Taxes: Extra Credit

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An Internal Revenue Service plan to make low-income families prove they qualify for a popular tax credit program has been radically scaled back, following a whirlwind of controversy that the proposal sparked when first unveiled last spring.

At a cost of almost $35 billion a year, the Earned Income Tax Credit, which gives rebates to low-income households that have children, puts more money into the hands of the working poor than public assistance and food stamps combined. Last year, the EITC returned $1.5 billion to the New York metropolitan area alone.

But the IRS, citing over-claim rates between 27 and 32 percent, says the program is wasteful. In 1999, the agency points out, ineligible taxpayers collected between $8.5 billion and $9.9 billion from the credit. So last spring, the IRS proposed an initiative that aimed to rein in the program by requiring claimants to prove they qualify before filing. Under the proposal, people claiming the tax credit would have had to show that a child lived with them for six months of the year and establish their relationship to the child.

Advocates railed against the idea, calling it unduly burdensome, and the IRS beat a hasty retreat. By winter, the initiative had been whittled down to a shadow of its former self. The IRS dropped the relationship certification idea altogether. And in December, it launched a small pilot program requiring just 25,000 people nationwide–a tiny fraction of the total 21 million EITC filers–to prove they live with the child they’re claiming this tax season.

At the end of the tax season, an independent auditor will determine whether the pilot has addressed the over-claim rate without creating an unreasonable burden for the taxpayer or lowering the participation rate.

“We think the IRS has made some sensible decisions,” says John Wancheck of the Center on Budget and Policy Priorities in Washington D.C. IRS EITC Programs Director David Williams credits those decisions to the massive input the agency got from advocates when it unveiled its original plan last spring. “Initially, advocates hadn’t really been engaged by the task force,” says Williams, explaining that now, “anything we roll out will have strong input from advocacy groups.”

Still, Wancheck argues that many filing problems are not the result of fraud but, ironically, the already complex rules governing who qualifies.

Two years ago, Harlem resident Nicole Miller Thomas sought help at her local IRS office on 125th Street and Lenox Avenue but ended up with a rejected return. “You stand out in the cold and they only take 10 people at a time,” she recalls, adding that they “messed up my return really bad,” by incorrectly listing her stepdaughter as a foster child. When she returned to rectify the problem, she was accused of providing wrong information. This year, Thomas is filing her taxes at one of Community Food Resource Center’s free tax assistance sites, located at 125th Street and St. Nicholas Avenue, instead.

President Bush’s 2005 budget proposes simplifying the entire tax code by authorizing the Treasury Department to create a single definition for a dependent child. Advocates like Wanchek are open to the idea. “The jury’s out. But we think it would have an overall beneficial effect and help reduce errors.”