The Internal Revenue Service is planning a "pilot" project beginning in August to require "pre-certification" of 45,000 Earned Income Tax Credit recipients. This effort is targeted to filers who are claiming children of whom they are not the parents. OMB Watch commented on the process and the form, which requires documentation or an affidavit to show that the children and caretakers have lived in the same household for six months of the taxpaying year. Comments on the form were due on July 14, 2003, but comments about the process may be submitted through December 31, 2003. See the IRS announcement for more details.

CC:PA:RU (Announcement 2003-40)
Courier Desk
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC.

July 14, 2003

To: Internal Revenue Service and Treasury Department

OMB Watch is a nonprofit research and advocacy organization that seeks to promote government accountability and citizen participation. One of our areas of work is in tax and budget policy. We concentrate on making the effect of budget decisions at the federal level on the lives of "ordinary" people more explicit, with particular attention to the impacts of tax and budget policy on low-income and vulnerable people and communities.

We are writing to comment on the IRS Pre-Certification Pilot Project for the Earned Income Tax Credit (EITC). The EITC is a vital support to families who are working their way out of poverty, and provides important income for basic needs like food, utilities and medical care. It is one of the most effective anti-poverty programs. Especially given state cut-backs in services and reduced spending on social programs, it is important that the EITC be maintained as an effective anti-poverty strategy. While we support efforts to insure compliance with tax laws, OMB Watch objects to the pre-certification of EITC recipients. To our knowledge, no other class of taxpayer is required to undergo verification requirements in advance of claiming a tax credit. Targeting EITC recipients who claim children (other than married parents or single female parents claiming their own children) as inherently more likely to defraud the government than any other tax filer is objectionable. There are a number of tax exemptions for middle-class taxpayers that are equally likely to be overstated or misused. There would be far more substantial reductions in waste, fraud and abuse if the IRS targeted corporate or very wealthy taxpayers.

Rather than implementing a "pre-certification" program, we think that efforts to reduce errors caused by the complexity of the EITC would be a much better alternative. Eligibility rules for EITC are complicated. The definition of a "qualifying" child differs from that used in other programs. Commercial tax preparers file over 70% of EITC claims and have error rates as high as self-prepared returns. Rather than attempt to pre-certify EITC recipients, an effort to make the instructions clearer, conform the definition of a "qualifying" child, and educate filers and
commercial tax preparers might be as effective in reducing error rates and would be less likely to discourage eligible recipients from claiming benefits. We strongly urge the IRS to step back from its current implementation schedule and work with stakeholders to rethink this initiative.

While we strongly oppose the pre-certification of EITC tax filers, we do have a series of comments on your proposal, which follow.

Our primary concern is that the pre-certification process, including the procedures and forms, should not make it more difficult for any qualified EITC recipient to file for and receive the tax credit. EITC recipients are, by definition, low income, and often lack the education, language skills, ability to pay for private tax or legal advice, and other resources that wealthier taxpayers take for granted. In addition, the IRS, as an institution, may be very intimidating to many EITC recipients. Special care needs to be taken to insure that the forms and process are as clear, unthreatening, and simple as possible.

We commend the IRS for explicitly labeling this a pilot project and for eliminating Form 8856, "Qualifying Child Relationship Statement." However, if this is truly a "pilot" project, then the results of the pilot group, specifically with regard to whether qualified recipients are failing to qualify for EITC benefits, must be fully evaluated before extending the pre-certification to a broader group of filers. There has been no assurance that this will occur. We also continue to have objections to the revised Form 8836, "Qualifying Child Residency Statement." Our comments about the process and the Form 8836 follow:

Pre-certification and Certification Process

Timing

The IRS intends to send out the new pre-authorization form to the pilot group in August 2003, requiring that the form and supporting documents be returned by December 31, 2003. Free tax preparation sites are not open during this period of time and most commercial tax preparation operations are also not available. While recipients can return the form and documents when they file their taxes before April 15, 2004 (possibly delaying their refund), it is unlikely that recipients will keep the form and materials and remember to file them. Will new forms be sent out with tax return documents to those EITC recipients who are required to complete Form 8836?

Certainly an incentive for filers to pre-certify would be the availability of assistance. There should be an education period during which the form and instructions can be supplied to free tax preparation groups and some method developed to alert and remind tax filers who are part of the pilot group. It would also be useful if there were some method for tax preparers to learn when a return must include the form and materials for the pilot project.

Expansion of Pre-certification

As mentioned earlier, the IRS should not expand pre-certification beyond the 45,000 pilot group until it has fully evaluated the pilot project, particularly to determine whether it has been effective in reducing overpayments and can be continued without losing eligible recipients of EITC or discouraging eligible filers for EITC. There should be no expansion of this effort, especially not to two million filers, until the "pilot" project is evaluated, the results made public, and appropriate changes accomplished.

Notices

Since "pre-certification" is a very confusing concept (and it has also been called ?pre-auditing? which sound even more punitive), it is very important that the notice accompanying the form include the following information:

• Why the form is being sent, i.e., it is not because of wrongdoing or an audit of previous tax filings.
• To whom the form is being sent, i.e., it is being sent to filers where it has been more difficult to verify eligibility to claim a child for the EITC, and not to all EITC recipients.
• That if a child is being claimed, the original form(s) and copies (not originals) of supporting documents must be sent to the IRS before December 31, 2003 or the filer's EITC refund may be delayed, but that the form can also be sent with the tax return for 2003.
• How the filer will be notified that s/he has been pre-certified or if there is a problem with pre-certification.
• How filers can obtain assistance from the IRS, the IRS Taxpayer Assistance Center, Taxpayer Advocate Services or a Volunteer Income Tax Assistance (VITA) sites. This information should be clearly displayed with instructions identifying the help available and giving telephone numbers and/or addresses.

Form 8836

Amplify the Instructions

First, the form itself should note that the filer should carefully read the instructions before attempting to complete the form. If the instructions are insufficient, numbers for more assistance should be clearly noted on the form.

An introductory section should be included that discusses EITC eligibility and the rules for a qualifying child. In particular, the requirement that the child live with the tax filer for six months of the tax year needs to be clarified, so that filers know that the period of time within which the six month period must fall is from January through December of 2003 (or the tax year for which the form is being completed).

The instructions should clearly indicate that either a third party affidavit(s) or documented proof(s) of residency are required?not both.

More examples should be given for both the documentation and third-party affidavit option.

Change the Order of the Options

The "affidavit" option ought to be listed first, since, in many cases, it will be less difficult than the very complicated record collecting required by the "documentation" option. It should be made clear that if the affidavit is properly completed and signed, there is no need for other documentation.

Include other Acceptable Third-Party Affidavit Signers and Clarify

Instructions should clarify the types of third parties who can sign the affidavit, and give more examples, for instance, whether a third-party informant can complete only one form if s/he has personal knowledge of a six month period where the tax filer and child may have changed their address.

The affidavit requires personal knowledge that a child has lived with the filer for six months. Many of the categories of individuals listed would be unlikely to have the personal knowledge necessary. The following categories of individuals should be permitted rather than specifically excluded:

• Neighbors. There is no reason why neighbors would be inherently more unreliable or prone to mistruth (especially given the overly strong perjury and criminal penalty language and the notice that the IRS may follow-up)and they are the most likely to actually have personal knowledge of the tax filer?s living arrangements.
• Neighbors or relatives who provide child-care. Many low-income families rely on informal networks of childcare, which often includes neighbors and relatives, and cannot afford the fees or manage transportation to licensed providers outside the neighborhood. Restricting the kind of child-care provider who can sign the affidavit to a provider who is not a neighbor or relative will pose a hardship to these low-income filers. It is also inconsistent, since a taxpayer can claim the Child and Dependent Care Credit for expenses paid to a neighbor or relative caregiver, but the same caregiver could not sign the pre-certification affidavit. There is no similar disqualification for any of the other categories. Why should a child-care provider who is a neighbor be disqualified, when a tribal council member or a pastor or a landlord who is a neighbor is acceptable? Any daycare provider who is over 18 and not a spouse or dependent of the tax filer should be allowed to sign the affidavit.
• Pharmacists. It may be less difficult for a filer to request that a pharmacist (whose records would have the name, address and date of the prescription) complete the affidavit than a health care provider. It is becoming increasingly more difficult for anyone to get forms completed by doctors or hospitals in a timely manner.
• "Landlord or property manager" should be clarified to include "building superintendent," "concierge," or "housing authority personnel." Since some low-income people, especially in rural areas, are homeowners, this category should also be expanded to include "bank official" or "insurance agent."
• In general, the use of the word "official," as in "school official" or "social service agency official" is confusing. It would be better to use "school principal, teacher or administrative assistant," or "social service caseworker or other public assistance office employee."

The language requiring a signature under penalty of perjury ought to be changed to reflect that the third party is supplying information to the IRS to enforce tax laws and that they are responsible for the truthfulness of their statements.

If the provisions limiting neighbors or child-care providers who are neighbors from signing the affidavit is retained, there needs to be a definition of "neighbor."

Clarify Instructions for Documentation by Official Records or Letters

As noted above, this option should come second on the form and it should be clear that if the filer has completed the third-party affidavit, no further documentation is required.

Clarify the Documentation Option

Since many of the suggested documents for the first option will not show the name of the EITC filer, the name of the child, the address at which both lived, and the dates during which the child lived with the filer, EITC filers will probably be required to gather a number of documents to get the correct combination that provides all the necessary information.

The General Accounting Office (GAO-02-449) has found that IRS ?examiners are inconsistent in how they assess supporting documentation provided by taxpayers? and that IRS examiners often rejected school records since the school year runs from September of one year to May or June of the next year, and were generally insufficient to document six months of residency during a January-December tax year. It would not be obvious to many tax filers that they would need to provide two years? worth of school records. The instructions need to be very clear about how a filer may need to submit several different documents that together show the child or children lived with the tax filer for six months, and how this can be done correctly.

There is also no information about what to do if a child has not yet lived with the tax filer for six months, but will have done so by December 31, 2003. The tax filer, in that case, might not be able to pre-certify before December 31, since there will be no documentation that the six-month requirement had been met.

Because of the difficulty inherent in providing adequate documentary evidence, there is a real danger that documents will be rejected by the IRS, in spite of the tax filer?s best efforts, leading to a delay in refunds, which can cause real hardship, and more time and energy on the part of both the tax filer and the IRS to correct the problem. The trouble of going round and round trying to get the right documents and being rejected may cause eligible tax filers to give up trying to claim EITC benefits. One reason the EITC is such a beneficial program is that it is not considered a ?welfare? program, but a tax benefit. The requirements of pre-certification will single out EITC recipients from other tax filers and require them to do considerable extra work to qualify. Many low-income people work more than one job or overtime to support their families and do not have flexible hours to take care of personal business. They often must use public transportation and obtain child-care to run errands. The pre-certification program, if it is to go forward, should minimize difficulty.

In sum, we believe that the pre-certification of EITC recipients should not go forward, but that other efforts at simplifying the requirements and educating tax filers and tax preparers would be more useful. If pre-certification goes forward, we urge the Service to delay its implementation in order to clarify the requirements to reduce the burden on EITC tax filers, and educate tax filers and preparers. Meetings and the opportunity for input from stakeholders should be held. If pre-certification is to go forward starting August 2003, we urge the Service to make the instructions more clear, include more categories for acceptable third-party affidavits, and generally revisit the forms and information to make them more user-friendly. A full opportunity for evaluation of this pilot program must be allowed before extending the program to other EITC filers.

Thank you for the opportunity to comment.

Sincerely,




Ellen Taylor
Senior Budget Policy Analyst