Crackdown on Tax Credit Put Off to Allow Comment
> By Albert B. Crenshaw
> The Internal Revenue Service is delaying a controversial program to
> eliminate errors and fraud in a fast-growing tax-credit program for
> low-income workers.
>
> The agency had planned to ask a sample of 45,000 taxpayers who are
> considered to be high risks for error to "pre-certify" that they are
> eligible for the earned income tax credit.
>
> The tax-credit program grew rapidly during the Clinton administration,
> which pushed it as a benefit for the working poor. For 2001, nearly 20
> million people had received a total of almost $34 billion.
>
> Pre-certification would be a departure for the IRS, which generally does
> its checking after the fact. But some studies have concluded that as much
> as 30 percent of the money paid under the tax credit goes to ineligible
> people. Congress directed the agency to clean up the program.
>
> The agency now plans to schedule a 30-day public comment period before
> proceeding with the pre-certification plan. That means requests for
> information would not go out until August or September, IRS officials
> said.
>
> "We are 100 percent committed to not deterring people from using that
> program," Internal Revenue Commissioner Mark W. Everson told a House panel
> Tuesday.
>
> Advocates of the poor have criticized pre-certification. Robert
> Greenstein of the Center on Budget and Policy Priorities called it
> "heavy-handed" and complained that the forms demanded information that
> many poor workers could not obtain, disqualifying or frightening away many
> eligible workers.
>
> Critics said it would be unfair to require affidavits from third parties
> attesting to a child's residency, and to restrict whom the third parties
> could be. So would be requiring taxpayers to provide copies of marriage
> licenses of other family members, the critics said, because many states
> refuse to provide copies of a license to someone who is not a party to the
> marriage
>
> Greenstein said IRS resources would be better spent on pursuing wealthy
> tax cheats who employ tax shelters or move assets and income offshore. He
> said statutory changes in the past several years have cut the error rate
> in the tax-credit program sharply anyway.
>
> The earned income tax credit dates to 1975, but over the past decade it
> has become the federal government's primary assistance program for
> low-income working people. Everson called it "a benefits program that's
> embedded in the tax code."
>
> The credit, meant to offset the burden of Social Security and other
> payroll taxes and to ease the transition from public assistance to work,
> is "refundable," meaning that if a working family's doesn't owe income
> tax, the credit is paid to them in cash.
>
> Congressional overseers of the IRS, such as Rep. Ernest J. Istook Jr.
> (R-Okla.), chairman of the House Appropriations Committee subcommittee on
> transportation, Treasury and independent agencies, contend that the proper
> comparison is to a conventional welfare program, such as food stamps, in
> which there would normally be "a certain amount of bureaucracy" to make
> sure recipients are eligible.
>
> It has long been clear that the low-income credit program has problems.
> It is extraordinarily complex. Many taxpayers make mistakes when trying to
> claim it, while others can't figure it out and give up. Because the
> program gives out cash, it has also attracted cheats.
>
> The credit is limited to taxpayers below certain income thresholds.
> Taxpayers do not have to have children to qualify, but the credit is more
> generous for those who do. But the rules defining a "qualifying child" are
> complicated, and not necessarily the same as those involving children in
> other parts of the tax law. For example, a child has to live with the
> taxpayer to qualify for the low-income credit, which is not required for
> certain other tax breaks.
>
> The IRS has found that eligibility problems arise in two key areas for
> taxpayers with children -- the "relationship test" and the "residency
> test." Research has found, agency officials said, that about
> three-quarters of applicants for the credit can be checked out, using
> Social Security numbers and the same sort of computerized
> document-matching techniques that are used to make sure that figures on
> tax returns, such as wages, interest and dividends, are accurately
> reported.
>
> But 20 percent, including taxpayers claiming a child who is not their son
> or daughter but is, for example, a grandchild or stepchild, are hard to
> check. It is among this group that the IRS thinks most errors occur.
>
> Under the pre-certification program, the agency had planned to start with
> the 45,000 sample and then move on to as many as 2 million in subsequent
> years, and ultimately to the entire high-risk group.
>
> "We think this is a good idea," National Taxpayer Advocate Nina E. Olson
> said recently, though she added that what the agency learns from the
> initial sample would guide what it does in the future.
>
> Pre-certification would allow the IRS to deal with low-income credit
> issues outside the spring filing season and would give taxpayers time to
> determine in advance whether they qualify or not.
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