The U.S. Senate is currently considering the $4.2 trillion Republican reconciliation package, which would extend tax cuts from the 2017 Tax Cuts and Jobs Act, provide significant additional tax cuts tilted towards large businesses and wealthy individuals, and cut tax benefits, health care, and nutritional assistance for low-income families.
For low-income taxpayers, one of the most significant tax changes under consideration is a new pre-certification requirement added to the Earned Income Tax Credit (EITC), a fifty-year-old policy that has support across the political spectrum due to long-standing evidence that it promotes work and reduces poverty. Today, it was announced that the pre-certification requirement is inconsistent with the budgetary “Byrd” rule. However, the Finance Committee may redraft the provision in an attempt to have it pass procedural muster. As the fate of this provision remains uncertain, it is useful to review the impacts should a substantially similar provision be enacted.
As currently drafted, the bill would require holding refunds for months for certain EITC taxpayers starting next year. Then, beginning tax year 2028, a new pre-certification program would require all EITC taxpayers to submit documents proving they are eligible to claim their children, effectively subjecting them to upfront IRS audits, every single year.
Had the program been in effect in 2020, the IRS would have effectively subjected 17 million EITC families to audits, more than 35 times the total number of audits on individuals. If enacted, this program could subject tens of millions families to refund delays and increased costs, while failing to realize a clear policy goal: The changes will neither significantly enhance program integrity nor will they make the tax system more responsive to the complex realities of family structures.
New EITC Pre-certification System Would Delay Refunds & Increase Costs for Families
The EITC is a critical financial lifeline for working families that keeps about 5.6 million people out of poverty each year, including three million children, and reduces poverty for another 16.5 million people, including six million children. The proposed pre-certification system would result in significant delays of that relief, increased tax preparation costs and burden, and will likely cause taxpayers who are fully eligible to lose access to the tax credits they qualify for under the law.
Before tax year 2028, the bill would hold EITC refunds until at least October 15 if there was a previous competing claim for that child. It may do so because October 15 is the date (with extension) to file a tax return. However, EITC claimants tend to file early in the filing season because they spend it on groceries and other immediate expenses. Many refunds are paid soon after February 15, before which EITC refunds cannot be paid under current law. There is no reason to delay the refund until October, a full eight months later. Moreover, this puts the timing of taxpayers’ refunds at the mercy of what other taxpayers did.
Take Tom. Tom has a full-time job and two children who live with him all year. His former spouse, Maria, also claimed the children on her tax return last year incorrectly. Next filing season, under the bill, Tom’s Earned Income Tax Credit would be held up for months until October 15 and be presumptively denied unless Tom submits additional information, though the bill provides no clear process or deadlines for doing so.
Starting in tax year 2028, absent use of Treasury discretion, he would have to prove to the IRS every year that he is eligible to claim each of his children. Tom would not be able to claim the refundable portion of the EITC unless he applies for an EITC certificate—in a manner and with documentation that is left up to Treasury and the IRS to determine.
If enacted, Tom would have to navigate a significantly novel process and would likely be confused about what is required of him and why his refund is delayed or denied. It could be difficult and expensive for him to obtain documentation. He may need to take time off of work to get birth certificates, paternity reports, court documents, school and medical records, and written statements from doctors, teachers, churches, or social services agencies. Forcing every EITC taxpayer to go through these hoops every year would not only be a significant burden on taxpayers, but also on schools, medical providers, churches, and other local institutions.
Even if taxpayers are able to obtain new documentation, imposing this new requirement on an under-resourced IRS could delay refunds. With an estimated 25 percent loss in IRS workforce, loss of personnel and institutional knowledge could translate to delays in the creation of the new processes, forms, and IT changes; lack of customer service and other capacity to address taxpayer questions and confusion; and ultimately delays in taxpayers receiving their EITC refunds.
Ultimately, these hurdles to claiming the credit are likely to result in a reduction in claims by eligible filers. If the intent is to address competing claims, the application is overly broad: if competing claims are on the order of less than 5 percent of returns, that is tens of millions of other families who would face unnecessary delays and increased costs
New EITC Pre-Certification System Would Provide Little Return on Investment
An IRS pilot during the George W. Bush Administration found that pre-certification was far less efficient and more burdensome than existing program integrity methods. Currently, when the IRS selects a return for audit, it already uses current prior tax return data as well as data from other agencies to hold potentially erroneous claims until additional documentation is provided.
For a sense of magnitude, in the most recent year for which audits are generally complete, the IRS conducted 491,000 audits across all individual taxpayers. Without changes, the bill could subject approximately 17 million low-income families every year to effectively a mandatory upfront audit. Without changes, this would result in 35 times the number of families subject to IRS scrutiny every year.
The IRS resources required to conduct this large-scale task are massive, especially compared to the size of any EITC claim. The IRS would have to claw back EITC amounts from millions of families to equal one $6 billion corporate transfer pricing case. An overly broad task for the IRS could also frustrate the very intent of the draft by limiting resources to review any one case. Conducting this effort alongside but not integrated with typical tax season processes could also impact other taxpayers’ ability to receive prompt refunds during filing season.
Any incremental gains of pre-certification over existing program integrity efforts should be weighed against the burden on both taxpayers and the IRS as well as the cost to eligible taxpayers who lose out on credits. Building on existing targeted approaches allows the IRS to focus on the sources of the highest errors. For example, the Governmental Accountability Office has recommended congressional action to address paid preparers with high probability of errors.
Complex Eligibility Rules Will Exacerbate Burdens of EITC Pre-Certification Program
The complexity of the underlying statutory rules for claiming children are not addressed in this bill and will exacerbate the burden to taxpayers with children and frustrate the effectiveness of IRS administration. Under existing rules, it would be an administrative nightmare for every EITC claimant with children to have to prove upfront that they meet every element of these complex rules.
Typically, competing claims involve two family members or caretakers claiming the same child, often due to honest mistakes. A taxpayer could be the “wrong” taxpayer not because they don’t care for the child, but because they fail any in a series of “relationship,” “residency,” and “age” tests, in addition to complicated eligibility rules that apply to separated spouses. Furthermore, when multiple taxpayers meet the eligibility criteria for the same child, a series of rigid tie-breaker rules govern which taxpayer is the “right” taxpayer to claim a child. For example, if no parent lives in the household, only the relative with the highest adjusted gross income is allowed to claim the child on their return.
Let’s take Emma. Emma is Grace’s aunt and took over raising Grace after Grace’s parents died tragically in a car crash. Emma’s mother (Grace’s grandmother) Betsy also lives with them. Under the bill, Emma provides information to the IRS about herself and Grace. However, she does not know whether Betsy has claimed or plans to claim Grace. Depending on Betsy and Emma’s relative incomes, the law could prescribe that Betsy is the “right” taxpayer to claim Grace, rather than Emma.
These complexities result in honest mistakes over how to accurately claim children for the EITC. In 2019, 41 percent of all children in the U.S. lived in a household arrangement other than with two married biological parents. Low-income families in particular are more likely to live in households where multiple adults can potentially claim the same child, such as parents with joint or shared custody as well as multigenerational households.
Importantly, however, these complexities are not limited to EITC claimants or low-income families. Although this bill singles out refundable EITC claimants for additional scrutiny, the same issues apply across all taxpayers with children. If the goal is a more fulsome examination of the complexity of claiming children and dependents, it should not be limited to the EITC, but instead also consider filing status and other family-related provisions in the tax code.
More broadly, policymakers should question whether there is a strong policy reason for the IRS to spend time and resources parsing through families’ private affairs in such granular detail. Instead, they should consider the purpose of the EITC and other child-related provisions. The Child Tax Credit proposal in the Build Back Better Act of 2021 and similar proposals have contemplated allowing taxpayers who provide care to the child to claim the child, suggesting one potential policy purpose is to deliver financial support that can be used in order to provide care for the child.
The dependency rules are not well-designed for the reality of how families live today. Rather than pursuing a punitive EITC pre-certification process, policymakers should consider legislative changes that would clarify the policy purpose, simplify the statutory rules, and make it easier for taxpayers to comply.
Conclusion
The EITC pre-certification provisions in this bill create substantial, unprecedented annual burdens for tens of millions of families, and will delay tax credits with no clear path for resolution of competing claims. The approach should be more carefully targeted at high-risk claims and aim to reduce administrative burden on families, local institutions, return preparers, and the IRS. Enforcement of EITC taxpayers should be part of an IRS enforcement strategy that appropriately prioritizes claims with the largest fiscal impact and holds the wealthy and large corporations to the same standard as low-income families.