The downsized EITC certification pilot program.

In 2003, the IRS announced plans to undertake an earned income tax credit (EITC) certification program, targeting nearly 45,000 taxpayers in 2003 and 2 million in 2004; see Bauman, Tax Practice & Procedures, "EIC Verification Initiatives," TTA, July 2003, p. 427. However, in August 2003, the IRS announced (IR 2003-97) that it would downsize and revise its original EITC precertification program. As a result, it:

1. Delayed the program's launch date to the 2004 filing season, sending out audit notices during the last two weeks of December 2003.

2. Reduced the pilot sample size of "high-risk" taxpayers from 45,000 to 25,000 for the 2004 filing season. According to the Service, the reduced sample size was adequate to perform statistical analysis and provide an accurate assessment of the program's future course.

3. Agreed to direct additional resources to EITC outreach efforts.

4. Changed its view of the project from a precertification program to a test pilot, agreeing to seek outside expertise to validate sample selection and data. Although it remains unclear how the pilot's "success" will be measured, the IRS stated that it will carefully assess the pilot's results and performance before deciding on how to proceed with the program.

5. Introduced a revised Form 8836, Qualifying Children Residency Statement, to conduct the pilot certification. Form 8836 is required to be filed with the taxpayer's 2003 tax return, but cannot be filed electronically. The EITC portion of the taxpayer's refund is held pending review and acceptance of the taxpayer's supporting documentation of child residency.

Preliminary Findings

As of May 5, 2004, the IRS revealed that:

* Nearly 20% of the taxpayers who asked to participate in the pilot study failed to claim the EITC.

* Roughly 65% of the 25,000 pilot taxpayers had filed their returns and claimed the credit, while 15% had yet to file.

* Of the returns received, about two-thirds were still being processed (i.e., taxpayers failed to send any documentation, sent inadequate documentation or sent documentation separately from the return); 20% of taxpayers had their returns processed and received most--if not all--of their refund.

* The pilot program's subjects were offered three ways to verify that a child that they were claiming actually lived with them for more than half of 2003. Forty percent sent in documents showing that the child had lived with them for six months or more; 20% submitted official letters from IRS-approved sources acknowledging that the child had lived with them for at least half a year; the remaining 40% used the pilot program's affidavit options; see Kenney, Tax Analysts, "Early Results of EITC Child Certification Pilot Study Released" (5/5/04).

Processing Procedure

For taxpayers who participated in the certification pilot program for the 2004 filing season, the Service will not send a balance-due notice until the entire verification process is completed and all deficiency procedures are followed. If a taxpayer does not agree with the IRS's decision, he or she can exercise appeal rights. In addition, by calling [phone], taxpayers or tax advisers can speak to an IRS assistor in the EITC certification pilot, who can discuss the Service's decision on the taxpayer's EITC claim and residency documentation.

CHRISTINE C. BAUMAN, PH.D., CPA, FACULTY DIRECTOR OF THE LOW INCOME TAXPAYER CLINIC, UNIVERSITY OF WISCONSIN--MILWAUKEE, MILWAUKEE, WI