The Earned Income Tax Credit (EITC): Legislative Issues Page: 2 of 6
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CRS-2
The Earned Income Tax Credit (EITC)'
The EITC is a refundable tax credit available to eligible workers earning relatively
low wages. Under current law there are two categories of EITC recipients: childless
adults and families with children. Because the credit is refundable, an EITC recipient
need not owe taxes to receive the benefits. However, a low-income individual or family
must file a tax return to receive the EITC. An EITC-eligible family may also receive a
portion of the credit in the form of advanced payments.2 Eligibility for, and the size of,
the EITC is based on income, age, and the presence of qualifying children. Several policy
and legislative issues are associated with the EITC: compliance, the use of refund
anticipation loans, marriage penalty, and poverty relief (family size).
Compliance Issue. Compliance with the EITC provisions has been an issue for
the program since 1990, when the Internal Revenue Service (IRS), as part of the Taxpayer
Compliance Measurement Program (TCMP), released a study on 1985 tax year returns
with the EITC. The study concluded that there was an over-claim rate of 39.1%. The
over-claim rate represents the percentage of claimed EITC that was invalid. Some of
these over-claims were recovered after the study by IRS collection efforts. Later studies
by the IRS have resulted in lower over-claim rates. The 1997 and 1999 tax return studies3
estimated that the unrecovered over-claim rates were 23.8% to 25.6%, and 27.0% to
31.7%, respectively. These studies presented the rates as upper- and lower-bound
estimates because a number of individuals contacted as part of the studies did not respond.
In the 1999 study, 24.9% of over-claims (with the errors known) were due to the
child claimed not meeting the EITC requirements for a qualified child. The most
common qualifying child error was that the child did not meet the residency test (living
with the tax filer for at least six months in the case of certain blood relatives, or one year
for other individuals). The second most common error was the child not meeting the
relationship (to the tax filer) test, particularly in the case of foster children where the child
did not live with the tax filers for the full year or was not cared for as the tax filer's own
child.
The definition of a child prior to tax year 2005 for the EITC was different from the
definition of (or requirements to claim) a child as a dependent for the personal exemption.
As a result, a single parent living in a multi-generational household may have been able
to claim the child for the EITC, while the grandparent or the child's nonresident parent
may have been able to claim the child for the personal exemption and child credit and not
the EITC.
To reduce the complexity created by the different definitions of a child, proposals
were made by both the U.S. Department of the Treasury and the Joint Committee on
Taxation to conform the definition of a child for purposes of the personal exemption,
1 A more detailed description of EITC eligibility and the calculation of the credit are in CRS
Report RL31768, The Earned Income Tax Credit (EITC): An Overview, by Christine Scott.
2 Only a small number of EITC recipients elect the advance payment option for the EITC.
3 Internal Revenue Service, Department of the Treasury, "Compliance Estimates for Earned
Income Tax Credit Claimed on 1999 Returns," February 28, 2002, p. 18.
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Scott, Christine. The Earned Income Tax Credit (EITC): Legislative Issues, report, January 3, 2008; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc810126/m1/2/: accessed May 30, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.