010 as $64 billion,' and EITC overpayment rates of twenty-three to twentyeight percent or $15-18 billion." The estimated EITC overpayment rate has remained constant at twenty-three to twenty-eight percent for several years and is not expected to change through The Service has argued that impending preparer 2013.6 regulation will shrink the future EITC overpayment rate," but in Inspector examining the Service's expectation, General for Tax Administration (TIGTA) found no evidence to expect a positive impact on the rate."

the Treasury

The annual EITC overpayment estimate ranks it fourth in relative size of programs with improper payment estimates.89 When programs administered by state and local agencies with federal funds are removed and only federally administered programs are examined, EITC overpayments are the second

highest federal program overpayments."o EITC's ranking as one of the "highest dollar value" of government-wide improper payments triggers the application of Executive Order 13520's required reduction targets and planning. IPIA and IPERA designation as a "susceptible program" is triggered, not by the EITC overpayment relative ranking against other federal program overpayments, but by passing the established thresholds of $10 million of improper payments and 2.5% of program outlays, or at least $100 million in improper payments." Designation under IPERA obligates an agency to perform risk assessments and report on plans to meet "measurable milestones.",

The Department of the Treasury's FY 2010 Performance and Accountability Report found EITC to be the only high-risk susceptible program under IPIA." That same report identified EITC as the only high priority program under Executive Order This is strange, particularly considering that EITC 13520.94 overpayments are estimated to be only five percent of the tax gap.9' In contrast, twenty percent of the tax gap (four times the EITC overpayment amount) is attributable to underreported selfemployment income.' Between ten and fifteen times the EITC to misreported business overpayment amount is attributable income." Commentators have also identified other tax credits that likely meet IPERA designation, including alternative fuel credits," and research credits.' Others have argued that "improper refunds of withholding and estimated tax payments" are subject to IPIA as TIGTA estimates that the improper First Time Home well." Buyer Credits paid in 2009 and 2010 were hundreds of millions of

dollars."' Improper payments at these levels should be subject to IPERA, at the very least. Other tax payments and preference items, including tax expenditures, should also be subject to improper payment law; however, this is beyond the purview of this Article.0'

D. The Service's Actions to Combat Improper EITC Payments

the Service's EITC

In compliance with IPIA, and with TIGTA's mission as the Inspector General of the Service," TIGTA regularly audits the Service's functions, including the administration of EITC and In its February 2011 report, TIGTA identified overpayments."' efforts and some of TIGTA noted that the Service had failed to shortcomings."1' establish reduction targets and strategies for reducing EITC In response, the Service defended itself with the overpayments." actions it takes to reduce improper payments."o7 The Service's defense relied almost exclusively on its return preparer initiative and identified it as its most promising avenue."' TIGTA did note, however, that the Service has undertaken a variety of education and public relations activities to assist participation by eligible

administrative

individuals." The responses of both TIGTA and the Service fail to acknowledge the power and process the Service undertakes to administer and police EITC. Their responses belie the Service's toolbox, which includes the use of correspondence exams, math error authority, and civiland preparer penalties.

III. Managing EITC with Correspondence Examinations

In Part II, this Article identified the alleged level of EITC overpayments. Part III attempts to explain the process that the correspondence identifies the alleged improper payments: examination process. This Part will explain how returns are selected for examination, as well as how often and why the Service utilizes correspondence examinations to audit EITC taxpayers.

A. Return Selection for Correspondence Examination

The Service executes its taxpayer compliance function with Typically, the Service utilizes a the examination process."' field correspondence examination, office examination, or a examination,"' which involve escalating degrees of Service personnel involvement. With a limited budget and personnel, "the Service uses the accumulated experience of its personnel in the classification and selection of returns" with the greatest potential for tax change and revenue yield for examination."' Returns are chosen for audit by computer analysis that "numerically scores tax returns according to a mathematically determined probability of error.""'

sophisticated computer

technology and

The Service has recently placed an emphasis on honing EITC audit selection, "spen[ding] millions of dollars developing probability filters to improve its selection of cases for audit using information contained in the Dependent Database.""' The Service

the Service has

increasingly used

also uses prior audit information to inform its audit selection."' third-party Recently, information from non-Service sources, including the Federal Case Registry, which is a database of custody orders for children receiving public assistance and custody orders from some private divorce cases, as well as information from the Social Security Administration databases to validate social security numbers and parents' names for qualifying children."6 TIGTA believes that the Service is leveraging this technology to identify EITC improper payments."' Even with all of these investments into EITC error detectors, the Service has made virtually no progress in limiting stated, the EITC overpayment rates are alleged to have hovered between twentythree percent and thirty percent for years and are predicted to remain at the same level for several more years."' Other than some educational public relations activities and the impending regulation of preparers, the Service has not committed to any new plans for reducing the EITC improper payment rate.120 It appears to continue using correspondence that the Service for EITC as examinations administration.

intends the primary

improper payments.""

As previously

compliance

tool

B. Why Use Correspondence Examinations?

No doubt a primary driver for the Service's choice of correspondence examinations to manage EITC claims is the low cost. Correspondence exams are less expensive because they are more automated, requiring less personnel labor than office or field examinations.121 The Service estimates that its administration of EITC costs less than one percent of benefits distributed. 122The

Service contrasts its EITC costs with the cost estimate of other social assistance program, which are nearlytwenty percent of Ironically, the alleged overpayments of benefits distributed.'" twenty-three to twenty-eight percent are strikingly similar to the twenty percent administrative cost of benefits, making the real to other social cost of administration of EITC comparable assistance programs targeting the poor.

EITC administration is kept at this low one percent cost by burdening the beneficiaries with administration costs.125 The EITC process leaves beneficiaries on their own to determine Scholars and eligibility via the self-assessment process. practitioners have noted that the complexity of claiming the EITC Indeed, completing a return with an EITC is overwhelming.'27 claim is "more challenging than completing a Form 1040 with itemized deductions."2

Although some Service tools are available to help EITC claimants, most are underutilized. The Service has an Internet

to EITC,"' and

guide the Service funds free EITC return preparation through its Volunteer Income Tax Assistance (VITA) program.' Very few EITC claimants utilize the free preparation options. Fewer than two percent of EITC returns are prepared by VITA sites."'

For most taxpayers, successfully claiming EITC requires professional assistance.32 For tax year 2009, 57.3% of all individual returns were prepared by preparers.as Seventy percent It is evident that many of the of EITC claimants use preparers.' costs of tax administration are transferred to taxpayers by virtue of self-assessment and code complexity, which, in many cases, requires professional assistance. This is certainly true for EITC administration, and for EITC the cost administration is borne by those least able to afford it.

transfer of

Experience does not seem to help alleviate the complexity and professional assistance problem. Recent studies indicate that changes to the EITC population may contribute to the long-term ineffectiveness of EITC education and public relations activities Sixty-one percent of EITC that the Service has undertaken.'' claimants from 1989 to 2006 claimed EITC for only one or two years at a time.13' The study indicated that only twenty percent of EITC claimants used EITC for more than five consecutive years.'7 Accordingly, efforts to educate an ever-changing population are likely ineffective. Any experience or knowledge which might be helpful for claiming EITC is likely only useful to a small number of

repeat claimants.

C. Audit Rates and Reasons

With

its limited resources

tax administration and compliance initiatives, the Service often takes the path of least resistance. In this case, the path of least resistance is auditing the "easy" returns. For the Service, EITC returns are easy returns: low-income returns tend to be simple, with fewer items of income and few, if any, deductions;... EITC claimants rarely respond to correspondence examination correspondence;"' nearly the entire process limited Service personnel involvement;... EITC claimants are unlikely to be able to afford or even secure free representation.14' For the Service, EITC returns are the proverbial low-hanging fruit.

is automated and has

illustrate

over-emphasis

audits, commentators often compare EITC and self-employed audits.14 Auditing self-employed taxpayers would likely yield more revenue than auditing EITC claimants, given that twenty percent of the tax gap is attributable to self-employed taxpayers (as opposed to only to EITC

tax gap attributable

five percent of

on EITC

However,

examination of

is much more

likely take significant

self-employed overpayments)." time and personnel taxpayers would resources to produce revenue, because discovering underreported verifying income documentation provided by an EITC taxpayer.'44 Moreover, it would be more difficult to audit self-employed taxpayers via correspondence exams given the alleged levels of underreported income."' The audit rate for self-employed taxpayers is 1.9%, and the audit rate for EITC taxpayers is 2.1%,"' which is nearly 10% higher.

labor-intensive

than

The audit rate for taxpayers with less than $25,000 income is 1.22%, which is significantly higher than the rate for taxpayers with $25,000-$200,000 of income which is 0.73%-1.00%.117 The audit rate does not rise to the level that the lowest-income taxpayers experience until income goes above $200,000.'4

This should not be surprising given the history of resources specifically earmarked to police the EITC."' Both scholars and reporters have noted the 1990s compromise between President Clinton and Congress that resulted in an increase in the Service's budget by $100 million specifically to audit EITC returns."o The legacy continued in 2002 when Treasury Secretary Paul O'Neill stated, "[i]f you look at why we're doing a relatively heavy audit of low-income [taxpayers], it is because we've been directed by the Congress to examine the devil out of the so-called earned income tax credit filers."' The overemphasis of EITC audits continues today. 152

Limited Service resources and congressional will are not the

Improper payment law only drivers of high EITC audit rates. requirements are certainly a driver, as they require the Service to demonstrate and execute a plan to bring down EITC improper payments."' Other commentators believe that heavy EITC compliance initiatives are attributable to the perception that EITC is "welfare" and the cultural belief that "cheating on one's income tax [is] ... less seriously wrong than committing welfare fraud." " Still others have suggested that EITC compliance initiatives may be driven by "the belief that EITC errors are the result of fraud function of racial stereotyping about EITC [which] recipients.""' Regardless of why EITC claimants are chosen for audit, for correspondence examinations at a higher rate than comparable groups of taxpayers

the data demonstrate

they are chosen

is a

that

D. An EITC Correspondence Examination

Once an EITC return is selected for audit via scoring, a letter is generated asking for information or documentation to verify one or more of the EITC requirements."6 The correspondence typically requests the EITC claimant to submit documentation to prove relationship to, or residency of, the qualifying children.7 A 2010 study by the Taxpayer Advocate Service "TAS" of 400 EITC cases noted that "[in ninety percent of the cases reviewed, the primary issue raised by the IRS involved either the Relationship Test or the Residency Test under the uniform definition of a 'qualifying These are the lynchpins in securing EITC, and they child."'" create proof issues during a correspondence examination. These proof issues are discussed below in Part IV. "

IV. Correspondence Examinations Impede Access to EITC

The previous Part addressed how, why, and how often EITC claimants are chosen for examination. The following Part will explore the conduct of EITC correspondence examinations and lay

a foundation for the ultimate conclusion that the manner in which EITC correspondence examinations are conducted is unduly burdensome.

A. Proof for EITC is Document-Intensive

As stated above, the majority of EITC examinations address the Relationship Test, the Residency Test, or both."o These can be very challenging to prove, particularly in non-traditional family arrangements. For example, an aunt caring for a niece must produce three birth certificates to satisfy the Relationship Test.' She must produce the niece's birth certificate to document her parentage as well as the niece's mother's birth certificate and aunt's birth certificate to demonstrate that they have the requisite familial relationship.'62 This may be challenging if the mother is not present in the home. It also may prove challenging for transient families, particularly those who have been evicted or are homeless. In addition, the Internal Revenue Manual lists only a to prove few relationship."3

acceptable documentation

that are

items

Residency of more than six months of a qualifying child can be even more challenging to prove, particularly when the Service only accepts certain documentation." Only copies of records from

social

service

agencies)

certain places (e.g., schools, medical providers, child care providers can be used as acceptable or documentation.'65 While in theory school records should be easily used to prove residency in the EITC claimant's home, the practice does not work well. School records document residency during a school year, which usually runs August-December (five months) and January-May (five months). Both semesters of a school year are less than the six months necessary to prove EITC residency, through is measured on a tax year basis(January which December).'"

The atypical documentation

that claimants often must submit can prove challenging during correspondence exams for a number of reasons. The types of documents used to prove the relationship and residency tests are not the types of documents that the Service specializes in dealing with, such as W2s, 1099s, and other returns."' With respect to traditional documentation, the Service has established processes for data matching and analysis.'" The Service struggles, however, to data mine atypical documentation. The Service's struggle to administer the FirstTime Homebuyer Credit (FTHBC) illustrates this point well."' This program required the Service to consider and examine home purchase settlement statements-new documentation for the Service."o The Service also used new Form 5405.1' Unfortunately, the Service's difficulty in processing settlement statements and the new Form 5405 led to errors in FTHBC administration that

could have been discovered

appropriate easily processing.12 Moreover, the novelty of these forms hampered the Service from accepting settlement statements electronically.73 These types of atypical documentation present an even greater challenge when the production is conducted via automation, as is the case with EITC correspondence examinations.14

through

EITC claimants selected

for audit face difficult proof burdens;"' however, these difficulties pale in comparison to the challenges in navigating the EITC examination process itself.16 Simply put, dealing with the Service during a correspondence examination is difficult. EITC claimants

for audit have virtually no alternatives to the correspondence exam process: once a claimant is chosen under the computerized system, the claimant is almost

chosen

In 2010, nearly certain to face a correspondence examination." ninety-seven percent of audited EITC returns were undertaken with correspondence examination."'7 Under Treasury regulation 301.7605-1, a taxpayer may petition to change the venue, which could mean changing from a correspondence examination (i.e., campus examination) to a face-to-face office examination.179 This regulation gives the Service the discretion to grant the request after considering six factors."' Despite the list of factors, "Imlany that correspondence IRS examinations will be transferred only in instances of hardship.""'

the view

centers

service

take

from a correspondence examination

The ability to take advantage of the very slim opportunity to the transfer taxpayer's ability to understand the correspondence sufficiently to find the regulation to transfer, comprehend the availability of the option, and successfully argue for transfer. "2 Ironically, these are the precise skills that a taxpayer needs to successfully navigate a correspondence exam. If the taxpayer lacks these skills to begin with, there is virtually no chance he or she will successfully argue for a more navigable and comprehensible examination.

turns on

Assuming that a taxpayer is chosen for correspondence examination, navigation of the process involves successful with the

Service.'" Interpreting the Service's correspondence is not easy for any taxpayer (nor any practitioner), but it is particularly difficult for low-income taxpayers who are more likely to have functional The Service's literacy" and financial literacy"' challenges."' correspondence suffers from deficiencies in basic readability. The systems that the Service uses to generate taxpayer correspondence are admittedly antiquated."' While some EITC correspondence has been redesigned to address readability issues, many others have not and continue to appear in the same, unchanged form." The typeface, layout, and whitespace make it difficult to read old, unchanged correspondence."' The aesthetics are compounded by the substantive readability problems. The sentences are complex and not written in plain language, and worse, the letters use Service and tax jargon that mean nothing to the average In a study of EITC taxpayers, more than seventy taxpayer."'

percent thought that examination correspondence was difficult to understand."' The tone of the Service's correspondence is often overly harsh and legalistic, which tends to frighten taxpayers.'" The most concerning results of the EITC audit correspondence study were the conclusions that, after reading the Service's correspondence, over a quarter did not understand that the Service was auditing their return, and nearly another quarter did not understand what documents to send to the Service. ' The the Service's failure correspondence makes it nearly impossible to comply with its requests.

to understand

substance

of

C. The Service's Phone Issues

Confusing correspondence prompts taxpayers to call the Service for clarification and assistance. Unfortunately, phone contact with the Service creates a host of additional issues. In Fiscal Year 2008, the Service's level of service (LOS) for its tollfree lines was fifty-three percent." Almost half of taxpayers who called the Service in FY 2008 were not helped. Since then, the Service's phone LOS has been "in the low-seventy percent range."'. The Service's goal is to answer eighty percent of its calls, and the IRS Oversight Board believes that even getting to the eighty percent level, where a full twenty percent of taxpayers are not assisted when they call, will cost another $100 million.'96

The Service's failure to answer the phone when taxpayers call is a significant issue. An inability to reach the Service to clarify questions can cause taxpayers to give up, resulting in a failure to respond to the Service's notices.'" Inaction by an EITC taxpayer will cause them to lose, in many cases, thousands of EITC dollars that could be keeping their family out of poverty.

D. Access to Examiners

Correspondence examination cases are only assigned to an

through

an automated

is received from the taxpayer.1s examiner after correspondence Cases in which a written response is not received are worked system.'" The completely correspondence examination process is designed to minimize contact with the Service's personnel, which is how the cost savings are realized.200 A taxpayer who calls the Service does not to be labeled as a the Service's filters necessarily responsive taxpayer, and can find him or herself on the receiving end of additional correspondence stating that he or she has failed to contact the Service along with a notice of deficiency.20'

trigger

audit

This is a problem when, as a study suggests, ninety percent of EITC audited taxpayers attempted to contact the Service about their audit, with nearly seventy-five percent of them calling or personally visiting the Service.2" As noted above, however, these are not the actions that get a correspondence case assigned to a person.203 These EITC claimants are contacting the IRS because they do not understand the letter, or are having difficulty with the documents the Service seeks.2

Until very recently, the Service's initial EITC correspondence did not designate an employee who could be contacted about the examination.20' Even now, the correspondence only designates a supervisor, and callers are routed to any available employee,206 assuming that the call is even answered.'" Evidence has indicated that the phone line where EITC calls were routed was not staffed,208 and callers were forced to leave a message.2"0 Anecdotal evidence suggests that return calls were rarely made from the

EITC voicemail.1o

E. Document Logging and Matching

the documents

Even when EITC claimants understood correspondence or were able to receive clarification about the documents sought, to the Service often made little forwarding difference in the examination.2" Document matching is a serious problem for the Service.21' The Service has significant delays in mail routing and in reading received mail.212 If mail is not logged into the Service's system correctly or in a timely fashion, the automated correspondence system continues actions based on the belief that the taxpayer has not responded or submitted the requisite substantiation.2 The Service has admitted that the premature issuance of statutory notices of deficiency is based on mail handling problems.21 5 Although some areas of the Service utilize barcode correspondence for document matching purposes, the EITC area in Small Business/Self Employed does not, and has refused to implement such a provision.216 While the Service claims 7 this author believes to have addressed its mail handling issues,2 processing that correspondence remain, and result in denial of EITC taxpayer rights.

logging, matching,

problems with

F. Studies Show EITC Audit Failure, Not Necessarily

Claimant Failure

Given all of the audit barriers that EITC claimants face,218 it

to have

in which a

taxpayer asks

would not be surprising that EITC claimants who should be In 2004, TAS entitled to the EITC are unable to obtain it. published a study2" in which TAS examined 679 random EITC audit reconsideration cases.220 Audit reconsideration is a Service their appeals process examination reviewed for accuracy."' Between forty percent and forty-five percent of EITC claimants whose EITC claims were denied or reduced during the correspondence examination process received additional EITC upon audit reconsideration.222 In other words, nearly half of EITC claimants failing the audit process It follows that being declared were in fact eligible for EITC. ineligible during the correspondence examination process is not necessarily indicative of ineligibility. Research from TAS suggests "that the EITC claims of many taxpayers are denied for lack of documentation even if they could meet applicable residence and relationship requirements."22

A lack of taxpayer response cannot be viewed as indicative of a lack of ineligibility either. In the same TAS study, forty-two percent of the taxpayers were categorized as "late response" or "no response";... however, nearly half of these taxpayers ultimately received favorable outcomes.22 5 In other words, the initially nonresponsive taxpayersreceived some amount of EITC. This outcome responsive.226 rate Extrapolating these findings would cut the alleged improper payment rate nearly in half.

taxpayers who were

is comparable

In 2005, TAS further researched

the challenges EITC This study underscored claimants face during examination.' many of the findings of the 2004 TAS Audit Reconsideration Study, particularly that barriers, not necessarily ineligibility,

The 2005 study notes that EITC inhibit EITC claimants. claimants often do not understand examination correspondence nor do they understand what they need to prove during a correspondence audit to claim EITC.2" While the study attributes this to challenging correspondence, the study also notes that the personal characteristics of some claimants (limited financial and actual literacy, transient homes) impact EITC accessibility.2" The study suggested that "the majority of their clients were truly eligible for EITC, but ... have difficulty assembling the requested documentation and just give up, forgoing the credit."230

G. EITC Overpayment Rate is Likely Incorrect

In the 2004 TAS Audit Reconsideration Study, "over forty percent of all taxpayers with representatives emerged from their audit with their full EIC intact.""' Another way of looking at this is that of a subset of 427,807 taxpayers claiming EITC who received payment and were later audited (the Service would call these improper payment post-audit), a substantial portion, perhaps even as many as forty percent, may not have beenimproper, if they had access to representation during audit.232 Without the extraordinary efforts relating to this study, the Service would have considered the forty percent in the EITC improper payment calculation.233 Taking it a step further, if, as in the TAS study, forty percent of EITC audits are not improper payments, and assuming we could the overpayment rate, then the EITC annual overpayment rate drops to between fourteen to seventeen percent.

translate

this

A potential criticism is that this calculation cannot be extrapolated because the sample population was arguably a motivated subset of individuals who felt they were wrongly denied access to EITC."' Admittedly, this is not a representative sample. It is nonetheless indicative of the existence of serious, widespread, and systematic barriers for claiming the EITC."' Even if the forty percent error rate found for EITC improper payments in the TAS study cannot be directly applied because of methodological issues,

it establishes that the twenty-three to twenty-eight percent improper payment rate is suspect.236 The National Taxpayer Advocate has come to a similar conclusion, stating, "[s]ignificant statistical questions about the IRS estimates remain."237

The EITC improper payment data is erroneous for other reasons too.238 First, the rate is based on three studies of EITC errors that considered a claimant's inability to document EITC as an overpayment, which (as shown by the TAS study) may "reflect premature and incorrect judgments."239 Second, the error rate does not consider underpayments.24' In a February 2011 report, TIGTA demonstrated that the Service ignores EITC underpayments in its improper payment calculation, in contravention of the OMB guidance.2'1 Additionally, in cases where the incorrect parent may have claimed EITC, the Service does not research, calculate, or include the possible underpayment (or lack of payment) to the appropriate EITC parent.242

The actual rate of EITC improper payments is probably not nearly as high as the Service reports.243 In addition, several commentators have discussed the role of unintentional error due to complexity as a significant contributor to the reported improper payment rate.2 4 As Professor Book has stated, "[elven though the IRS has studied and reported on EITC extensively there is very little data regarding how much EITC noncompliance relates to intentional conduct and how much relates to unintentional error."245

V. Continued Use of Correspondence Examinations Contravenes Executive Order 13520

The previous four Parts have attempted to explain the intersection of improper payment law, the earned income tax credit, and correspondence examinations. The ultimate conclusion should be obvious: the manner in which the Service uses correspondence examinations to administer the EITC unduly

burdens access to EITC for many low income taxpayers, and this undue burden is contrary to Executive Order 13520.24

A critical look at EITC correspondence examinations suggests that many eligible EITC claimants failduring the correspondence examination process, albeit not necessarily because of their to document EITC ineligibility.247 requirements within the narrow confines allowed in the Internal improper Revenue Manual are payments.

the measurement

The claimants

for EITC

failures

The burden is on the taxpayer to read the voluminous instructions, determine EITC eligibility (with virtually no Service assistance), and correspond in writing (with limited telephone access to Service personnel).2" Executive Order 13520 is clear in its direction that agencies must minimize improper payments without unduly burdening program participation.4 ' The current lawful EITC inhibits use of correspondence Continued Service use of correspondence participation.2o examinations, as undertaken with full automation and nearly no to Service personnel for clarification or assistance, to access manage EITC improper payments contravenes Executive Order 13520.

examination

VI. Possible Solutions

The most obvious solution is to simplify eligibility for EITC so that claiming and verifying EITC eligibility is accessible and possible for the low-income taxpayers EITC is designed to help. The current This, of course, requires congressional action. polarized political climate, as shown by the current struggle within Congress to agree to any tax compromises and Congress's decade-long propensity for brinkmanship in tax legislation, limit hope for this solution. As is typical with tax issues on which Congress cannot or will not take action, it falls -to the Service to address the problem.

It is not the intent of this Article to cast the Service as the

lone villain in the EITC examination story. Service actions are problematic, but the Service is faced with its own burdens of revenue collection with a tight budget and antiquated systems that have not been fully modernized.252 The Service has periodically undertaken pilots in an attempt to study possible changes to EITC administration.25 3 Some have been unsuccessful, but others show promise and, more importantly, reflect the possibility that the Service is aware of the EITC's examination undue burden."

A. Precertification Pilot

Given

inexpensive

(but arguably

the government

the pressure on

reduce expenditures, it is hard to foresee the Service willingly discarding correspondence its it uses with examination process or correspondence examinations."' This realization, that change is unlikely to emerge on its own, informs the purpose of this Article, which is to suggest the possibility of a legal catalyst to force change.

the minimal staffing

ineffectual)

The Service has undertaken certain pilot programs for EITC, that demonstrate the Service's recognition of the undue burden that correspondence examinations create for EITC taxpayers.25 6 Just a few years ago, the Service piloted an EITC precertification Unfortunately, program to minimize precertification added another for EITC claimants."' The Service ultimately concluded that, despite a variety deterred EITC participation by eligible beneficiaries.259

improper payments.5

layer of burden

precertification

alternatives,

of

B. State Data Pilot

In 2010, the Treasury Department began a pilot to assess the

ability to use state Supplemental Nutrition Assistance Program (SNAP) and TANF data to assist in validating EITC eligibility.260 The pilot has four goals: minimizing improper EITC payments, advancing efficiency in the administration of the EITC, improving communications, and reducing barriers to EITC access.' While the Treasury Department identified claimant privacy and consent as possible issues to implementation," a bigger concern is that erroneous state data will create another possible barrier for claimants and serve as a basis for more audits or improper denials during audits.262

C. Examiner Contact Pilot

The Service

Income Taxpayer Clinic directors

The Service has recently begun two pilots that have much less risk for harm and also reflect a better understanding of the burdens of EITC examinations.26' is piloting a modified correspondence exam process for a selected set of EITC In this study, the National Taxpayer Advocate and claimants.' trained a group of Low correspondence examiners who will make personal phone calls to audited EITC claimants twice during the examination process to answer questions.266 This pilot is essentially a pilot of a noncorrespondence audit process. Based on previous EITC claimant the TAS Audit Reconsideration Study,267 EITC success claimants likely will have far more success in this pilot than if they were left to the automated system. Improvement in the EITC claimant success rate in this pilot would evidence that solely automated correspondence exams are a bad match for EITC compliance, and impede access to program benefits. Success in this study would be evidence that Service personnel personal involvement is necessary to administer the EITC examination process.26

in

D. Affidavit Pilot

limited

In another pilot, the Service is testing an expansion of the list of acceptable proof during an EITC very correspondence examination.269 In addition to the list of official records and select letters on official letterhead, examiners will also accept third-party affidavit evidence to prove qualifying child relationship and residency,270 which are two of the largest proof hurdles. its precertification study, that affidavits are "easier for taxpayers to obtain than official documents or letters" and "had a higher acceptance rate than the other two types of documents."271 This study can also help alleviate some of the proof burden for EITC claimants.

The Service has already concluded, during

E. Future Possibilities

If expanded for all twenty-six million EITC claimants,272 these two pilots have the possibility to alleviate some of the burdens of EITC correspondence examinations: a lack of personal contact with Service personnel and documentary proof issues. These two pilots are not, however, a panacea for all of the ills of this process. They do not address, for example, that establishing eligibility for the credit is still far too document the Service's telephone LOS is likely to remain at abysmally low seventy to eighty percent levels, or the troublesome document logging and matching problem. A more looming reality is that, even if these pilots are successful, the Service is unlikely to secure funding for the universal expansion of telephone contact for all EITC examinations.27 The economic and political climates make that funding very unlikely.274 Without it, the EITC correspondence examination process will continue as an unfair and undue burden.

intensive,

Conclusion

Correspondence examinations have proven insurmountable 5 According to a TAS study, many

for many EITC claimants.27

is

access

the correspondence examination process

EITC claimants just give up because proving their eligibility and too navigating daunting.276 Such barriers to program participation are precisely what Executive Order 13520 proscribes in its attempts to limit improper payments.2 Two current Service pilots, which aim to an EITC Service to expand correspondence examination and to accept affidavit evidence to document qualifying children, have promised to lessen the burden of these audits.2 the personnel expansion necessary for examiner contact during all EITC correspondence examinations is unlikely to receive funding, even if the pilot is successful.7' Accordingly, it may fall to Executive Order 13520 to become the necessary legal lever for change.

personnel during

Unfortunately,

o

--- FOOTNOTES ---

Part of the Law Commons

Minnesota Journal of Law & Inequality is published by the University of Minnesota Libraries Publishing.

t Assistant Professor of Law and Ethics at the Georgia Institute of Technology, Scheller College of Business. I would like to thank the participants of the Emory Law School's Critical Tax Policy Conference, the participants of the Southeastern Academy of Legal Studies in Business Conference, Professor Dorothy Brown of Emory Law School, and Professor Lucien Dhooge of Georgia Institute of Technology's Scheller College of Business for their thoughtful input on these ideas.

1. See David J. Lynch, Growing Income Gap May Leave US Vulnerable, BLOOMBERG (Oct. 13, 2011 11:37 AM), http://www.bloomberg.com/news/2011-1013/growing-income-divide-may-increase-u-s-vulnerability-to-financial-crises.htmI (referencing Census Bureau Data that indicates "[slince 1980 about five percent of annual national income has shifted from the middle class to the nation's richest households").

2. Id.

3. See Francine J. Lipman, The Working Poor Are Paying for Government Benefits: Fixing the Hole in the Anti-Poverty Purse, 2003 WIs. L. REV. 461, 461 (2003).

4. Compare IRS, IRS DATA BOOK 2000 42 (2000), with IRS, IRS DATA BOOK 2010 tbl. 9a (2010) (comparing FY 2000 vs. FY 2010 correspondence activity); see also Mike Landsmann, Campus Correspondence Audit Process & Resolution, slide 4 (Jul. 14, 2010) (graphing the rise in correspondence examinations) (on file with author).

5. See Leslie Book, The IRS's EITC Compliance Regime: Taxpayers Caught in the Net, 81 OR. L. REV. 351, 390 (2002) [hereinafter Compliance Regime] ("[Wihile the Service's middle-income constituency would be able to tackle these tasks, it provides a formidable obstacle for low-income taxpayers.").

6.See NAT'L TAXPAYER ADVOCATE, 2007 ANNUAL REPORT TO CONGRESS, VOLUME Two, at 102 (2007) ("The findings are based on a dataset containing 427,807 taxpayers. Of these returns only 7,688 (1.8%) were represented in the original audit.").

7. See Book, Compliance Regime, supra note 5, at 369-72, 390-406 (noting complexity as a reason for EITC errors and discussing special circumstances of the working poor and specific barriers to effective EITC compliance action); see also Taxpayer Advocate Report and Low-Income Taxpayer Clinic Program: Hearing Before the Subcomm. on Oversight of the Comm. on Ways & Means, 107th Cong. 45 (2001) (written statement of Janet Spragens, Professor of Law and Director, Federal Tax Clinic, Washington College of Law, American University) (examining documentation challenges that EITC taxpayers face).

8. See NAT'L TAXPAYER ADVOCATE, 2004 ANNUAL REPORT TO CONGRESS,

VOLUME TWO, at i:

low

[This study confirms what many taxpayer advocates have maintained for many years -that the manner in which the IRS conducts its audits of low income taxpayers impacts the audit outcomes. One can infer from the study that in many cases 43 percent of 67,000 FY 2002 audit reconsiderations, or over 28,000 cases -taxpayers were entitled to virtually all of the EITC they claimed. That is, their original audit results did not accurately reflect their eligibility for the EITC. Rather, the audits merely show that the taxpayer flunked the IRS audit process.

9. See Gene Steuerle, Economic Perspective: Research Required for the EITC Precertification Process, 100 TAX NOTES 259, 259 (2003) (articulating that, even though the Service has administered the EITC since 1975, it still lacks knowledge about, and research to substantiate, its successes and failures).

10. See infra pp. 55-61. 11. See IRS OVERSIGHT BOARD, FISCAL YEAR 2012 INTERNAL REVENUE SERV.

BUDGET RECOMMENDATION SPECIAL REPORT 4 (2011).

12. See NAT'L TAXPAYER ADVOCATE, 2007 ANNUAL REPORT TO CONGRESS,

VOLUME Two, at 102 (2007).

13. See Landsmann, supra note 4, at slide 13 (depicting that cases with no

response are worked completely through an automated system).

14. See id. 15. See Joe B. Marchbein, Managing an IRS Correspondence Audit, J. ACCT., Aug. 2011, http://www.journalofaccountancy.comIssues/2011/Aug/20114142.htm.

16. IRS, INTERNAL REVENUE MANUAL 4.19.14.5.5, 4.19.14.5.7 (last visited Oct.

27, 2012).

17. See Anne Alstott, Tax Policy and Feminism: Competing Goals and Institutional Choices, 96 COLUM. L. REV. 2001, 2080 (1996) ("[I]n recent years the

EITC has been widely criticized as a program 'rife with fraud."' (citing Anne L. Alstott, Comments on Samansky, Tax Policy and the Obligation to Support Children, 57 OHIO ST. L. J. 381, 390-91 (1996 ; James Bovard, Clinton's Biggest Welfare Fraud, WALL ST. J., May 10, 1994, at Al8; Lisa Schiffren, America's BestKept Welfare Secret, AM. SPECTATOR, Apr. 1995, at 24 ; see also Dorothy Brown, The Tax Treatment of Children: Separate but Unequal, 54 EMORY L. J. 755, 779-80, n.111, n.112 (2005) [hereinafter Separate but Unequal] ("[T]he assumption has often been made that errors on EITC returns are the result of fraud" (citing Leslie Book, EITC Noncompliance: What We Don't Know Can Hurt Them, 99 TAx NOTES 1821, 1823 (2003) ("[A]t the center of the debate on the Initiative is the belief that the EITC is riddled with taxpayer cheating." .

18. See U.S. DEP'T OF TREASURY, 2010 PERFORMANCE AND ACCOUNTABILITY

REPORT 281 app. B (2010).

19. See Recent Efforts

to Address Improper Payments and Remaining Challenges: Hearing Before the Subcomm. on Gov't Org., Efficiency, and Finan. Mgmt. of the H. Comm. on Oversight and Gov't Reform, 112th Cong. 7 (2011) (written statement of Kay L. Daly, Director, Financial Management & Assurance, GAO) [hereinafter Daly Statement].

administrative, or other

An improper payment is defined as any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, legally applicable contractual, ineligible includes any payment requirements. recipient, any payment for an ineligible service, any duplicate payment, payment for services not received, and any payment that does not account for credit for applicable discounts. Office of Management and Budget (OMB) guidance also instructs for which insufficient or no agencies to report payments documentation was found as improper payments.

to an

It

20. See infra text pp. 70-71. 21. Improper payment laws, discussed in infra Part I, are designed to limit the

federal government from wrongly paying third parties.

22. See Lawrence Zelenak, Tax or Welfare? The Administration of the Earned Income Tax Credit, 52 UCLA L. REV. 1867, 1896-98 (2005) (articulating that the EITC is the only Service program identified as susceptible to improper payments and for which OMB has requested improper payment information and that improper refunds of withholding and estimated payments should be similarly subject to IPIA requirements); Leslie Book, Freakonomics and the Tax Gap: An Applied Perspective, 56 AM. U. L. REV. 1163, 1170 (2007) [hereinafter Freakonomics] (noting the EITC's error rate in comparison with the error rates of other benefits programs and citing to the IPIA); Dorothy Brown, Race and Class Matters in Tax Policy, 107 COLUM. LAW REV. 790, 806 (2007) [hereinafter Race and Class] (highlighting that "[t]he EITC is the only tax provision about which the OMB has requested improper payment information").

23. See Exec. Order No. 13520, 74 Fed. Reg. 62,201-05 (Nov. 20, 2009). 24. The tax gap is the difference between projected revenue and the amount collected. See JAMES M. BICKLEY, CONG. RES. SERV., R42739, TAx GAP, TAX ENFORCEMENT, AND TAx COMPLIANCE PROPOSALS IN THE 112TH CONGRESS 3-5 (2012).

25. See Catherine Rampell, Sure Cure for the Debt Problem: Economic Growth, N. Y. TIMES, July 30, 2011, at BU1 ("We face the largest budget deficit the nation has ever known: $1.6 trillion, the equivalent of about 11 percent of our economy. And, whatever Washington does, many economists say the situation will grow only worse, particularly as Americans age and Medicare costs spiral higher."); see also Harry Bradford, U.S. Economy Surpasses Pre-Recession Level After 45 Months, HUFFINGTON POST (Oct. 28, 2011, 6:11 PM), http://www.huffingtonpost.com/

2011/10/28/us-gdp-growth-us-economy-surpasses-pre-recession-level-45months n_1064016.html (reporting on recession and U.S. economic growth levels).

26. See Brent Cebul, Government, Big or Small, L.A. TIMES, Jan. 23, 2012,

http://articles.latimes.com/2012/jan/23/opinion/la-oe-cebul-smaller-govt-20120123 (noting President Obama's rhetoric promising smaller, more efficient government); see also Mitt Romney, Address at the Detroit Economic Club (Feb. 21, 2012), DETROIT FREE PRESS, Feb. 24, 2012, available at http://www.freep.com/article/ 20120224/NEWS15/120224034/Text-of-Mitt-Romney-s-speech-to-the-DetroitEconomic-Club ("By making bold cuts in spending and commonsense entitlement reforms, we will make our government simpler, smaller, and smarter . . Together, let's put America on the path toward more jobs, less debt, and smaller government.").

.

.

27. See GARRETT HATCH & VIRGINIA A. MCMURTRY, CONG. RESEARCH SERV., BACKGROUND,

INFORMATION ACT OF 2002:

RL34164, IMPROPER PAYMENTS IMPLEMENTATION AND ASSESSMENT 25 (2010).

28. Id. 29. See Improper Payments Information Act of 2002, Pub. L. No. 107-300, 116 Stat. 2350 (2002); Improper Payments Elimination and Recovery Act of 2010, Pub. L. No. 111-204, 124 Stat. 2224 (2010).

30. See Presidential Memorandum, Finding and Recapturing Improper Payments, 75 Fed. Reg. 12,119-29 (2010) [hereinafter Finding and Recapturing]; Presidential Memorandum, Enhancing Payment Accuracy Through a 'Do Not Pay List', 75 Fed. Reg. 35,953 (2010) [hereinafter Enhancing Payment Accuracy].

31. See HATCH & MCMURTRY, supra note 27, at 1. 32. See MITCHELL E. DANIELS, OFF. MGMT. & BUDGET, EXEC. OFFICE OF THE PRESIDENT, IMPROPER PAYMENTS INFORMATION ACT OF 2002 P.L. 107-300, at 2 (2003).

33. Id. 34. U.S. Gov'T ACCOUNTABILITY OFFICE, STATUS OF FISCAL YEAR 2010 FEDERAL

IMPROPER PAYMENTS REPORTING 2 (2011).

35. See JACOB LEW, OFF. MGMT. & BUDGET, EXEC. OFFICE OF THE PRESIDENT, ISSUANCE OF REVISED PARTS I AND II TO APPENDIX C OF OMB CIRCULAR A-123, at 3 (2011).

36. See PAYMENT ACCURACY,

http://paymentaccuracy.gov.about-improperpayments (last visited Nov. 9, 2012) (commenting on the progress on improper payments); see also HIGH-ERROR PROGRAMS, http://paymentaccuracy.gov/highpriority-programs (last visited Nov. 9, 2012) (containing a list of the federal programs with the highest error rates.).

37. See HIGH-ERROR PROGRAMS, supra note 36. 38. See DANIELS, supra note 32, at 13. Additional IPIA guidance was revised

and incorporated into OMB Circular A-123, Appendix C. Id. at 14.

39. Id. 40. See HATCH & MCMURTRY, supra note 27, at 3. 41. Id. 42. See id. at 4. 43. See id. at 14. 44. Id. at 25. 45. Exec. Order No. 13520, supra note 23, at §§1, 3 (emphasis added).

C. Improper Payments Elimination & Recovery Act of 2010

46. See id. at 62201-02 (emphasis added). 47. See Finding and Recapturing Improper Payments, supra note 30, at 12,119. 48. See Enhancing Payment Accuracy, supra note 30, at 35,953. 49. Pub. L. No. 111-204, 124 Stat. 2224 (2010). 50. See HATCH & MCMURTRY, supra note 27, at 14. 51. See U.S. Gov'T ACCOUNTABILITY OFFICE, supra note 34, at 8.

D. Applying Improper Payment Law

52. See Improper Payments Elimination and Recovery Act of 2010, Pub. L. No.

111-204, §2(a)(1) (2010).

53. See DANIELS, supra note 32, at 4-5. 54. See U.S. Gov'T ACCOUNTABILITY OFFICE, supra note 34, at 2. 55. See HATCH & MCMURTRY, supra note 27, at 1. MGMT. FED. 56. See

FINAN.

OFF.

PAYMENTS, http://www.whitehouse.gov/omb/financialfia-improper/ (last visited Nov. 11, 2012).

IMPROPER

57. See PAYMENT ACCURACY, supra note 36 The website states:

(including

overpayments

to the wrong Improper payments' occur when: funds go recipient; the right recipient receives the incorrect amount of underpayments). funds Documentation is not available to support a payment; or the recipient uses funds in an improper manner. For 2010, federal agencies reported a government-wide improper payment rate of 5.49%, a decrease from the 5.65% improper payment rate that was reported in 2009, but more than the original target of improper last year. Despite 5.33% established to higher outlays associated with the payment rate, due economic downturn, improper payments totaled approximately $125 billion in 2010 -an increase of $15 billion from 2009. For the Supplemental Nutrition Assistance Program example, (formerly known as food stamps), reported that outlays grew from $34.6 billion in 2009 to $50.4 billion in 2010.

lower

58. The Postal Service and the Department of Transportation failed to report program risk assessments to comply with the provisions of the IPIA for fiscal year 2010. See Daly Statement, supra note 19, at 7.

59. See id. 60. See Zelenak, supra note 22; Leslie Book, Preventing The Hybrid from Backfiring: Delivery of Benefits to the Working Poor Through the Tax System, 2006 Wis. L. REV. 1103 (2006); Book, Compliance Regime, supra note 5; Book, EITC Noncompliance, supra note 17; Brown, Separate but Unequal, supra note 17; Brown, Race and Class, supra note 22; Stephen Holt, Keeping it in Context: Earned Income Tax Credit Compliance and Treatment of the Working Poor, 6 CONN. PUB. INTEREST L. J. 183 (2007); Lipman, supra note 3.

61. See I.R.C. § 32(a)(1). 62. IRS,

596: http://www.irs.gov/publications/p596/ar01.html (last visited Nov. 9, 2012).

PUBLICATION

EARNED

TAX

CREDIT,

63. Hearing on Improper Payments in the Administration of Refundable Tax Credits, Before the Subcomm. on Oversight of H. Comm. on Ways and Means, 112th Cong. (2011) (written statement of Nina Olson, National Taxpayer Advocate) [hereinafter Olson, Ways and Means] (citing Stacy Dickert et al., The Earned

Income Tax Credit and Transfer Programs: A Study of Labor Market and Program Participation, in TAX POLICY AND THE ECONOMY, VOL. 9 (James M. Poterba ed., 1995 .

64. See Zelenak, supra note 22, at 1873-75 (depicting EITC as a hybrid tax-

transfer program).

65. See Book, Compliance Regime, supra note 5, at 352 ("The EITC

excessively complicated in its application. ...").

is

66. See I.R.C. § 32(b) (listing the percentages for qualifying children); I.R.C. § 32(c)(2) (defining earned income); I.R.C. § 32(c)(3) (defining qualifying child). For example, in 2010 a single mother with $24,000 of earned income would be entitled to an EITC of $3,440 for two qualifying children but only $1,830 with one qualifying child. EITC plateaus at three children; there is no additional credit for a fourth qualifying child.

67. See I.R.C. § 32(b)(1)-(2). 68. Id. 69. Id. 70. The American Recovery and Reinvestment Act of 2009 (ARRA) created the third child additional amount for tax years 2009 and 2010. See Pub. L. No. 111-5, 123 Stat. 115 (2009). The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended the additional amount for two more years. See Pub. L. No. 111-312, 124 Stat. 3296 (2010).

71. For 2011, EITC phases out at $49,078 of income for a married couple with

at least three qualifying children. See IRS, PUBLICATION 596, supra note 62.

72. See Book, Freakonomics, supra note 22, at 1177: Poverty is more prevalent among larger families, and the EITC's effectiveness is 'poorly designed to address this pattern of child poverty.' To address this inequity, low wage workers with more than two children are tempted to 'share' the benefits with related parties who may have

earned income, but fewer than two qualifying children of their own.

Id. (citing JASON FURMAN, CTR. ON BUDGET & POLICY PRIORITIES, TAX REFORM AND POVERTY 4 (2006 ; see also Brown, Separate but Unequal, supra note 17, at 789 (2005).

73. See I.R.C. § 32(k) (disallowing EITC for taxpayers making fraudulent and

reckless EITC claims for ten years and two years respectively).

74. I.R.C. § 32(k)(1)(B)(i). 75. I.R.C. § 32(k)(1)(B)(ii). 76. See Zelenak, supra note 22, at 1893-85 (comparing EITC sanctions with those under TANF and food stamps and concluding that "[airguably, the EITC sanctions are even more severe. ..

77. Id. 78. Id. 79. See I.R.C. § 6662-63 (listing accuracy-related and fraud penalties). 80. See Zelenak, supra note 22, at 1894. 81. Id.

impression that EITC is riddled with fraud."

82. See supra note 17. 83. See, e.g., David Nolte, IRS is Paying Tens of Billions of Fraudulent (May 31, 2011),

Refundable Tax Credits, BETWEEN THE NUMBERS BLOG http://betweenthenumbers.net/2011/05/irs-is-paying-tens-of-billions-of-fraudulentrefmdable-tax-credits/ (assuming erroneously that improper payments are all due to fraud); Ernest Istook, Congress Will Send Billions To Tax Cheaters, HERITAGE FOUND. (Feb. 5, 2008), http://www.heritage.org/research/commentary/2008/02/ (attributing congress-will-send-billions-to-tax-cheaters payments to "fraud" by "cheaters" filing "phony" returns).

all EITC

improper

84. See U.S. DEP'T OF TREASURY, 2010 PERFORMANCE AND ACCOUNTABILITY

REPORT, supra note 18, at 278 app. B.

85. See id.; see also TREASURY INSPECTOR GEN. FOR TAX ADMIN., REDUCTION TARGETS AND STRATEGIES HAVE NOT BEEN ESTABLISHED TO REDUCE THE BILLIONS OF DOLLARS IN IMPROPER EARNED INCOME TAX CREDIT PAYMENTS EACH YEAR 3 (2011) [hereinafter REDUCTION TARGETS].

86. See U.S. DEP'T OF TREASURY, 2010 PERFORMANCE AND ACCOUNTABILITY REPORT, supra note 18, at 278 app. B. While Treasury expects EITC outlays to remain flat for FY 2011, Treasury expects total outlays to shrink to $58 billion for FY 2012 and FY 2013. Id.

87. Other scholars have noted the possibility of reduced improper payment rates with preparer regulation. See Brown, Separate but Unequal, supra note 17, at 781 n.120 ("One study suggests that regulating certain tax preparers could decrease the EITC error rate from 30% to 18%." (citing Lipman, supra note 3, at 494 .

88. See REDUCTION TARGETS., supra note 85, at 335-37 app. D. 89. See Daly Statement, supra note 19, at 4.

90. See TREASURY INSPECTOR GEN. FOR TAx ADMIN., supra note 85, at 1. 91. See Improper Payments Elimination and Recovery Act of 2010, Pub. L. No.

111-204, 124 Stat. 2224 (2010).

92. Id. 93. U.S. DEP'T OF TREASURY, 2010 PERFORMANCE AND ACCOUNTABILITY

REPORT, supra note 18, at 45.

94. Id. 95. See Holt, supra note 60, at 188 (estimating EITC tax gap). 96. Id. (comparing EITC tax gap with underreported self-employment tax gap); see also Brown, Separate but Unequal, supra note 18, at 776 (noting the tax gap difference between EITC overpayments and underreported self-employment income).

97. JOHN WANCHECK & ROBERT GREENSTEIN, CENTER ON BUDGET & POL'Y PRIORITIES, EARNED INCOME TAX CREDIT OVERPAYMENT AND ERROR ISSUES 4 (2011), available at http://www.cbpp.org/files/4-5-lltax.pdf.

98. See NAT'L TAXPAYER ADVOCATE, FISCAL YEAR 2012 OBJECTIVES REPORT TO

CONGRESS 9 (2012).

99. Id.

100. See Zelenak, supra note 22, at 1897.

101. TREASURY INSPECTOR GEN. FOR TAX ADMIN., THE INTERNAL REVENUE SERVICE FACEs SIGNIFICANT CHALLENGES IN VERIFYING ELIGIBILITY FOR THE FIRSTTIME HOMEBUYER 4 (2009); see also TREASURY INSPECTOR GEN. FOR TAX ADMIN., ADMINISTRATION OF THE FIRST-TIME HOMEBUYER CREDIT INDICATES A NEED FOR IMPROVED CONTROLS OVER REFUNDABLE CREDITS 26 (2011) [hereinafter NEED FOR IMPROVED CONTROLS].

102. See Zelenak, supra note 22, at 1896-98 (asserting that the EITC is the sole Service program identified under the IPIA and noting that, for the purposes of improper payment law, EITC is treated like TANF and food stamp overpayments and unlike income tax overpayments); see also Brown Race and Class, supra note 22, at 806-07 (acknowledging that EITC is the "only tax provision about which the OMB has requested improper payment information," and speculating that "[tihe belief that EITC errors are the result of fraud and not complexity is a function of the mental connection between EITC recipients and welfare recipients").

103. TREASURY INSPECTOR GEN. FOR TAX ADMIN., STRATEGIC PLAN FISCAL YEARS

2009-2014, at 1 (2009), available at http://www.treasury.gov/tigta/about/ tigta.strategic-plan.pdf (last visited Oct. 28, 2012).

104. See REDUCTION TARGETS, supra note 85; TREASURY INSPECTOR GEN. FOR TAX ADMIN., ACTIONS CAN BE TAKEN TO IMPROVE THE IDENTIFICATION OF TAX RETURN PREPARERS WHO SUBMIT IMPROPER EARNED INCOME TAX CREDIT CLAIMS (2010) [hereinafter ACTIONS CAN BE TAKEN]; TREASURY INSPECTOR GEN. FOR TAX ADMIN., THE EARNED INCOME TAX CREDIT PROGRAM HAS MADE ADVANCES; HOWEVER, ALTERNATIVES TO TRADITIONAL COMPLIANCE METHODS ARE NEEDED TO STOP BILLIONS OF DOLLARS IN ERRONEOUS PAYMENTS (2008) [hereinafter PROGRAM HAS MADE ADVANCES].

105. See REDUCTION TARGETS, supra note 85, at 1. 106. Id. at 10. 107. Id. 108. Id.

109. Id. 110. See MICHAEL SALTZMAN, IRS PRACTICE AND PROCEDURE 8-5 (2d ed. 2002). 111. See Book, Compliance Regime, supra note 5, at 375 ("The most common types of examinations are those conducted at a taxpayer's place of business, at an IRS office, or by correspondence.").

112. See SALTZMAN, supra note 110, at 8-4. 113. Id. 114. See TREASURY INSPECTOR GEN. FOR TAx ADMIN., REDUCTION TARGETS AND STRATEGIES HAVE NOT BEEN ESTABLISHED TO REDUCE THE BILLIONS OF DOLLARS IN IMPROPER EARNED INCOME TAX CREDIT PAYMENTS EACH YEAR 4 (2011) ("Probability filters are characteristics of noncompliance the IRS has developed using historical data and are used to determine the likelihood that an EITC claim is erroneous. The Dependent Database is a risk-based audit selection tool used by the IRS to identify EITC tax returns for audit.").

115. See Landsmann, supra note 4, at slides 10, 11 (on file with the author). 116. Id. 117. PROGRAM HAS MADE ADVANCES, supra note 104, at 22. 118. Id. 119. See U.S. DEP'T OF TREASURY, 2010 PERFORMANCE AND ACCOUNTABILITY

REPORT, supra note 18, at 281 app. B.

120. See REDUCTION TARGETS, supra note 85, at 14-15. 121. TREASURY

INSPECTOR GEN. FOR TAX ADMIN., Ref. No. 2011-30-016, PROGRESS HAS BEEN MADE TO REENGINEER THE EXAMINATION PROGRAM, BUT ADDITIONAL IMPROVEMENTS ARE NEEDED TO REDUCE TAXPAYER BURDEN 1 (2011) the labor-intensive, ("In contrast correspondence examination process is ...more automated," and "correspondence examinations also enable the IRS to reach more taxpayers at a lower cost .... [hereinafter PROGRESS HAS BEEN MADE].

examination,

face-to-face

the more

122. IRS, IRS EARNED

INCOME TAX CREDIT INITIATIVES, ADDENDUM TO THE REPORT ON QUALIFYING CHILD RESIDENCY CERTIFICATION, FILING STATUS, AND IMPLEMENTATION OF ALTERNATIVE AUTOMATED UNDERREPORTED

TESTS,

APPROACHES TO [hereinafter EARNED INCOME TAX CREDIT INIATIVES].

IMPROVING THE ADMINISTRATION OF THE EITC 2

(2008)

123. Id. 124. See Olson Ways and Means, supra note 63, at 9.

Current administration costs are less than 1% of benefits delivered. This is quite different from other non-tax benefits programs in which administrative costs related to determining eligibility can range as high as 20% of program expenditures. For TY 2009, the IRS reports that it paid $55 billion in EITC claims. If this amount had been paid by another agency that spent 20 percent of program expenditures verifying eligibility, the administration costs to the government would have been $11 billion -nearly 100 percent of the amount of improper payments that the IRS estimates were made.

125. See Lipman, supra note 3, at 465 (commenting that EITC claimants manage the "inconceivable complexity" of the credit by hiring paid tax practitioners to assist them).

126. The Service offers an online EITC Assistant.

IRS, Earned Income Tax Credit (EITC)-Use the EITC Assistant to Find Out if You Should Claim It, IRS.Gov, (last updated Aug. 2, 2012), http://www.irs.gov/lndividuals/EamedIncome-Tax-Credit-%28EITC%29-%E2%80%93--Use-the-EITC-Assistant-to-FindOut-if-You-Should-Claim-it.

127. George K. Yin et al., Improving the Delivery ofBenefits to the Working Poor: Proposals to Reform the Earned Income Tax Credit Program, 11 AM. J. TAX POL'Y 225, 294 (1994) ("Both the program's eligibility rules and the paperwork necessary to file a claim are complex, particularly for the typical taxpayer eligible for the EITC benefit."); see also Brown, Race and Class, supra note 22, at 829 ("Numerous scholars have described the EITC as complex."); Leslie Book, The Poor and Tax Compliance, 51 U. Kan. L. Rev. 1145, 1155 (2003).

128. See Lipman, supra note 3, at 464.

129. See EITC Assistant, supra note 126. 130. IRS, Free Tax Return Preparation for You by Volunteers, IRS.Gov (last

updated Oct. 30, 2012), http://www.irs.gov/individuals/article/0,,id=107626,00.html.

131. See ALAN BERUBE, THE BROOKINGS INSTITUTION, THE NEW SAFETY NET: HOW THE TAx CODE HELPED Low-INCOME WORKING FAMILIES DURING THE EARLY 2000s 1 (2006).

132. See Lipman, supra note 3, at 463 ("Congress has created an extensive antipoverty program, which is almost impossible for the targeted families to obtain without professional assistance because it is too complicated to comprehend and claim.").

133. IRS, SOI Tax Stats-Tax Stats at a Glance, IRS.Gov (last updated Aug. 22,

2012), http://www.irs.gov/uac/SOI-Tax-Stats---Tax-Stats-at-a-Glance.

134. IRS, Earned Income Credit Preparer Due Diligence at IRS Nationwide 2008 National Tax Forum at slide 5 (2008), available at http://www.irs.gov/pubirsutl/eitcdue diligence.requirements.pdf.

135. See Indivar Dutta-Gupta, New Research Highlights Importance of EITC for (Oct. 19, 2011, 2:49 PM),

Working Families, OFF THE CHARTS BLOG http://www.offthechartsblog.org/new-research-highlights-importance-of-eitc-forworking-familiesfutm-source=facebook&utmmedium=FACEBOOK&UTM campaign=CBPPFACEBOOK

136. Id. 137. Id.

138. EITC is not available for taxpayers with over $2200 in investment income.

I.R.C. § 32(i)(1).

139. Hearing on the Tax Gap and Tax Shelters Before Sen. Comm. on Fin., 108th Cong. 17, n.43 (July 21, 2004) (written statement of Nina Olson, National Taxpayer Advocate) [hereinafter Olson, Sen. Comm. on Fin.] ("Data provided by the EITC Program Office indicate nearly a 40 percent no response/undeliverable no response/undeliverable rate including Statutory Notice of Deficiency is fifty-three percent.").

correspondence.

for FY 2003

to TAS

EITC

rate

140. See PROGRAM HAS MADE ADVANCES, supra note 104 at 23. 141. See NAT'L TAXPAYER ADVOCATE, 2007 ANNUAL REPORT TO CONGRESS, supra

note 6, at 102.

142. Brown, Separate but Unequal, supra note 17, at 776.

[W]hile the IRS estimate of the EITC noncompliance rate is high, it is not the highest. The IRS estimates that taxes owed but unpaid by individual and corporate taxpayers is over $100 billion (the "tax gap"). In addition, the IRS states that its enforcement efforts only resulted in the collection of about 25% of the tax gap. Underreported self-employed taxpayers was nearly $30 billion of the tax gap. The estimated tax gap for the EITC exceeded $1 billion. The EITC therefore represents less than 1% of the tax gap. The IRS estimates that self-employed individuals generally underreport their income by 64%, and self-employed individuals who operate in a cash business underreport their income by 89%. Small corporations and sole proprietors constitute 29% of the tax gap. Thus, significant noncompliance areas that generate greater revenue losses than are estimated for the EITC go unaudited.

income by

143. See BICKLEY, supra note 24, at 3-5. 144. Id. at 4. ("Much of the gross tax gap for individual income tax filers is due to

types of unreported income that are difficult to detect.").

145. See id. 146. See IRS, 2011 DATA BOOK 21-25 (2011) (reporting 574,372 of 26,861,559

EITC returns and 278,092 of 14,867,564 non-farm business individual returns).

147. Id. 148. Id. 149. See DAVID CAY JOHNSTON, PERFECTLY LEGAL: THE COVERT CAMPAIGN TO RIG OUR TAX SYSTEM TO BENEFIT THE SUPER RICH-AND CHEAT EVERYBODY ELSE 130 (2003) (explaining that in 2001, the IRS audit rate of those who applied for EITC totaled more than eight times that of individuals earning over $100,000).

150. Id. at 132; see also Brown Race and Class, supra note 22, at 797, 808; John W. Lee, Transaction Costs Relating to Acquisition or Enhancement of Intangible Property: A Populist, Political, but Practical Perspective, 22 VA. TAX REV. 273, 293 (2002).

151. See Brown Race and Class, supra note 22, at 807 n.103. 152. See IRS, supra note 146, at 21-25 (listing the audit rates for both EITC and

self-employed taxpayers).

153. See Olson, Ways and Means, supra note 63, at 9 (discussing IRS programs

designed to reduce improper payments to EITC claimants).

154. Zelenak, supra note 22, at 1899 n.142. 155. See Brown, Separate but Unequal, supra note 17, at 780. 156. See PROGRESS HAS BEEN MADE, supra note 121, at 1. 157. See NAT'L TAXPAYER ADVOCATE, FISCAL YEAR 2012 OBJECTIVES REPORT TO CONGRESS, supra note 98, at app. VIII-3 nt. 346 (explaining the test to determine whether a child is a "qualifying child").

158. See id. at app. VIII-3. 159. E.g., Olson, Ways and Means, supra note 63, at 13 (describing the

documentation required to show proof).

160. See Holt, supra note 60, at 197 ("In the EITC Compliance study of Tax Year 1999, nearly 60 percent of the amount improperly claimed involved misapplication of the qualifying child and filing status rules.").

161. Olson, Ways and Means, supra note 63, at 13.

Assume Granduncle claims the EITC with respect to Grandnephew. Assume further that the IRS questions the claim based on the relationship requirement. To document his relationship to the qualifying child, Granduncle may be required to produce his own birth certificate, a birth certificate for his sibling showing common parents, a birth certificate for his niece showing that Granduncle's sibling was the niece's parent, and a birth certificate the niece was Grandnephew's mother. That is four birth certificates in all. Depending on the states in which these four individuals were born and the restrictions those states impose on who may obtain birth certificates, it may be extremely time-consuming or even impossible for Granduncle to obtain the requisite substantiation. As a result, the IRS may deny the claim even though it was legitimate.

for Grandnephew

showing

that

INTERNAL REVENUE MANUAL

162. See id. 163. IRS, (listing acceptable documentation including "[b]irth certificates or other official documents of birth[,] [m]arriage certificates that verify your relationship to the child[1 letter from an authorized adoption agency[,] letter from the authorized placement agency or applicable court document").

to prove relationship to a qualifying child,

4.19.14.5.6

164. Acceptable documentation to prove the residency of a qualifying child

includes:

Photocopies of school (no report cards), medical, childcare provider

(provider can't be a relative) or social service records[,] [a] letter on official letterhead from a school, a health care provider, a social service agency, placement agency official, employer, Indian tribal official, landlord or property manager, or a place of worship that shows the name of child's parent or guardian, child's address and the dates that they lived with taxpayer.

165. Id. 166. See Olson, Ways and Means, supra note 63, at 31 (discussing the IRS

payments for EITC claims in Tax Year 2009).

167. See IRS, INFORMATION REPORTING AND DOCUMENT MATCHING (IRDM)PRIVACY IMPACT ASSESSMENT (June 28, 2011), http://www.irs.gov/pub/irs-pia/irdmpia.pdf.

168. See id. 169. TREASURY INSPECTOR GEN. FOR TAX ADMIN., A COMPREHENSIVE STRATEGY Is BEING DEVELOPED TO IDENTIFY INDIVIDUALS WITH FIRST-TIME HOMEBUYER CREDIT REPAYMENT REQUIREMENTS 6-8 (2010) [hereinafter COMPREHENSIVE STRATEGY]; TREASURY INSPECTOR GEN. FOR TAX ADMIN., ADDITIONAL STEPS ARE NEEDED TO PREVENT AND RECOVER ERRONEOUS CLAIMS FOR THE FIRST-TIME HOMEBUYER CREDIT 14-16 (2010).

170. COMPREHENSIVE STRATEGY, supra note 169, at 3. 171. See NEED FOR IMPROVED CONTROLS, supra note 101, at 4.

B. The Service's Correspondence Issues

172. Id. ("[T]he IRS had not developed and implemented examination filters to identify potentially erroneous claims for the Homebuyer Credit."). TIGTA identified the following:

Taxpayers claimed Homebuyer Credits although they had not made home purchases but reportedly would in the future. These taxpayers listed home acquisition dates on their Forms 5405 that were subsequent to the dates the claims were processed by the IRS.

Taxpayers claimed Homebuyer Credits for homes for which at least one other taxpayer also claimed the Credit and the combined amounts for each address exceeded $8,000.

taxpayers claimed Homebuyer Credits

for homes Some purchased before April 9, 2008, the effective date of the HERA legislation.

Id. at 4-5.

173. See First-Time Homebuyer Tax Credit: Taxpayers' Use of the Credit and Implementation and Compliance Challenges Before the H. Comm. on Ways and Means Subcomm. on Oversight, 111th Cong. 5-6 (2009) (written testimony of James R. White, GAO); see also Tax Filing Season Update: Current IRS Issues Before the S. Comm. on Fin., 111th Cong. 8 (2010) (written testimony of Nina Olson, National Taxpayer Advocate) ("[The specific requirements of each revision of the FTHBC involve enhanced documentation that prevents taxpayers from electronically filing their tax returns, causing administrative problems for the IRS.").

174. See Landsmann, supra note 4, at slide 13 (on file with author). 175. See Olson, Ways and Means, supra note 63, at 14 (describing the effect of

difficult proof burdens on improperly denied claims).

176. See Marchbein, supra note 15 ("For most taxpayers, an examination is fraught with anxiety, which can only be compounded if correspondence explaining the taxpayer's position or providing requested information or verification seems not to have been duly taken into account by the IRS.").

177. See IRS, 2010 DATA BOOK, supra note 4, at tbl. 9a. 178. Id. 179. Treas. Reg. § 301.7605-1(e) (1993). 180. The Department of Treasury Regulations state:

the Service has set for an examination.

The Service will consider, on a case-by-case basis, written requests by taxpayers or their representatives to change the In place that considering these requests, the Service will take into account the following factors(i) The location of the taxpayer's current residence; (ii) The location of the taxpayer's current principal place of business; (iii) The location at which the taxpayer's books, records, and source documents are maintained; (iv) The examination most efficiently; (v) The Service resources available at the location to which the taxpayer has requested a transfer; and (vi) Other factors that indicate that conducting the examination at a particular location could pose undue inconvenience to the taxpayer.

location at which the Service can perform

181. Marchbein, supra note 15. 182. Cf Jonathan P. Schneller et al., The Earned Income Tax Credit, LowIncome Workers, and the Legal Aid Community, 3 COLUM. J. TAX L. 177, 178 (2011) (arguing that the correspondence system is "uniquely challenging to low-income taxpayers who may lack the skills required to navigate the tax return and audit processes").

183. The communication process begins with a letter from the Service to the

EITC claimant being audited. Id. at 200.

184. 'Functional literacy' is defined by UNICEF as "the ability to use reading, writing, and numeracy skills for effective functioning and development of the individual and the community." U.N. EDUC., SCIENTIFIC AND CULTURAL ORG., EDUCATION FOR ALL GLOBAL MONITORING REPORT 158 (2006).

185. See ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT IN DEVELOPING COUNTRIES: (OECD), THE CASE FOR FINANCIAL LITERACY PROMOTING ACCESS TO FINANCE BY EMPOWERING CONSUMERS 2 (2009) ("Financial literacy is the combination of consumers'/investors' understanding of financial products and concepts and their ability and confidence to appreciate financial risks and opportunities, to make informed choices, to know where to go for help, and to take other effective actions to improve their financial well-being.").

186. See Book, Compliance Regime, supra note 5, at 396 (discussing literacy issues with low-income taxpayers); Lipman, supra note 3, at 471 ("[Lliteracy limitations are sharply higher among low-income adults." (citing Jeffrey S. Gold, Proposed IRS Consortium Deal for Return Prep and e-Filing is Flawed, 96 TAX NOTES 1645 (2002 ; see also THE NAT'L TAXPAYER ADVOCATE, FISCAL YEAR 2006 OBJECTIVES REPORT TO CONGRESS 34-35 (2007) ("Financial literacy plays an important role in tax compliance because taxpayers who do not understand basic financial transactions are unlikely to understand the difference between employee and independent contractor status or the EITC's complex eligibility rules.").

187. See Jodi Patterson, Making a Noticeable Difference: Presentation to the 2011), available at 1-3 (illustrating issues

Monthly PLAIN Meeting, www.plainlanguage.gov/news/files/IRSPLAINpresentation.ppt with the Service's correspondence). EITC

NOTICES

ELECTRONIC

188. Compare

REJECTS,

(Mar.

slides

IRS,

9,

CORRESPONDENCES (July 2, 2009) http://www.eitc.irs.gov/rptoolkit/toolsandtips/ eitcnoticeschart/ (associating meanings with electronic reject codes), with IRS, UNDERSTANDING 2012), the new http://www.irs.gov/individuals/article/O,,id=96199,00.html forms for correspondence CP-11A, CP-12, and CP-13A along with older forms for other correspondence).

(July (displaying

IRS NOTICE

LETTER

YOUR

30,

OR

189. See Patterson, supra note 187, at slide 2. 190. See NAT'L TAXPAYER ADVOCATE, 2007 ANNUAL REPORT TO CONGRESS, supra note 6, at 104 (commenting that 42.7% of the study participants "[did not

understand some words/terms").

191. Id. 192. See id. (16.4% of study participants agreed that "[tlone of the letter scared

taxpayer"). 193. Id. 194. See Olson, Sen. Comm. on Fin., supra note 139, at 2. 195. IRS OvERSIGHT BD., FY 2012, supra note 11, at 21. 196. Id. at 4 ("Achieving this level of service requires both the $23.3 million increase in FY 2012 to reach the President's policy level and the $81.3 million initiative in FY 2012 to Improve Taxpayer Service.").

197. See Olson, Sen. Comm. on Fin., supra note 139, at 3.

198. See Landsmann, supra note 4, at slide 13 (on file with author). 199. Id. 200. See NAT'L TAXPAYER ADVOCATE, 2004 ANNUAL REPORT TO CONGRESS, supra

note 8, at iii.

201. See Landsmann, supra note 4, at slide 20 (on file with author). 202. See NA'L TAXPAYER ADVOCATE, 2007 ANNUAL REPORT TO CONGRESS, supra

note 6, at 104.

203. See Landsmann, supra note 4, at slide 13 (on file with author). 204. See NAT'L TAXPAYER ADVOCATE, 2007 ANNUAL REPORT TO CONGRESS, supra

note 6, at 104.

205. See PROGRESS HAS BEEN MADE, supra note 121, at 2. 206. See Marchbein, supra note 168 ("Correspondence from the IRS bears only the name of a supervisor. If the practitioner calls the supervisor, the IRS typically refers the call to whatever employee is available."); see also PROGRESS HAS BEEN MADE, supra note 121, at 2 ("Practitioners shared that the IRS did not designate, in the various letters, an employee who could be contacted to further define the issues or answer taxpayer questions.").

207. See Olson, Sen. Comm. on Fin., supra note 139, at 17 n. 43. 208. See PROGRESS HAS BEEN MADE, supra note 121, at 2. 209. Id. at 5.

210. Id. 211. See NAT'L TAXPAYER ADVOCATE, 2007 ANNUAL REPORT TO CONGRESS, supra

note 6, at 95-96.

212. Id. 213. See Marchbein, supra note 15.

to not be reviewed for several Also, correspondence tends months, resulting in the IRS' sending letters advising the taxpayer that it needs additional time to review it. When the in some cases the proposed IRS finally it has not properly adjustments are considered and evaluated documents and substantiation furnished by the taxpayer or his or her representatives.

incorrect because

issues reports,

214. Id. 215. See Landsmann, supra note 4, at slide 21 (on file with author). 216. In 2011, SB/SE rejected a Taxpayer Advocacy Panel request to implement a barcoding system for mail matching and logging purposes. TAXPAYER ADVOCACY PANEL, 2011 ANNuAL REPORT (on file with author).

217. Id. 218. See NAT'L TAXPAYER ADVOCATE, 2007 ANNUAL REPORT TO CONGRESS supra

note 6, at 95-96.

219. See NAT'L TAXPAYER ADVOCATE, 2004 ANNUAL REPORT TO CONGRESS, supra

note 8.

220. Id. at 9. 221. IRS,

INTERNAL REVENUE MANUAL

reconsideration).

4.13.1.2

(2006)

(defining audit

222. See NAT'L TAXPAYER ADVOCATE, 2004 ANNUAL REPORT TO CONGRESS, supra

note 8, at 9.

223. NAT'L TAXPAYER ADVOCATE, FISCAL YEAR 2012 OBJECTIVES, supra note 98,

at 7 (citing Olson, Ways and Means, supra note 63, at 10-11).

224. NAT'L TAXPAYER ADVOCATE, 2004 ANNUAL REPORT TO CONGRESS, supra

note 8, at 21.

225. Id. at 29. 226. Id. at 27. 227. IRS, CHALLENGES FOR TAXPAYERS CLAIMING THE EARNED INCOME TAX

CREDIT 2 (2005).

228. Id. at 1-2. 229. Id. at 5-6. 230. Id. at 2. 231. See NATL TAXPAYER ADVOCATE, 2007 ANNUAL REPORT TO CONGRESS, supra

note 6, at 96.

232. Id. at 102. 233. Id. at 101-03. 234. Id. at 100-01. 235. Id. at 95.

236. Id. at 67. 237. See Olson, Ways and Means, supra note 63, at 6. 238. See WANCHECK & GREENSTEIN, supra note 97, at 1. 239. Id. at 5-6. 240. Id. 241. See REDUCTION TARGETS, supra note 85, at 14-15. 242. See WANCHECK & GREENSTEIN, supra note 97, at 6. 243. Id. at 5. 244. See Book, The Poor and Tax Compliance, supra note 127, at 1184-86; Book,

Compliance Regime, supra note 5, at 371-72; Holt, supra note 60, at 185-86. 245. Book, Preventing the Hybrid from Backfiring, supra note 60, at 1113.

246. See Exec. Order No. 13520, 74 Fed. Reg. 62,201-02 (Nov. 20, 2009). 247. See NATL TAXPAYER ADVOCATE 2004, supra note 8, at 29. 248. See Landsmann, supra note 4, at slides 12-21 (on file with author). 249. See Exec. Order No. 13520, 74 Fed. Reg. 62201 (Nov. 20, 2009) ("Because this order targets error, waste, fraud, and abuse-not legitimate use of Government services-efforts to reduce improper payments under this order must protect access to Federal programs by their intended beneficiaries.").

250. See NAT'L TAXPAYER ADVOCATE, 2007 ANNUAL REPORT TO CONGRESS, supra

note 6, at 103-04.

251. Id.

252. See Book, Compliance Regime, supra note 5, at 371-81. 253. Id. at 382-90. 254. See IRS, EARNED INCOME TAX CREDIT INITIATIVES, supra note 122, at 11. 255. See PROGRESS HAS BEEN MADE, supra note 121, at 2. 256. Id. at 1-11; see also Partnership Fund for Program Integrity Innovation, Assessing State Data for Validating EITC Eligibility, PARTNER 4 SOLUTIONS (Nov. 2010), 23, http://partner4solutions.gov/sites/www.partner4solutions.gov/files/EITCDataMat ching-pilot concept.pdf.

257. EARNED INCOME TAX CREDIT INITIATIVES, supra note 122, at 3-4. 258. Id. at 5. 259. Id. at 9 ("Although a 3 percent deterrence rate for eligible claimants might appear low, this deterrence rate could have broader significance and even conflict with the IRS goal of increasing EITC participation among the eligible population.").

260. See Partnership Fund for Program Integrity Innovation, supra note 256, at

1.

261. Id. 262. Id. at 4. 263. Id. at 2. 264. See Olson, Ways and Means, supra note 63, at 19-20. 265. Id. 266. Id. 267. See NAT'L TAXPAYER ADVOCATE, 2007 ANNUAL REPORT TO CONG., supra

note 6, at 115.

268. See Olson, Ways and Means, supra note 63, at 19-20.

269. Id. at 20. 270. Id. 271. Id. (citing EARNED INCOME TAX CREDIT INITIATIVES, supra note 122, at 14). 272. IRS,

CENTRAL

EITC

(Dec.

2011),

EITC Statistics, http://www.eitc.irs.gov/central/eitestats/.

273. See Romney, supra note 26, (detailing the failing economy and large

government debt); Bradford, supra note 25.

274. See Romney, supra note 26; Bradford, supra note 25. 275. See NAT'L TAXPAYER ADVOCATE, 2007 ANNUAL REPORT TO CONGRESS, supra

note 6, at 95.

276. See Olson, Ways and Means, supra note 63, at 13-14. 277. See Exec. Order No. 13520, 74 Fed. Reg. 62,201 (Nov. 20, 2009). 278. See Olson, Ways and Means, supra note 63, at 19-20. 279. See Romney, supra note 26; Bradford, supra note 25.