CPAs recommend simplifying earned income tax credit.

The Republican majority has stepped up pressure to find ways to revamp the tax system, cut social spending and reduce government, and CPAs are making contributions to the debate. At a Senate Governmental Affairs Committee hearing in April, scrutiny focused on the earned income tax credit (EITC)--A tax credit enacted in 1975 to offset the impact of Social Security taxes on low-income workers and encourage low-income individuals to seek employment rather than welfare.

According to the Internal Revenue Service, the EITC rule affects 15 million individual taxpayers. IRS commissioner Margaret Milner Richardson told the committee that an IRS study of 1000 returns with the EITC filed electronically through january 28, 1994, showed that 35% to 45% of the returns contained errors. Fifty percent of those errors are suspected to be intentional. Richardson said that compliance initiatives for the 1995 filing season, including electronic Social Security number verification, should result in better EITC compliance.

But Deborah Walker, chair of the American Institute of CPAs tax executive committee, told the Senate committee that poor EITC compliance was the result of complicated eligibility tests and "a maze of worksheets." She said EITC rules had been changed 10 times since 1976 and that the frequent changes contributed greatly to the EITC's high error and noncompliance rates. "We strongly urge the committee and Congress to rewrite the EITC rules to be understandable and usable by the taxpayers that this provision is intended to benefit--low income wage earners," Walker said. Some of Walker's recommendations to rewrite the EITC rules include

* Simplifying the definitions and calculations.

* Defining earned income as taxable wages and self-employment income.

* Modifying the "qualifying child" rules. For example, replacing the definition with the existing dependent child definition.

* Combining and expanding the denial provisions.

* Modifying the EITC table or providing a percentage rate in its place.

Walker supported all efforts to eliminate EITC problems to ensure that "those who legally qualify for the EITC receive it and can claim the benefits in a simplified and easy process."

A report by the U.S. General Accounting Office suggested the IRS revamp the EITC eligibility criteria. The GAO said current criteria did not consider all of a recipient's resources, and that changing the criteria to test for taxpayers' wealth could yield between $318 million and $971 million in savings for 1997. The GAO did suggest that recent steps taken by the IRS to detect and prevent erroneous payments to taxpayers claiming the EITC could "improve the overall level of EITC compliance."

Cost of Earned Income Tax
Credit Program

Program costs for the EITC have increased
dramatically as Congress has
broadened its coverage and increased
the available credit.
             Millions of dollars
Year                      (1994)
1988                      $4,433
1990                       6,856
1992                      11,127
1994                      15,010

Projected:
1996                      24,550
1998                      27,241
2000                      28,048
Source: The U.S. General Accounting Office,
Fiscal year estimates from the President's
1990, 1992, 1994 and 1996 budgets.