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Article Excerpt
Abstract--We examine EITC compliance using a unique dataset combining income tax returns, Unemployment Insurance data, state child support data, and data collected by hand from Wisconsin courthouses. A substantial number of EITC claims are made by adults listed as the court-ordered payor or by adults not identified in child support data. Simple calculations extrapolating Wisconsin's experience to the rest of the country suggest that as much as $1.7 billion of noncompliant EITC claims could possibly be identified. We conclude that the child support case registry can be an effective tool for identifying a subset of inappropriate EITC claims prior to payment.
INTRODUCTION
The Earned Income Tax Credit (EITC) is the largest cash or near-cash U.S. antipoverty program. Taxpayers in both the federal and Wisconsin tax systems gain access to the EITC by having incomes below certain thresholds and by filing a tax return that reports an EITC-qualifying child. (1) A child must live with the taxpayer more than half the year to be EITC-qualifying.
A large fraction of EITC payments appear to go to taxpayers who are not eligible for the credit. The most recent study of EITC noncompliance examined returns filed in 2000 (for tax year 1999) and found that of the $31.3 billion claimed in EITC, between $8.5 and $9.9 billion, or 27.0 to 31.7 percent of the total, exceeded the amount to which taxpayers were eligible (Internal Revenue Service, 2002a).
Of the errors the IRS was able to classify, roughly one-half arose because of qualifying-child errors and one-half of those (or 25 percent of the total) arose because the child claimed was not the taxpayer's qualifying child. (2) Of these errors, the most common problem was that EITC-qualifying children failed to live for at least six months with the taxpayer claiming the child. Mistakes of this type can run the gamut from innocent taxpayers running afoul of complex IRS rules to fraud. (3)
Tax returns do not collect information on the location of children during the year. Consequently, absent additional information, the IRS has little ability to scrutinize EITC-qualifying child claims before the EITC is paid out. Given this problem, in the 1997 budget bill the Clinton Administration and Congress directed the Secretary of the Treasury and the Secretary of Health and Human Services to use the Federal Case Registry of child support orders (FCR) to improve the accuracy of the child support and tax systems. The logic underlying this provision was that the case registry identifies child support payees and child support payors. (4) It was further assumed that the payee generally has physical custody of the child. If this assumption is true, then EITC claims made by someone other than the child support payee would be noncompliant since they would not meet the "residence test" that requires an EITC qualifying child to live with the claimant for more than half the year. The 2001 tax bill (Economic Growth and Tax Relief Reconciliation Act) pushed this provision further, giving the IRS authority to apply "math error procedures" to tax returns claiming the EITC if, according to the FCR, the taxpayer is listed as being the court-ordered child support payor of the EITC-qualifying child. (5)
Since a large fraction of EITC errors arise in cases where someone other than the person living with the child is claiming the child for EITC purposes, the FCR is a potentially promising tool that could allow the IRS to identify a substantial number of noncompliant cases. Alternatively, the data in the registry could be flawed; living arrangements could be fluid, making the FCR data insufficiently up to date; or it could be infeasible or inefficient (from a cost-benefit standpoint) to use FCR data during processing to stop questionable refund claims before money is paid out. Once inappropriate EITC claims are paid out, it is very difficult to get the money back.
Eleven years after the IRS was granted access to the FCR, we know little about its potential for detecting tax noncompliance or for better understanding other tax-related issues. More generally, except for the use of Unemployment Insurance data to measure incomes in many contexts, there are few examples where administrative data from one program have been used to address key policy issues in complementary programs.
Through special arrangements made with the Internal Revenue Service and the state of Wisconsin, we matched (by social security number) all federal individual income tax returns filed with Wisconsin addresses in 1999 and 2000 to state Unemployment Insurance data (which provide information on earnings), the state child support case registry (the Wisconsin portion of the FCR), and a special sample of child support cases collected by hand from selected country courthouses in Wisconsin, which provide additional evidence on the quality of the state child support case registry.
We use these unique data to examine a central EITC compliance issue. We take the sample of all EITC claimants in Wisconsin with children in 2000 (and 1999), matched to the child support records, and document the frequency with which an EITC--qualifying child is claimed by someone other than the child support payee. In cases where someone other than the child support payee uses the EITC-qualifying child, we also calculate the value of the EITC that they forsake had they used the child to claim the credit and compare that amount to the value of the EITC that was actually claimed to see whether behavior is consistent with some taxpayers allocating children in a refund-maximizing way. Given relatively low audit rates in the tax system, taxpayers may correctly perceive that they have some discretion over the information reported on their tax returns. We conclude with a discussion of the reliability of the state case registry, making use of a unique sample, collected by hand from county courthouses across Wisconsin, that has more detail than the case registry on the physical placement of children covered in child support orders. These hand-collected data allow us to identify cases where the case registry appears to provide inaccurate evidence of physical residence. Our results for 1999 and 2000 are nearly identical, so for brevity, we report only the results for calendar year 2000 here. Complete results are available on request.
BACKGROUND
In 2000, taxpayers with two or more children could receive a federal EITC of 40 percent of income up to $9,720, for a maximum credit of $3,888. Taxpayers (with two or more children) with earnings between $9,720 and $12,690 receive the maximum credit. Their credit is reduced by 21.06 percent of earnings between $12,690 and $31,152. The EITC for taxpayers with one child was 34 percent of income up to $6,920, for a maximum credit of $2,353. One-child taxpayers with earnings between $6,920 and $12,690 receive the maximum credit. Their credit is reduced by 15.98 percent of earnings between $12,690 and $27,413. A small EITC with a maximum value of $353 was available to childless taxpayers, but we focus on taxpayers with children in this paper. See Scholz (2007) for more on tax policies for childless workers.
The Wisconsin Case Registry of Child Support Orders
The Wisconsin Case Registry of child support orders contains the information needed to administer the child support system. It typically identifies a child, a court-ordered recipient of child support, and a court-ordered payor of child support. The court-ordered recipient...
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