IRS Taxpayer Advocate Nina Olson, in Final Report, Calls for EITC Reform

By:
Chris Gaetano
Published Date:
Jul 11, 2019
IRS

National Taxpayer Advocate Nina E. Olson, in her final report before her July 31 retirement, called for administrative reforms around the Earned Income Tax Credit (EITC) in order to make it easier to understand and more accessible to the taxpayers who need it most. 

As things are right now, she said, despite the credit's proven effectiveness in fighting poverty and high participation rate, it is plagued by improper payments that both increase administrative overhead for the IRS and subjects low-income taxpayers to increased audit risks. 

"All too often the IRS takes an enforcement-oriented approach to administering the EITC, leading to relatively high audit rates for low income taxpayers. This approach can deter or altogether block eligible taxpayers from claiming the credit, prevent ineligible taxpayers from understanding what they did wrong, and squander opportunities to educate taxpayers to encourage future voluntary tax compliance," she said. 

With this in mind, she said that, before anything, the IRS needs to change its mindset toward the EITC by explicitly acknowledging its role as a benefits administrator on top of its existing role as revenue collector. An agency that views its primary mission as one of enforcement, absent any self-conception as a benefits administrator, will inevitably design procedures and allocate resources in a way that does not emphasize serving the public and meeting taxpayer needs. In this respect, she said the IRS should hire people from backgrounds suited for delivering benefits, such as those from the social work field, as well as explicitly stating the administering of these benefits as part of its agency mission. 

At the same time, she said Congress needs to redesign the IRS to make it easier to administer the EITC. For instance, today, when the IRS is unable to verify or authenticate data relating to EITC eligibility, or the EITC’s complexity means that taxpayers and preparers cannot understand how the law applies, she said it makes the EITC more vulnerable to opposition and increases pressure on the IRS to audit EITC claimants. Olson believes that this then leads to a cycle where the IRS is criticized for disproportionately auditing low income taxpayers while still being unable to reduce stubbornly high improper payment rates. Additionally, she called for Congress to conduct regular oversight hearings of the IRS on a permanent basis, allowing the IRS to identify challenges and successes with tax administration. 

As for how the credit should be reformed, Olson recommended restructuring it as two credits: a worker credit and a child benefit. Much like the current EITC, the worker credit would be phased-in as a percentage of earned income, reach a plateau, then phase out. However, this credit would, unlike today, be uniform for each worker at a given income level and not vary based on martial status or number of children. Since the credit would be based on earned income, regardless of the presence of qualifying children, improper payments would likely fall, as it would be easier to calculate. It would also do away with the main driver of the marriage penalty among low income taxpayers, and therefore reduce the incentive to misreport martial status or discourage work among secondary earners in a married couple. 

The child benefit, meanwhile, would be designated as a fixed amount per child, without a phase in or phase out. This would replace the current EITC and child credit. By doing so, said Olson, it sends the message that families at all income levels need a minimum amount of resources to adequately care for children, and expresses a common interest in the welfare of all children. A fixed benefit would also be easier to understand and more transparent. Along with this reform, said Olson, would need to come an updated modernized definition of a qualifying child. She noted that adults today provide care for children in many different ways that may not necessarily involve a particular relationship or residency test. Their primary caregiver, for instance, may not be a biological parent but perhaps an aunt. She said that, instead, Congress should instead think along the lines of a "primary carer" and develop definitions and criteria that fit this framework. 

She also said that the IRS needs to exert more oversight of third party preparers, saying that "there is strong evidence that some private intermediaries are not acting in the best interest of taxpayers and tax administration. She said the IRS should authorize the secretary to establish standards for return preparers and tax software providers, as well as require disclosure and reporting of fees to the taxpayer prior to providing tax prep and filing services. She spoke in support of recent legislation that would give the service the ability to regulate paid preparers. 

Olson also spoke of the importance of the IRS protecting and enhancing due process rights and limiting summary assessments authority. 

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