Guest Commentary: Understanding Improper Payments in the EITC

By Elaine Maag, Senior Research Associate at the Tax Policy Center and the Urban Institute

The President’s budget proposes increasing the earned income tax credit (EITC) for workers without qualifying children. This group includes non-custodial parents, people who have children either over age 18 and no longer in school or over age 24, people who have custody of children who are not related to them or where the relationship is too distant to qualify (such as cousin), and people without children. Much attention has been focused on erroneous or improper payments of the EITC. In the face of an EITC expansion, it’s important to assess whether an EITC expansion of the sort proposed would likely lead to even higher error rates. The simple answer? Not likely.

According to the last published compliance study performed by the IRS (based on tax year 1999), the improper payment rate for the EITC was between 23 percent and 32 percent. However, recent estimates of improper payments by IRS put the range at closer to 21 to 26 percent. According to the compliance study, for tax returns where the error is known, almost half of overpayments were made because of problems associated with claiming a qualifying child. For the proposed expansion, this is not an issue, since one cannot claim the EITC for workers without qualifying children if they do, in fact, have a qualifying child. As a result, the error rate for people claiming the EITC under the President’s proposal is likely to be substantially lower than current estimates of error rates.