A new paper offers suggestions for helping the IRS better administer social benefit programs.
By Dwyer Gunn
Cars drive past the Internal Revenue Service headquarters building in Washington, D.C. (Photo: Matthew Cavanaugh/Getty Images)
Approximately 50 million Americans receive government benefits through the Earned Income Tax Credit or the Child Tax Credit every year. In fact, the EITC is now the largest cash transfer program for low-income families with children; it’s also one of only a few social programs to enjoy broad bipartisan support. But, as I wrote earlier this year, it’s not clear that the Internal Revenue Service is ready for a modern-day “tax war on poverty.”
On Monday, the American Enterprise Institute, a conservative think tank in Washington, D.C., held a panel on how to improve the IRS’s administration of benefit programs like the EITC. Steve Holt, an AEI scholar and the author of a new paper on the topic, opened the discussion by highlighting four problems with the IRS’s administration of the EITC:
- The IRS wasn’t designed for such a role. It’s not service-oriented and lacks the apparatus (as well as the funding) to respond to the questions and concerns of EITC recipients. In a 2015 paper, Nina Olson, the National Taxpayer Advocate, concluded that “[c]urrent IRS EITC processes are stacked against taxpayers as they attempt to interact with the agency and be heard. ... The correspondence audit process is singularly ill-designed for obtaining the correct answer in EITC cases.”
- Distributing the EITC as a tax refund creates a “timing mismatch.” Recipients have to wait to receive their benefits (in one lump sum, which is also not ideal) until the following year, as opposed to receiving them at the time of greatest need.
- It shifts the administrative costs of the program onto the recipients, most of whom pay a for-profit tax preparer to file their taxes. Many of these preparers are expensive, some are predatory, and some are actively engaged in fraudulent behaviors that leave the recipient holding the bag for any improper claims.
- It results in “compliance problems,” although policymakers debate how many of these errors are willful (people intentionally filing incorrectly to collect a larger EITC benefit) or accidental (people filing incorrectly because they’re confused by the program’s complicated rules). Commercial tax preparers also play a large role here — Holt reports that the “highest rate of EITC overclaim returns is among unregulated preparers (who constitute the majority of preparers), some of whom hide their identity by writing ‘self-prepared’ on the return or leave the preparer signature block blank.”
So what’s to be done? Despite the IRS’s failings, most experts (including the panelists at AEI) agree that there’s no better-suited agency for the task — both for practical and philosophical reasons. Surveys of EITC recipients repeatedly find that the program lacks the stigma associated with other government welfare programs.
“Households claiming the credit see themselves as workers and, even more importantly, as rightful participants in American society,” Holt writes in his recent paper. “They are part of the mainstream. After all, in any given year about one in five taxpayers receive the credit, and almost half of taxpayers with a child claim the EITC at least once over 18 years.”
In an interview earlier this year, Susannah Camic Tahk, a professor at the University of Wisconsin Law School, made a somewhat related point about the advantages of administering this benefit through the IRS.
“The processes around applying and fighting over welfare and food stamps are so demeaning,” Tahk said. “But when you have someone resolving a dispute with the IRS, at least they’re using processes that are designed for all taxpayers — businesses, rich folks, poor folks. The IRS isn’t trying to make these processes humiliating — it’s going to be a similar process for someone who’s high-income or low-income.”
So, in the absence of a better option, can the IRS transform itself into an efficient administrator of social benefit programs? Holt, along with the other AEI panelists, believes it can. But there need to be some changes. For starters, the IRS needs more funding so it can better respond to EITC payment and compliance issues. Holt also recommends a shift toward real-time income data and online taxpayer accounts, alternative EITC disbursement options (quarterly payments, deferral to savings accounts, etc.), the formalization and regulation of commercial tax preparers, and a simplification of the rules on EITC eligibility.
The EITC isn’t going anywhere—nor should it, given all it does for low-income working families. Really, it’s one of the few social welfare programs that has a chance of being expanded in the next few years. It’s time, Holt argues, to give the IRS the resources it needs to effectively administer the program.