IRS, DOR undermining Earned Income Tax Credit

IN THE MIDST of new proposals for a major tax system overhaul, there’s one tax policy almost everyone agrees has been highly effective: the Earned Income Tax Credit. It delivers significant financial relief to working families while providing financial incentive to work. In 2015, the average credit was $3,186 for families with children.

How disappointing, then, to see important working-class tax policy undermined, despite the best of intentions, by federal and state tax collection bureaucracies. In an effort to cut back on fraud, the IRS has delayed returns and both the IRS and the state Department of Revenue are now routinely auditing Schedule C returns — filings from self-employed individuals who are seeking the tax credit.

For these taxpayers, taking advantage of the EITC has become onerous and usually economically prohibitive. It simply isn’t worth the time and expense to claim the credit, according to Massachusetts Society of CPA members who have been working pro bono with EITC clients. The self-employed who are eligible for the credit are simply out of luck unless they want to spend money they may not have to battle the likes of the IRS and the DOR.

I know of no other category of taxpayer that faces almost automatic audits, and it’s a sad irony that it’s among the poorest that are receiving the toughest scrutiny.

Call it a governmental overreaction to a growing problem: Tax collectors have legitimate concerns about fraud, which totaled an estimated $3.1 billion in 2014. But for fraud related to the EITC, the numbers can be deceiving. The error rate with the credit is high, yet most of the filing problems stem from EITC’s sheer complexity—in other words, it’s not only fraud, it’s also plenty of confusion. The Center on Budget and Policy Priorities says the instructions for the EITC are nearly twice as long as those for the Alternative Minimum Tax, a tax that was originally targeted to prevent the wealthy from skirting the system but is now hitting the middle class.

It’s time to correct this bizarrely unfair tax-enforcement situation:

• Eliminate the fraud at the source. We’ve filed legislation proposing due diligence requirements similar to those imposed by the IRS. This would require an EITC taxpayer to either use a CPA or go through a Volunteer Income Tax Assistance program that offers free tax assistance. This will cut down on the “fly-by-night” tax preparers who are ruining the credit opportunities for honest taxpayers.
• Simplify the filing process. Although some helpful reforms have been adopted, confusion still can reign. Particularly confusing is the act of claiming a child dependent, where the EITC rules differ from the child care credit. The worst solution would be to further complicate the process with additional filing requirements.
• Share information with the states. The IRS should share its list of suspect preparers with the state authorities, a common-sense way to coordinate and focus tax enforcement rather than punish a whole class of taxpayers indiscriminately.

Let’s stop the audit overkill and find more strategic approaches to balancing a valuable tax credit program with the need to battle tax fraud.

Amy Pitter is president and CEO of the Massachusetts Society of Certified Public Accountants.