A credit that cuts taxes for low-income working people goes unnoticed by up to 4 million taxpayers who may
qualify and millions of those who do claim the earned income tax
credit make mistakes because of its daunting complexity.
"Some of these errors may be due to intentionally excessive
claims, but the complexity of the rules ... produces large numbers
of mistakes even for people trying to get it right," Yale Law
School professor Michael Graetz wrote in his recent book The
Decline (and Fall?) of the Income Tax.
Simply determining eligibility for the credit requires
completion of a 12-question checklist, which is followed by a
nine-line worksheet and an eight-line form. All of this requires
reference to several pages of Internal Revenue Service
The IRS, which expects 20 million taxpayers to claim the credit
this year, frequently finds up to 40 percent of such returns
contain some error. But the people for whom the credit is intended
typically don't have the money to hire a tax professional.
"For the most part, people make careless errors or they just
don't understand the law," said Candice Cromling, director of the
IRS program on the credit.
The earned income tax credit was created in 1975, in part to
keep lower-income people working to contribute payroll taxes to
Social Security and Medicare and in part to give people incentives
to stay off welfare.
Depending on how many children a taxpayer has, people earning
generally between $10,030 and $30,095 could be eligible this year.
The income levels change each year according to inflation.
The maximum credit is $3,756, and it is refundable, which means
it can trigger a refund even for people who don't owe any income
taxes. Last year, IRS processed $29 billion in such claims
resulting in $23 billion in refunds. Most of the rest resulted in a
lower tax bill.
But the Treasury Department estimates 20 percent of people who
are eligible never attempt to put in a claim. "A lot of people
don't know about it," said Mildred Carter, senior tax analyst at
CCH Inc., an Illinois-based consulting firm.
The IRS has begun a campaign to raise people's awareness of the
credit, including inserts in envelopes containing W-2 forms, "EITC
Days" at community centers and volunteers with churches and
charities who help people with their taxes in working-class
The IRS is also trying to reduce the error rate. Agents screen
thousands of returns that claim the credit to check for mistakes as
simple as an incorrect Social Security number or faulty math.
But the IRS also reviewed 290,000 suspect returns in 1998 that
claimed earned income credits worth $662 million. Of those
"flagged" returns, the agency found 68 percent were invalid,
according to the General Accounting Office, Congress' investigative
The IRS this year is preventing taxpayers who improperly claimed
the credit from attempting to do so again, unless they fill out a
new form explaining why they are eligible. For more serious
offenders, the IRS can bar the credit for up to 10 years.
There are ways to get help: IRS offices have Publication 596,
which explains the law and eligibility rules. Agents at many of
those offices can answer questions, or taxpayers can call the
agency toll-free at 1-800-829-1040, seven days a week, 24 hours a
IRS rules say some taxpayers earning as much as $14,200 and as
little as $6,950 a year may not be required to file an income tax
return, depending on age, marital status and other factors.
But Cromling said it's worth the effort: The average refund for
taxpayers claiming the earned income credit is running at just over
$2,000 this year. That compares with a national average refund of