Association for Public Policy Analysis & Management

What more can the IRS do to improve compliance in claiming the Earned Income Tax Credit (EITC) and perhaps other areas where there is systemic noncompliance? This paper explores how a focus on taxpayer characteristics, and an understanding of what drives individual decision-making, may offer new opportunities to improve EITC compliance.

The EITC has broad importance as a matter of national policy, yet the IRS also suffers criticism for the stubbornly high overclaim or improper payment rate. The EITC is a benefit administered through the tax system that is generally applauded for helping to reduce poverty and incentivize low-wage work. It’s estimated that one in five taxpayers claim the EITC and approximately 44% of all filers with children receive the EITC.

This year alone, more than 27 million low-income working families and individuals, who often live paycheck to paycheck, will receive a financial boost from the EITC. It a sizable tax time windfall for families, with the average EITC claimed in 2013 being approximately $2400. The EITC has become known as the nation’s largest anti-poverty program as it has been shown to have a major effect on lifting people out of poverty. In terms of dollars, taxpayers claimed $68.1 billion in EITC in 2013, with most of that (87%) refunded to taxpayers.

Despite the IRS’s traditional compliance efforts (i.e. audits and penalties), overclaim rates remain at approximately 25% of all claims. For 2015, the estimated dollar value of improper payments was approximately $15.6 billion. This puts the integrity of the program at risk. The traditional audit and penalty approach to addressing EITC noncompliance has its limits in terms of its ability to meaningfully move the needle toward greater compliance and that new tools are needed. We will explore reasons for non-compliance, and why these situations may lend themselves to improvement using behavioral economics techniques.