The IRS and Census Bureau estimate that only about 78 percent of people who are eligible for the earned income tax credit (EITC) get it. And this shortfall has advocates—and even the IRS—trying to figure out how to get the credit to everyone who qualifies. Unfortunately, a recent experiment with California EITC (CalEITC) shows how difficult it can be to increase participation. Even telling taxpayers they might be eligible doesn’t seem to move the needle.
Now, US senators Sherrod Brown (D-OH) and Catherine Cortez Masto (D-NV) are proposing an even more aggressive effort– having the IRS deliver automatic refunds to certain eligible EITC filers without requiring them to first claim the payment.
Who fails to claim the EITC?
Not surprisingly, people eligible for larger credits are more likely to claim them – so about 85 percent of EITC dollars get claimed. But who isn’t claiming the credit?
Each year, the IRS matches its administrative data with the Census Bureau’s Current Population Survey and American Community Survey data to estimate EITC participation. The match isn’t perfect— people’s characteristics may change from the time they are interviewed by Census to when they file their tax returns, survey responses may differ from information reported on tax returns, and those factors may affect eligibility for the EITC. For example, a taxpayer might get divorced or a child might end up living with another parent for a majority of the year. Researchers have concluded that non-participants are more likely to be people who are:
- Living in rural areas
- Receiving disability income or have children with disabilities
- Without a qualifying child
- Not proficient in English
- Grandparents raising grandchildren
- Recently divorced, unemployed, or experienced other changes to their marital, financial, or parental status.
Other work suggests that many non-participants do not file a tax return since their income is so low that filing a return is not compulsory. Congressional actions to require Social Security Numbers for children and taxpayers claiming the EITC as well as the IRS’s focus on reducing credit payments to ineligible households (so-called “erroneous payments”) since the mid-1990s both may discourage taxpayers from claiming the EITC.
What did researchers do to encourage participation?
The researchers set up a random control trial where they informed more than one million Californians that they might be eligible for the EITC. For some, they even calculated the estimated amount of their benefit. Some Californians were given information about free tax-filing options.
The result? A few more people looked at online resources related to California’s EITC, but the letters and texts did not result in more people filing a tax return, using a free tax preparation services, or claiming the federal or state EITC.
What do Senators Brown and Cortez Masto recommend?
Senators Brown and Cortez Masto want the IRS to automatically deliver EITC refunds to workers without qualifying children. This was one of several recommendations by the Treasury Inspector General for Tax Administration (TIGTA) to increase participation in the EITC. The Senators focus on this group because their tax returns are less complicated than returns for workers with children.
Increasing participation among eligible EITC recipients while reducing erroneous payments have been longtime goals of the IRS. The new research confirms that increasing participation won’t be simple – but at least exploring automatic refunds for workers without qualifying children seems like a reasonable next step.