An earlier version of this post originally appeared on the Forbes PT site on August 27, 2015.
There has been a fair bit of attention in the last week or so regarding language in an appropriations bill relating to self-prepared EITC returns. The language in the bill addresses the challenges IRS faces in administering the EITC, and puts the spotlight on self-preparing EITC claimants who currently have no obligation to submit additional supporting information with tax returns. In particular, the language in the bill requires that starting in 2016 claimants would have to submit essentially the same information with self-prepared returns that paid preparers submit with Form 8867, the preparer due diligence checklist. There was similar language in an appropriations bill last year.
Critics have pointed out all sorts of problems with this legislative proposal, including that it will potentially reduce the numbers of people submitting returns claiming the EITC. At a minimum the change may needlessly drive up the costs, in terms of time, for those who self prepare. It may cause these individuals to switch from self preparation to using paid preparers which will benefit chain preparers. See, for example, Bob Greenstein at CBPP Senate Bill Would Boost Burdens Costs to Claim Working Family Tax Credits and the Vox post H&R Block snuck language into a Senate bill to make taxes more confusing for poor people.
In this post I will give some context and highlight the current controversy. In addition, at the end of the post, I include a statement we received on the controversy from Theresa Pattara, Senior Director, Public Policy & Advocacy at H&R Block.
What is going on? Congress is taking aim at error rates in EITC claims but focusing this time only on those which are self-prepared.
As I discussed in EITC Snapshot: Overclaims and Commercial Preparer Usage, there has been a steady decline in the reported use of commercial preparers for EITC claimants over the past few years. In addition, as I discuss in IRS Issues New Report on EITC Overclaims (Title A), recent IRS studies show similar overclaim rates between preparers and self-prepared returns, though quite a difference in overclaim rates depending on the type of preparer, with unenrolled preparers leading in submitting EITC returns with overclaims and volunteer groups like VITA submitting the fewest overclaim returns (see Table 9 of the EITC compliance study at page 26 that was the subject of my IRS Issues New Report on EITC Overclaims post).
IRS and Congress in the past few years have been focusing much more intensely on preparers and their role in facilitating or intentionally goosing EITC refunds, though over the years claimants themselves have received all sorts of attention in the form of draconian EITC bans for intentional or reckless claims (an issue I discussed a few times, including The Ban on Claiming the EITC: A Problematic Penalty) and excessively long agency freezes of suspect refunds. In particular, with respect to preparers, Congress has imposed special due diligence rules on EITC preparers (see Preparers and Due Diligence), IRS has targeted EITC preparers with special audits and IRS has fought to increase oversight over unenrolled preparers through its ill-fated mandatory testing regime struck down in Loving and its more recent voluntary plan.
Congress now seems to be leveling its playing field of scrutiny and returning to focus on the EITC claimants themselves rather than those preparing the returns. The bill does nothing to advance the IRS initiative to regulate return preparers. The controversy in this approach, aside from the failure to address that the statistically largest problem in this area concerns unenrolled preparers, stems over the following language in the Appropriations bill (which I have bolded) that ties the increased requirements on self-prepared returns to the requirements that preparers have to satisfy to meet their due diligence obligations:
The Department of Treasury reported, in its most recent financial statements, that the EITC improper payment rate, comprised of both intentional fraud and unintentional filing errors, was nearly $18,000,000,000 for fiscal year 2014. In an effort to reduce intentional fraud and unintentional filing errors in refundable credit programs intended to help taxpayers, the Department of the Treasury is directed to ensure that the same eligibility questions are being asked of taxpayers whether they are preparing their returns with a paid tax preparer or via do-it-yourself methods such as paper forms, preparation software, or online preparation tools. Implementing uniform eligibility questions for refundable credit filers is a common sense step that will help alleviate confusion over eligibility and better establish qualification for these credits. The Department of the Treasury shall ensure that all EITC eligibility questions included on Form 8867, such as questions 1 through 19 and the eligibility questions used to meet the requirements of question 24, will be included on the Schedule EIC. The Department of Treasury shall implement this for tax returns filed after January 1, 2016. The Department of Treasury shall ensure that eligibility questions for all other refundable credits, such as the Child Tax Credit, American Opportunity Tax Credit, or the healthcare premium tax credit, are the same for all taxpayers regardless of filing method and that it utilize existing forms for refundable credit due diligence programs instead of creating additional forms or work- sheets as it did with the proposed Form 8967.
Readers with a good memory may recall that last year Intuit’s Chief Tax Officer David Williams wrote a guest post Intuit Chief Tax Officer Says Reducing EITC Errors Shouldn’t Come On Backs Of Poor in PT forcefully arguing that tying the information that taxpayers have to submit with self-prepared returns to preparer’s due diligence requirements was not a good idea. His post was in part a response to my post suggesting that preparer behemoth H&R Block’s proposal to focus on the type of information that self-prepared claimants submit with a return was a good idea, in that questions that are tied to what we know are likely sources of claimant error may in fact drive down overclaim rates by enhancing visibility and increasing the psychological costs of lying when submitting tax returns.
In re-reading my post from last year on the issue, I would be happy to change the title which was H&R Block CEO Asks IRS To Make it Harder to Self-Prepare Tax Returns and Why That is Good for the Tax System. To be sure, I believe that increasing costs and burdens on taxpayers is not in and of itself a good idea. What I do believe is that targeted questions for claimants which are tied to what IRS knows about noncompliance is good tax administration. I also endorse what Mr. Williams suggests in his post, which is that using behavioral economics techniques to improve software and the forms themselves is sound tax policy. I believe that the private sector and the IRS can help create a self-preparing experience that does not necessarily make the process more difficult for claimants but is in fact tethered to the likelihood of increased compliance. That requires a public private partnership and a willingness for all sides to look at the issue and put rhetoric aside. That is not easy, especially in a charged political environment and when considering a loaded issue such as using the tax system to deliver benefits for the working poor and alleviating poverty.
We will keep an eye on this issue. As my PT colleague Keith Fogg notes, it seems that both Block and Intuit have good ideas but Congress is focusing on the disparity between paid preparers who comply with the extra burden placed on preparers, as Block preparers would do, and paid preparers who ignore the extra requirements as unenrolled and ghost preparers are more likely do. If the problem of unenrolled and ghost preparers continues to persist, a better idea might be to look for solutions to that problem than to try to level the playing field between the two more compliant groups.
Below is a statement we received on the issue from Theresa Pattara, who is the Senior Director, Public Policy & Advocacy at H&R Block.
During the 2014 extenders debate, Congress weighed expanding and making the EITC and other family friendly tax provisions permanent. However, one of the biggest hurdles to expansion and permanence was the fraud and improper payment rate associated with the EITC and CTC.
To reduce the fraud and improper payments on self-prepared returns, a group of leading software companies, as part of the IRS-Software Developer’s Working Group, made a consensus proposal that the IRS implement changes to the Schedule EIC (not the 8867) to ensure that all taxpayers are subject to the same eligibility (not preparer due diligence) questions. That proposal was offered to staff to consider in addition to preparer due diligence penalties. Once the appropriations report language was made public, the working group sought clarification and correction of the language, but there was not sufficient time to make the corrections as Congress rushed to complete the omnibus appropriations bills at the end of the year.
Both Treasury (in the Greenbook) and Congress (in the Senate Finance Committee extenders bill from last summer) proposed extending the 6695(g) EITC preparer due diligence penalties to the child tax credit and other refundable tax credits. In discussions with both appropriations and tax writing committees on the due diligence proposals, it was explained that, with EITC taxpayers continuing to migrate to do-it-yourself tax preparation methods, the IRS’s efforts to reduce EITC fraud and improper payments were increasingly ineffective because they focused solely on paid preparers.
This year, discussions with congressional staff have continued. In the meantime, the working group has made significant progress working with Treasury and IRS to address the issue.