WASHINGTON ― The Republican tax agenda unveiled this week would repeal an inheritance tax that affects only the richest 0.2 percent of the population.
For low-income workers, the tax reform plan could mean closer scrutiny of their filings ― something more like an audit than a tax break.
The tax code currently provides a significant benefit to people on the lower end of the income scale through a $69 billion program called the earned income tax credit. Twenty-eight million households received checks from the program in 2015, averaging $2,381 for a family with one child. Conceived in 1975 as a “work bonus,” today the credit provides an annual cash refund to workers with modest earnings. The amount is scaled based on income, and parents are eligible for much larger refunds than people without children.
President Donald Trump said Wednesday that “my plan is for the working people,” the very constituency for whom the tax credit especially benefits. But even though the amount of the credit has been expanded on a bipartisan basis several times in past years ― including in the 1986 tax reform that House Speaker Paul Ryan (R-Wis.) frequently cites ― Republicans have no interest in doing so this time.
A senior administration official said during a conference call on Tuesday that while they didn’t want any changes to the earned income tax credit, “We’re encouraging the committees to improve how the program works.”
Improving how the program works might actually mean making the benefit more difficult to obtain.
In July, Republicans on the House Budget Committee approved a spending outline that would require the Internal Revenue Service to verify the income of everyone filing for the earned income tax credit. The program does have a high rate of improper payments ― more than 23 percent, according to the IRS. Conservatives argue this is due to fraud, but past analyses have suggested improper payments are as likely to be the result of honest mistakes made in the tax filing process, such as accidentally misreporting income or separated spouses both claiming on behalf of the same children.
If a tax return is suspicious or gets selected as part of a random sample, IRS auditors will seek to verify it. But under the House Budget Committee’s proposal, the millions of filers claiming the credit could be subject to extra income verification ― which could delay benefits for weeks or months.
As the liberal Center on Budget and Policy Priorities puts it, “all low-income filers claiming the EITC would effectively be subject to a quasi-audit.” It’s not clear exactly what the House Budget Committee’s proposed verification process would look like; there is little detail in the proposal, and a spokeswoman did not respond to a question about the verification process. The IRS opens regular audits by mailing a notice to the filer in question.
Wage-earners who claim EITC benefits typically file their taxes with W-2 forms containing earnings data that the IRS matches with forms filed by employers. To aid that process, Congress recently passed legislation moving the employer deadline for filing W-2 forms to the end of January (instead of the end of March) while also delaying payment of refunds until mid-February. This year was the first that the IRS used the new schedule.
John Wancheck, a tax credit expert with the Center on Budget and Policy Priorities, said the roughly 7 million self-employed EITC claimants would be more likely to face a “quasi-audit” forcing them to provide things like receipts and credit card statements to prove their income and expenses.
“Probably the big issue is verifying the income when it involves self-employment and sole proprietors,” Wancheck said.
“All low-income filers claiming the EITC would effectively be subject to a quasi-audit.”
Last year, the conservative Heritage Foundation advocated delaying refund payments until all income had been verified, including by requiring claimants with self-employment or business income to provide “invoices of payments received including date of service and identifying contact information from customers.”
The Republican budget is a key part of the tax reform process; both the House and Senate need to approve it in order to unlock the special “reconciliation” rules that allow accompanying tax legislation to pass the Senate with just 50 votes instead of the usual 60, meaning Republicans wouldn’t need any Democratic support.
The budget itself is a resolution, not a piece of legislation that goes to the president’s desk or becomes law. It’s basically a list of suggestions that committees are expected to consider as they write actual legislation, and it would ultimately be up to the House Ways and Means Committee to decide whether to take the budget’s suggestion for a more rigorous vetting of EITC claimants as part of tax reform.
Just like the Trump administration, the Ways and Means Committee has suggested it’s amenable to the idea of more rigorous scrutiny of the tax filings of anyone who claims an EITC credit. A spokeswoman told HuffPost in August that Committee Chairman Kevin Brady (R-Texas) supports maintaining the EITC and “ensuring that it is working effectively and efficiently.”
A curious thing about targeting the high rate of improper EITC payments is that they actually represent a relatively small share of what is known as the “tax gap” ― the amount of revenue the IRS collects versus what it’s supposed to collect. Improper EITC payments in 2013 amounted to as much as $16 billion; the tax gap from 2008-2010, the most recent years available, was $458 billion. Most of the gap is from much wealthier individual filers and business owners underreporting their income.
Larry Zelenak, a tax expert with Duke University, said the EITC is an unusual combination of a tax cut and a social safety net program.
“This has created competing notions as to how strictly we ought to enforce it,” Zelenak said, noting that cash safety net programs have stricter penalties and enforcement mechanisms to prevent people from collecting excessive benefits. “Conversely, we don’t seem to be equally concerned about people avoiding paying a dollar of tax.”
Correction: An earlier version of this story misstated the income limit for the earned income tax credit.