H&R Block Wants EITC Precertification Pilot Program Delayed

To Department of the Treasury and IRS:

[1] As the preparers of one in seven individual income tax returns and one in four Earned Income Tax Credit claims, H&R Block plays an important role in ensuring eligible taxpayers obtain the appropriate credits to which they are entitled in compliance with applicable rules.

[2] We fully support four of the five parts of the IRS EITC initiative announced June 13, including speeding and improving EITC examinations, reducing burdens on taxpayers and improving the quality of communications, increasing outreach efforts to encourage eligible taxpayers to claim the EITC, and focusing compliance efforts on taxpayers who are ineligible because their incomes disqualify them.

[3] As we stated in our May 19, 2003 letter to Commissioner Everson, however, we remain concerned about the fifth provision, a pilot program to certify qualifying child residency eligibility for high-risk claimants, starting in August 2003. Because of the complications and burdens taxpayers will experience and we recommend that implementation be delayed until 2004.

[4] Delaying implementation will permit adequate consideration of the comments and concerns of the public and IRS stakeholders and lead to an improved, less burdensome, and more workable program. We also urge you to evaluate fully the precertification pilot and its impact on participation as well as compliance before advancing to precertification of 2-5 million more taxpayers in subsequent years.

[5] Since nearly 70% of EITC recipients rely on paid tax return preparers, the role of such preparers and of volunteers in precertification this summer and during the coming tax filing season still needs to be clarified. At present, many of those who receive precertification notices will be unable to secure competent assistance because the IRS has not provided adequate guidance on this issue and tax professionals may lack needed information and training. Relying only on the resources of the IRS and volunteers is not sufficient.

[6] The IRS notice asks us initially for comment on the June 12, 2003 draft of Form 8836. Those detailed comments follow our views on the five main questions raised in the Federal Register notice.

Comments on Questions Requested

[7] 1. Types of Information and Documentation. Given the difficulties taxpayers are likely to face in obtaining records or documents validating residency of qualifying children, reliance on third-party verification should be encouraged and eased by broadening the range of qualified third parties and adopting less intimidating language regarding their responsibilities for truthfulness. The sources of third-party verification identified on the form should be broadened to include neighbors, relatives other than spouses or dependents, pharmacists, public officials, bank officials, insurance agents, and homeless shelter operators who have actual knowledge of residency. The challenges of obtaining documentation described on the form are discussed below.

[8] 2. Simplifying or Clarifying Form 8836. Simplification would be facilitated by convening a workshop of tax practitioners, experts in drafting plain English forms, and low- income taxpayer advocates so multiple perspectives and skills can be enlisted. That interactive process is likely to be more productive than the relying solely on the notice and comment process.

[9] As our comments below detail, space in Part II should be expanded to allow qualification of additional children and clarification of how to determine which children to pre-certify; Part IV should include a broader list of qualified third-party verifiers; the specific month provisions should be simplified to include "six months or more;" the term "affidavit" should be replaced by "verification;" and "penalties of perjury" should be replaced by less intimidating language. For clarity, the instructions should provide more information rather than refer taxpayers to Publication 596 (53 pages), although it may be a useful backup.

[10] Importantly, information should be provided on when and how the IRS will let the taxpayer know if he or she has met the residency test. Mention should be made that assistance can be received from "a professional tax return preparer" in addition to information on IRS Taxpayer Assistance Centers, the Taxpayer Advocate Service, the IRS Web site, and an IRS 800 telephone number, since nearly 70% of EITC recipients use paid preparers. Additional clarity is needed for the instructions on circumstances for filing more than one Form 8836, and for providing information on more than two qualifying children. The estimates for the amount of time needed for recordkeeping and completing the form seem not to include the time required to obtain documents or third-party verification, which can be lengthy. Other suggestions are detailed below.

[11] 3. Outreach, Incentives, Messages. To encourage precertification, the IRS should emphasize avoiding delays in obtaining a tax refund. Speed in receiving a refund, including the EIC portion, is a compelling motivator for millions of taxpayers who rely on their tax refunds to meet food, medical, utility, and rent expenses and to pay overdue bills. IRS's cover letter and information accompanying the form should explain the reasons for precertification to ease apprehensions and to clarify consequences -- benefits of compliance and costs of unresponsiveness. Multiple channels of communication should be used to reinforce the message -- IRS letters, public service announcements, published notices, media releases, and meaningful cooperation with IRS stakeholders (including professional tax return preparers who are uncertain as to their role in the program). It is important that the IRS make information available to taxpayers and, with the approval of those taxpayers to their return preparers, about who has been asked to pre-certify and the status of their certification to improve compliance and reduce refund delays. We would be happy to volunteer assistance in designing an information campaign.

[12] 4. Outreach and Increased EIC Participation. Multiple messages -- on precertification and on EIC participation generally -- can be helpful if clearly presented. The IRS should convene a task force including tax professionals, community leaders, state and local officials, nonprofit and foundation executives, and others interested in expanding EIC participation to work on this. H&R Block in the past has distributed IRS public service announcements encouraging EIC participation and it participates in some city EIC outreach campaigns. We are considering additional activities and welcome more cooperation with the IRS.

[13] 5. Pilot Evaluation. Results of the pilot should be fully analyzed before the program is rolled out to a larger population. Factors should include:

Comments on Records and Document Requirements

[15] 1. The time that a taxpayer and a child are temporarily separated due to military service or juvenile detention is counted toward the residency test. The types of documents that can be used to report such periods should be identified.

[16] 2. Many individuals may believe that the term "official records" used on the form and in the instructions refers to government documents. Although examples of non-government documents are provided (child-care records, lease, and pay stub), omitting the word "official" could reduce confusion.

[17] 3. The instructions state that taxpayers may provide a copy of an official record. The instructions should emphasize that taxpayers should not send originals.

[18] 4. The instructions state that documents must clearly show several items including:

[20] If all of these types of information are indeed required on each document, the instructions should include examples of acceptable methods of incorporating the additional information. If the only acceptable method of incorporating such information is a cover letter from the organization, this should be clearly stated.

[21] 5. The instructions should include examples of acceptable combinations of documents. For example, a lease or utility bill might show that the taxpayer lived at a specific address during a specific period of time without proving that a particular child lived there at the same time. A third party might verify that a particular child lived with the taxpayer during the period the taxpayer lived at that address, but might not remember the dates. In this case, the lease or utility bill plus the third party's statement could show that the child lived with the taxpayer during the specific dates in the lease, and thus together constitute sufficient evidence of residency.

[22] 6. School years typically run from September to June of the following year. As a result, a single year of school records will not provide documentation for a sufficient period of time to meet the residency test. The instructions should specifically address this issue by explaining the need to provide records for two school years.

Comments on Third-Party Affidavits

[23] 1. The form lists nine types of third parties who may provide affidavits. This list, however, excludes some potentially important validators of living arrangements. The form should include a place for "Other" types of third parties. For example, since taxpayers who live in homeless shelters may qualify for the EIC, the instructions should include operators of such shelters as third parties who may submit affidavits.

[24] 2. The treatment of neighbors and relatives on the form is problematic. They should be considered appropriate validators of residence. Neighbors and relatives are frequently the people with the most accurate information about living arrangements. If such persons are not allowed to provide documentation, many taxpayers will be unable to provide acceptable proof of residency.

[25] For example, the draft form excludes child-care providers who are also neighbors or relatives from the list of third parties who may provide documentation. Neighbors and relatives are not mentioned in any other category. This seems to imply that neighbors and relatives who are landlords or employers are somehow more trustworthy than neighbors or relatives who care for children. This distinction does not seem to have any basis in fact.

[26] If, notwithstanding our view, the IRS decides to bar neighbors and relatives from validating residence, the instructions should be modified to make this point more clearly. In any case, the terms "neighbor" and "relative" should be defined. The lack of definition will add to the difficulties facing taxpayers who must complete Form 8836.

[27] 3. In the affidavit section of the form, third parties attest that one or both children lived with the taxpayer for a specific period of time at a specific address. The instructions should clarify whether separate affidavits are required for each separate address and/or for non-consecutive periods of time.

[28] 4. The affidavit requires third parties to attest under penalties of perjury that the listed dates and places are correct. Third parties who might be willing to attest that someone has lived in a certain place "since last summer" or "until after Thanksgiving" may be unwilling to attest to anything more specific because of a fear of perjury penalties. A better approach would be language explaining that third parties are responsible for the truthfulness of their statements.

Comments on Amending Form 8836 and Changes to Qualified Children

[29] 1. There should be provisions for amending Form 8836. The instructions should discuss when and how such amendments may be made. If certification is denied for one child, it should be possible to attempt certification for another qualifying child.

[30] 2. If taxpayers are permitted to certify only two children, they should be allowed later to submit amended forms with their tax return to reflect changes. The form has space for two children and the instructions state, "Do not provide information about more than two qualifying children. You need only two qualifying children to claim the maximum EIC." But this limitation seems to ignore new EIC rules that permit taxpayers to choose which person claims a particular qualifying child.

[31] Example: Al lives with his two daughters (Barbara and Carol) and their children. Barbara and Carol each have two qualifying children. All four of his grandchildren are qualifying children for Al. Al and Barbara each earn $12,000 per year. Carol earns $25,000. Al receives Form 8836. He consults a tax adviser who tells him that Al should claim the EIC using Carol's children and Barbara should claim the EIC for her own children. Using the 2002 EIC tables, the family would receive $8,280 of EIC. Therefore, Al lists Carol's children on his Form 8836 and provides necessary documentation.

[32] In December, Barbara marries Ken who earns $60,000 per year. Barbara is no longer eligible for the EIC. Al pre-certified Carol's children. He was not allowed to pre-certify more than two children. As a result, either Al or Carol could claim the EIC for a maximum of $4,140. If Al had been allowed to pre-certify all four of his grandchildren, he could claim a credit of $4,140 using Barbara's children, and Carol could claim $1,717 using her own children.

[33] The limitation on the number of children that can be pre- certified could cost Al and his family $1,717.

Comments on Other Procedural and Preparation Issues

1. Taxpayers should have a right to check on the status of their EITC precertification -- whether the documentation has been received and whether the claim has been approved or rejected. The toll-free telephone number listed in the Form instructions for assistance (1- 800-294-2723) should have such information available, as should the www.irs.gov Web site. Given a December 2003 precertification filing deadline and the 2003 tax return filing period immediately following, this information is essential to avoid confusion, added complexity, excessive paperwork, and taxpayer burden.

2. The IRS, with the taxpayer's consent, should provide electronic information to electronic tax return filers or to Electronic Return Originators (EROs) to alert taxpayers that IRS records show a precertification notice was issued but precertification materials had not been received, or that they had been received and rejected. The taxpayer should be able to file his or her tax return despite the notice, but tax professionals would be able to assist taxpayers more quickly in bringing themselves into compliance. The electronic indicator could be similar to a reject code or status indicator. EROs now receive similar information. For example, Error Reject Code 600 provides that, "IRS Master File indicates that the taxpayer must file Form 8862 to Claim Earned Income Credit after disallowance. Form 8862 is missing from the tax return and it is required." And Error Reject Code 606 provides that, "IRS Master File indicates that the taxpayer is not allowed to claim the Earned Income Credit for this tax year." A similar indication that "A 'Qualifying Children Residency Statement' (Form 8836) is required but has not been received." would allow practitioners to assist in managing taxpayer expectations, expediting compliance, and enabling taxpayers to receive more promptly refunds to which they are entitled.

3. It should be made clear that completed forms and documents may be faxed to the IRS as well as sent by mail.

4. Consideration should be given to having EROs file Form 8836 electronically and having EROs retain the records or affidavits as Form 8453 signature documents are now retained.

5. The form or a cover letter should include information on options and remedies in case the taxpayer disagrees with an adverse IRS precertification decision.

6. The materials sent to taxpayers should include clarification of the opportunity and consequences of two taxpayers precertifying the same child or children and then making a choice at the time of filing their tax return as to which taxpayer actually claims the qualifying child or children.

7. While the draft Form 8836 indicates that taxpayers who do not receive a precertification notice should not file it, the IRS should clarify whether taxpayers who nonetheless file the form can thereby improve their chances or speed of EITC approval in case of examination. The consequences of such voluntary filing should be clear.

[34] We hope efforts can be made to improve both Form 8836 and the process by which EITC compliance programs are developed by greater inclusion of low-income advocates, the public, and the professional tax preparation community. We share a strong commitment to improving compliance, minimizing taxpayer burden, and ensuring maximum EITC participation by qualified claimants.