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IRS Tightening Rules for Earned Income Tax Credit

Auburn, May 9, 2003 --- For some people, qualifying for the Earned Income Tax Credit will not be as easy as in the past, thanks to a series of new Internal Revenue Service guidelines aimed at cracking down on fraud.

The new guidelines, according to a recent New York Times article, are aimed at reducing the estimated $6.5 to $10 billion lost each year because of improper payments. 

“IRS officials claim the new guidelines are necessary because efforts to correct these payouts through after-the-fact audits have not worked,” says Barbara Mobley, an Alabama Cooperative Extension System family programs specialist.

The new guidelines, which are expected to go into effect in July, ultimately will affect more than 4 million people whom the IRS categorizes as “high error claimants.” This represents roughly a fifth of the 19 million Americans who claim these tax credits.

In July, roughly 45 thousand taxpayers who fit into this category will be asked to provide proof of their eligibility within six months. The program will encompass roughly 2 million claimants by 2004, ultimately reaching some 4 million people within the next few years.

High error claimants will include all claimants except married taxpayers filing joint returns and single mothers. Those falling under this category will include fathers with sole custody of their children and grandparents, aunts and uncles, foster parents and others.

They will have to provide papers proving that their claims of guardianship are accurate and that the children lived with them for at least six months of the year.

Only a few types of evidence will be acceptable.

In some cases, for example, proving their relationship to children will require marriage certificates.

Some will even be required to document marriages that took place abroad. In some instances, claimants even will have to document proof of great-grandparents and even great-great grandparents.

To provide proof of where a child lived, claimants also will have to provide school, medical records, leases or similar documentation showing both the applicant’s and child’s name, along with their joint address. In cases where these can’t be provided, they will be required to produce a sworn affidavit from a school official, employer or other similar person claiming personal knowledge of the claimant’s guardianship. 

The new requirements are considered more rigid than those required to apply for food stamps, which require only statements from neighbors, building managers, and others likely to be familiar with the applicant’s living arrangements. Moreover, these individuals are not required to swear under penalty of prosecution for perjury.

The new IRS requirements have sparked criticism among some supporters of the Earned Income Tax Credit who believe the rules unfairly single out working poor rather more egregious violators.

“Critics of the new guidelines argue that the same IRS study undertaken to measure tax fraud reveal that the biggest tax dodgers were people running their own businesses,” Mobley says.

“Likewise, a study by Harvard University economist Hihir Desai revealed that corporations managed to sidestep as much as $54 billion by hiding about $155 billion in profits in tax shelters.”

The Earned Income Tax Credit was enacted in 1975 and expanded several times. Conservative and liberal legislators alike have been credited with lifting large numbers of people out of poverty.  The credit is designed to provide an offset to Social Security taxes that low-income workers already have paid along with a credit for their earnings.

The average tax credit for households with children in 2001 was $1,976, while the average food-stamp benefit for the same category of households was $2,904. 

(Source: Barbara Mobley, Extension Family Programs Specialist, 334-844-2225.)

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