Republican presidential candidate Mitt Romney may have distanced himself from his recorded comments about the “47 percent” of Americans who pay no income taxes, but the media certainly hasn’t strayed. Every word of Romney’s economic plan has been under close scrutiny. For example, Romney is proposing to eliminate certain tax breaks.
Many support cutting the Alternative Minimum Tax, which gives tax relief to corporations. But the same proposals that ultimately increase corporate taxes also recommend ending the economic stimulus’ expansion of the Earned Income Tax credit, as well as others which assist working families.
Republican aides in Congress advocate reducing the percentage of the population eligible for the EITC, a number that increased the past four years. Under the Obama economic stimulus plan, a marriage penalty was minimized and more taxpayers qualified for the credit. The stimulus’ expansion is set to expire at the end of this year.
Families or singles can claim the EITC if their earnings are less than $50,000 each year, with exact income thresholds depending on how many children are living in the home. Taxpayers who qualify can earn a tax credit as much as $5,891. The EITC is unique, however, because it not only reduces owed taxes, but can result in a refund—exceeding even payroll taxes already refunded for the year. The precise amount of EITC is based on both total income earned as well as qualifying children. Last year, the average credit was about $2,100.
According to the IRS, in 2011 almost 27 million taxpayers received about $59.5 billion by claiming the EITC. Therefore, by that figure alone, allowing the credit’s expansion to expire may not raise taxes on 47 percent, but it would certainly impact nearly 12 percent—the most financially-strapped of the working population. According to the Center on Budget and Policy Priorities, payments linked to the EITC assisted approximately 6.3 million people—half children—escape poverty in 2010.
“For people earning minimum wage, having enough money to get by can be really problematic,” Michael Saltsman, a research fellow at the Employment Policy Institute, told CNN. “This credit is not only reducing poverty, but stimulating employment, so there’s definitely an increased effort on the part of the government to let people know it’s out there.”
The White House 2013 budget plan proposed making the expansions permanent. House Democrats are pushing for the same strategy.
The fate of the tax credit will not be decided until after the Nov. 6 election, but will need to be made prior to the Dec. 31 deadline, part of the notorious “fiscal cliff.”
Even as Democrats push to save the credit which has assisted so many low-income, working families during tough economic times, the Government Accountability Office estimates about $15.2 billion in invalid EITC payments have been issued over time. The U.S. Treasury released a report last month stating refundable credits, such as the IETC, are vulnerable to fraud and errors can cost billions in taxpayer dollars.
Because the refundable tax credits can reduce a taxpayer’s liability to a negative amount, providing a payment, rather than a refund, be made to the worker, the EITC, as well as the First-Time Homebuyer Credit, the Additional Child Credit, and others, are “vulnerable to erroneous claims and fraudulent tax schemes.”
In fact, between 2006 and 2009, taxpayers paid $2.3 billion in fraudulent or erroneous tax credits. As of 2011, the IRS had only recovered $1.3 billion, most through future refund offsets.
According to the report, of recovered claims, the IRS spent an average of 49 weeks to invalidate the refunded credit. Then, it took on average an additional 27 weeks to collect the funds.
Treasury Inspector General for Tax Administration J. Russell George, who conducted the report, said since recovery rates are so low the IRS must take takes to identify questionable credits and validate them before refunds are issued. He recommends the IRS implement a tax account alert which would indicate taxpayers who have claimed erroneous refundable credits in the past. Then, all taxpayers with such an indicator would be required—for a certain period of time—to verify their tax return with documentation before future refundable credits get processed.
The IRS agreed it should take action on the matter; the agency announced it plans to utilize a pre-refund filter to consider historical taxpayer information, rather than TIGTA’s recommendation. TIGTA, according to the Treasury report, says the IRS plan is “a viable alternative.”
“As noted, we are in the process of refining the filter process to address many of the issues raised in the report,” Peggy Bogadi, commissioner of IRS Wage and Investment Division, wrote in response to the report. “Our experience with the EITC indicates that the filtering process applied during initial return processing results in a better selection of claims to be referred for pre-refund examination when compared with relying solely on the presence or absence of the EITC ban indicator.”