THE EARNED-income tax credit is one of the government’s most effective poverty-fighting, work-encouraging tools. The program pays low-income employees a wage supplement, in the form of a tax credit, that can be worth more than $6,000 a year to a family with three or more children. The EITC has offset higher Social Security taxes and the minimum wage’s erosion by inflation in recent years.
The tax credit’s Achilles’ heel, however, is implementation. As the program has expanded, it has become more complex; the eligibility criteria related to proving custody over children are notoriously difficult to parse and all too easy to manipulate. When you combine that with EITC beneficiaries’ lack of time, resources and expertise, you get between $11.6 billion and $13.6 billion in inaccurate payments in 2012, according to the Treasury Department’s inspector general. Most of that was overpayment, though there is evidence that the program’s complexity also deters some eligible workers from applying.
Many who qualify turn to paid tax preparers for help, only to find that their troubles have just begun. Most preparers are honest and try their best; the market is unregulated, however, so poorly qualified or fraudulent freelancers abound. Typically, fly-by-night preparers charge a contingency fee, giving them an incentive to inflate the EITC — for which the client is ultimately answerable to the Internal Revenue Service, as testimony Tuesday before the Senate Finance Committee revealed. Both Congress and the IRS have been aware of the issue for years; in 2011, the IRS introduced regulations that would have required preparers to register and meet minimum qualifications, but federal courts struck down that well-intentioned rule. The most recent ruling came in February from the U.S. Court of Appeals for the D.C. Circuit, which upheld a finding that the regulations lacked sufficient basis in law.
That prompted Finance Committee Chairman Ron Wyden (D-Ore.) to hold Tuesday’s hearing in preparation for introducing a measure to authorize stronger regulations. President Obama supports the concept. Foes of preparer certification suggest that free-market competition will weed out bad actors. But this ignores the fact that taxpayers are ultimately responsible for preparers’ errors or omissions — and that choosing a different preparer next year is a poor remedy for the money an incompetent or dishonest one might have cost you this year.
Surely if Republicans and Democrats can agree on anything, it would be ensuring that the EITC pays exactly what the law requires — no more and no less.