Earned Income Tax Credit:

Implementation of Three New Tests Proceeded Smoothly, But Tests and Evaluation Plans Were Not Fully Documented

GAO-05-92: Published: Dec 30, 2004. Publicly Released: Dec 30, 2004.

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Research has shown that the Earned Income Tax Credit (EITC) has helped lift millions of individuals out of poverty. In recent years, the Internal Revenue Service (IRS) has paid approximately $30 billion annually to about 20 million EITC recipients. However, the program also has experienced a high rate of noncompliance. IRS estimated that EITC overclaim rates for tax year 1999, the most recent data available, were between 27 and 32 percent of dollars claimed or $8.5 billion and $9.9 billion, respectively. We were asked to describe the three tests IRS has begun to reduce overclaims and how the funds appropriated for them were spent; assess how well IRS implemented the tests and describe planned refinements for the 2005 tests; and assess whether IRS's evaluation plans had sufficient documented detail to facilitate managerial review and stakeholder oversight and describe the status of the 2005 evaluation plans.

IRS implemented three tests in 2004 to address leading sources of EITC errors: a qualifying child test, where selected taxpayers were asked to document that their child lived with them for more than half the year in 2003; a filing status test, where selected taxpayers were asked to provide documentation to prove the accuracy of their 2003 filing status, and an income misreporting test, where a new screening process was used to select EITC returns that identify taxpayers likely to have the most significant changes in their assessments due to underreporting of income on their tax return. IRS's implementation of the tests proceeded smoothly and largely as planned. However, some information, such as a key change in the filing status test, was not well documented and the level and quality of some services provided to test participants were not measured. This lack of documentation hindered monitoring, oversight, and did not foster a common understanding of the tests. For the 2005 tests, IRS made key changes to the qualifying child test to encourage taxpayers to certify in advance of filing their return and to attempt to simulate what might happen with nationwide implementation. IRS also changed the sample selection criteria for the filing status test to better target noncompliant taxpayers. IRS's plans for evaluating the 2004 tests generally lacked documentation and detail for many key issues, which undermined their value to managers and stakeholders. For example, IRS did not specify how it planned to analyze some qualifying child survey data. In essence, an evaluation plan is the management plan or roadmap for the evaluation endeavor and well-developed plans facilitate test management and oversight. Despite the importance of having evaluation plans prior to implementation, IRS had not completed its plans for the 2005 tests before two of the tests had begun.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: The Commissioner of Internal Revenue should ensure that reports disseminating the results of the 2004 and 2005 test evaluations clearly outline aspects of test design and evaluation shortcomings that limit the interpretation and utility of the results.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: In our December 2004 report, we recommended that the Commissioner of Internal Revenue ensure reports disseminating the results of the 2004 and 2005 Earned Income Tax Credit (EITC) test evaluations clearly outline aspects of test design and evaluation shortcomings that limit the interpretation and utility of the results. In October 2005, the Internal Revenue Service (IRS) published the IRS Earned Income Tax Credit (EITC) Initiative, Final Report to Congress--a summary of the 2004 test results. This report contains a description of the test designs for the three EITC initiatives and applicable shortcomings. As a result of implementing this recommendation, IRS has begun the process of disclosing more complete information about the design and evaluation of the test. This is important as stakeholders use the report to make future decisions about the EITC.

    Recommendation: The Commissioner of Internal Revenue should develop a means of gathering information during the 2005 tests on the use of such locations as LITCs and walk-in sites on the level and quality of service provided by those sites, particularly in light of IRS's plans to draw its sample from a single community for the qualifying child test.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: In March 2005, IRS expanded its national tracking system in walk-in sites to identify taxpayer contacts regarding certification tests. IRS also provided training to assisters nationwide with additional training for assisters in the single community area to ensure their awareness of the 2005 tests and their ability to provide quality service. In March 2005, IRS expanded its national tracking system in walk-in sites to identify taxpayer contacts regarding certification tests. IRS also provided training to assisters nationwide with additional training for assisters in the single community area to ensure their awareness of the 2005 tests and their ability to provide quality service. As a result of implementing this recommendation, IRS was able to more effectively evaluate the impact of its efforts in using walk-in site facilities.

    Recommendation: The Commissioner of Internal Revenue should adopt a policy of documenting the rationale for key policy decisions and other significant events as the 2005 tests are implemented.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: In March 2005, IRS developed and implemented a new process for the 2005 tests that allowed for a more extensive historical record. Specifically, IRS now maintains a record of decisions made by senior IRS executives during any briefings or meetings in response to important events. As a result, the ability of IRS and stakeholders to oversee the evaluation increased and limitations in the evaluation could be identified, addressed, and clearly communicated.

    Recommendation: The Commissioner of Internal Revenue should complete the development of comprehensive and adequately detailed evaluation plans for the 2005 tests.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Not Implemented

    Comments: We reviewed the EITC Fiscal Year 2005 Initiatives Evaluation Plan (published in October 2005). We determined that it was not comprehensive and lacked sufficient documented detail to facilitate managerial and stakeholder review and oversight. In our report we noted that this lack of detail limits IRS's and stakeholders' ability to oversee the evaluations and identify and address limitations in the evaluations. Had the evaluation plan been comprehensive and adequately documented, managers and stakeholders could have had the opportunity to provide input into the design and implementation of the test and thus maximize the potential for the evaluations to produce conclusive and useful results. Two examples of the impact of the lack of documentation are as follows: 1) The January 2007 report indicated that the Qualifying Child Certification initiative will run for a 3rd year and the algorithm used to select participants will be modified to "focus the certification program better on taxpayers who claim, but are not eligible for, the EITC with qualifying children." If the selection criteria had been made explicit in the 2005 evaluation plan, stakeholders and managers might have been able to provide input that would have improved the criteria used to select participants. 2) IRS acknowledged that the mandatory validation procedures used to assess the validity of the submitted documentation may have impacted their ability to assess the certification process. Had there been documentation about these procedures in the evaluation plan, stakeholders and managers could have been made aware of the potential for the mandatory validation effort to confound the results and perhaps could have worked with the research staff to try and mitigate this problem.

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