U.S. Refundable Credits: The Taxing Realities of Being Poor

Leslie Book

Abstract


This paper looks at the American experience in using tax law to deliver benefits to low and moderate-wage workers. First examining two recent cases in which individuals improperly claimed the earned income tax credit, this paper explores some of the challenges to both taxpayers and tax administrators associated with using the tax system to deliver benefits that are dependent on levels of attachment to children and the presence of earned income. The paper then explores two approaches to improve compliance. One approach is a proposal in a recent Heritage Foundation policy briefing recommending that only parents with legal custody of their children should be entitled to receive the earned income tax credit. The state of California initially excluded self-employment income from its definition of earned income in its state earned income tax credit. Both measures fail to reflect characteristics of the lives of the working poor, including a growing reliance on multi-generational living arrangements and shared care of children, a surge in nontraditional employment associated with the gig economy, and a reliance on third parties such as return preparers and tax software providers. Despite the problems with the proposals, they reflect genuine compliance concerns. This paper concludes with recommendations to address those compliance concerns that will likely serve the goal of improving integrity, while also ensuring the law and administration of the law reflects the lives of lower-income Americans who increasingly rely on the tax system to meet basic needs and support their families. As the American tax system is increasingly a key component of the safety net, this paper is especially timely and can assist policymakers who wish to balance improvements in program integrity with a respect for taxpayer rights and achievement of other program goals.

Key Terms

Tax compliance; earned income tax credit; tax credits; self-employment income; return preparers.


Full Text:

PDF

References


Adamson, M. B. (2016). Earned Income Tax Credit: Path Dependence and the Blessing of Undertheorization. Duke Law Journal, 65, 1439. Retrieved from http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=3847&context=dlj

Australian Department of Human Services. (2017, May 11). Family Tax Benefit. Retrieved from https://www.humanservices.gov.au/customer/services/centrelink/family-tax-benefit

Bankman, J., Nass, C., & Slemrod, J. (2015, March 13). Using the “Smart Return” to Reduce Tax Evasion. University of Michigan’s Ross School of Business. Retrieved from http://webuser.bus.umich.edu/jslemrod/Bankman_Nass_Slemrod_Smart_Return.pdf

Beers, T., LoPresti, E., & San Juan, E. (2012). Factors Influencing Voluntary Compliance by Small Businesses: Preliminary Survey Results. 2012 National Taxpayer Advocate Annual Report to Congress, Vol. 2, 1-70.

Beers, T., Wilson, J., Nestor, M., Ibbotson, A., Saldana, J., & LoPresti, E. (2013). Do Accuracy-Related Penalties Improve Future Reporting Compliance by Schedule C Filers? 2013 National Taxpayer Advocate Annual Report to Congress, Vol. 2, 1-13.

Beesley, C. (2013, February 27). Sole Proprietorship – Is this Popular Business Structure Right for You? [Blog post]. Retrieved from https://www.sba.gov/blogs/sole-proprietorship-popular-business-structure-right-you

Boll, K. (2016). Collaborative Tax Regulation: Can Consumers be Engaged as ‘Partners’ in the Regulatory Craft? Journal of Tax Administration, 2, 2. Retrieved from http://jota.website/article/view/104/72

Book, L. (2008, December 31). The Need to Increase Preparer Responsibility, Visibility, and Competence. 2008 National Taxpayer Advocate Annual Report to Congress, Vol. 2, 73-116.

Book, L. (2015, May 10). On Mother’s Day Cowan Case Highlights Unfairness of Family Status Tax Rules. Procedurally Taxing. Retrieved from http://procedurallytaxing.com/on-mothers-day-cowan-case-highlights-unfairness-of-family-status-tax-rules/

Book, L. (2015, December 18). Extenders Bill Gives IRS Additional Powers to Impose Penalties on Preparers and Disallow Refundable Credits. Procedurally Taxing. Retrieved from http://procedurallytaxing.com/extenders-bill-gives-irs-additional-powers-to-impose-penalties-on-preparers-and-disallow-refundable-credits/

Book, L. (2016, April 28). Bureaucratic Oppression and the Tax System. Tax Lawyer, 69, 3. Retrieved from https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=2772322

Braithwaite, V. (2007). Responsive Regulation and Taxation: Introduction, Law & Policy, 29, 3.

Brooks v. Commissioner, 105 T.C.M. (CCH) 1832 (2013). Retrieved from Westlaw Academic database.

California Earned Income Tax Credit, Cal. Rev. & T. Code §17052 (2017).

Cavanagh, S. (2015, February 26). An Analysis of New Census Data on Family Structure, Education, and Income. Council on Contemporary Families. Retrieved from https://contemporaryfamilies.org/family-structure-education-income/

Center on Budget and Policy Priorities. (2016, June 17). Policy Basics: State Earned Income Tax Credits. Retrieved from http://www.cbpp.org/research/state-budget-and-tax/policy-basics-state-earned-income-tax-credits

Cohn, G. (2017, April 26). President Trump Proposed a Massive Tax Cut. Here’s What You Need to Know [Blog post]. Retrieved from https://www.whitehouse.gov/blog/2017/04/26/president-trump-proposed-massive-tax-cut-heres-what-you-need-know

Compromises, 26 C.F.R. §301.7122-1 (2002).

Crandall-Hollick, M. L. (2015, April 9). The Earned Income Tax Credit (EITC): Administrative and Compliance Challenges. Federation of American Scientists. Retrieved from https://fas.org/sgp/crs/misc/R43873.pdf

Crandall-Hollick, M. L. (2018, March 20). The Earned Income Tax Credit (EITC): A Brief Legislative History. Federation of American Scientists. Retrieved from https://fas.org/sgp/crs/misc/R44825.pdf

Curry, J., & Cooper, C. K. (2017, March 28). White House, Brady Send Mixed Signals on Tax Reform Efforts. taxnotes. Retrieved from http://www.taxnotes.com/editors-pick/white-house-brady-send-mixed-signals-tax-reform-efforts

Debot, B., Horton, E., & Marr, C. (2017, March 16). Trump Budget Continues Multi-Year Assault on IRS Funding Despite Mnuchin’s Call for More Resources. Center on Budget and Policy Priorities. Retrieved from http://www.cbpp.org/research/federal-budget/trump-budget-continues-multi-year-assault-on-irs-funding-despite-mnuchins

DeLaney Thomas, K. (2013, August 26). Presumptive Collection: A Prospect Theory Approach to Increasing Small Business Tax Compliance. Tax Law Rev., 67, 111. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2316233

DeLiema, M., Mottola, G., & Deevy, M. (2017, February). Findings from a Pilot Study to Measure Financial Fraud in the United States. Stanford Center on Longevity. Retrieved from http://162.144.124.243/~longevl0/wp-content/uploads/2017/02/SCL-Fraud-Report-Feb-2017_Draft2.pdf

Department for Professional Employees. (2016). Misclassification of Employees as Independent Contractors. Retrieved from http://dpeaflcio.org/programs-publications/issue-fact-sheets/misclassification-of-employees-as-independent-contractors/

Dependent defined, IRC § 152 (2008, October 7).

Desmond, M. (2015, March). Unaffordable America: Poverty, Housing, and Eviction. Institute for Research on Poverty, 22-2015. Retrieved from https://www.irp.wisc.edu/publications/fastfocus/pdfs/FF22-2015.pdf

Drumbl, M. L. (2017, February 15). Beyond Polemics: Poverty, Taxes, and Noncompliance. eJournal of Tax Research, 5, 2. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2761083

Dungan, A. (2016). Sole Proprietorship Return, Tax Year 2014. SOI Bulletin: A Quarterly Statistics of Income Report, 36, 2. Retrieved from https://www.irs.gov/pub/irs-soi/16falbul.pdf

Earned Income Tax Credit & Other Refundable Credits. (2017, April 17). Statistics for Tax Returns with EITC. Retrieved from https://www.eitc.irs.gov/EITC-Central/eitcstats

Entrap. (n.d.). In Merriam-Webster.com. Retrieved from https://www.merriam-webster.com/dictionary/entrap

Entrap. (2014). In OxfordDictionaries.com. Retrieved from http://www.thefreedictionary.com/entraps

Falk, G. (2014, October 22). The Earned Income Tax Credit (EITC): An Overview. Congressional Research Service. Retrieved from https://fas.org/sgp/crs/misc/RL31768.pdf

Freund, S. (2014). Effective Tax Administration Offers in Compromise-Why so Ineffective? Va. Tax Rev. 34, 157. Retrieved from Westlaw Academic database.

Foxx v. U.S., 130 Fed. Cl. 415 (2017). Retrieved from Westlaw Academic database.

Gangl, K., Hofmann, E., Pollai, M., & Kirchler, E. (2012, March 16). The Dynamics of Power and Trust in the “Slippery Slope Framework” and its Impact on the Tax Climate. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2024946

Groseclose v. Bowen, 809 F.2d 502 (8th Cir. 1987). Retrieved from Westlaw Academic database.

Grall, T. (2016, January). Custodial Mothers and Fathers and Their Child Support: 2013. United States Census Bureau. Retrieved from https://www.census.gov/content/dam/Census/library/publications/2016/demo/P60-255.pdf

Hickman, K. E. (2015). Administering the Tax System We Have. Journal of Tax Administration, 1, 1. Retrieved from http://jota.website/article/view/9/17

Holt, S. (2016). The Role of the IRS as a Social Benefit Administrator. American Enterprise Institute. Retrieved from https://www.aei.org/wp-content/uploads/2016/07/The-Role-of-the-IRS.pdf

Hoynes, H., & Rothstein, J. (2016, March). Tax Policy Toward Low-Income Families. The National Bureau of Economic Research. Retrieved from http://www.nber.org/papers/w22080

Internal Revenue Service. (n.d.). Annual Filing Season Program. Retrieved from https://www.irs.gov/tax-professionals/annual-filing-season-program

Internal Revenue Service. (2011, July 12). IRS Identifies 100,000 Prepares Who Failed to Follow New PTIN Rules. Retrieved from https://www.irs.gov/uac/irs-identifies-100-000-preparers-who-failed-to-follow-new-ptin-rules

Internal Revenue Service. (2014, June). IRS Unveils Filing Season Program for Tax Return Preparers, Answers Frequently Asked Questions. Retrieved from https://www.irs.gov/uac/newsroom/irs-unveils-filing-season-program-for-tax-return-preparers-answers-frequently-asked-questions

Internal Revenue Service. (2016). Volunteer Income Tax Assistance (VITA)/Tax Counseling for the Elderly (TCE) Volunteer Assistor’s Test/Retest. Retrieved from https://www.irs.gov/pub/irs-pdf/f6744.pdf

Internal Revenue Service. (2016, April). Tax Gap Estimates for Tax Years 2008-2010. Retrieved from https://www.irs.gov/pub/newsroom/tax%20gap%20estimates%20for%202008%20through%202010.pdf

Internal Revenue Service. (2017, April 4). The Tax Gap. Retrieved from https://www.irs.gov/uac/the-tax-gap

Internal Revenue Service Research, Analysis and Statistics. (2016). Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2008-10. Publication 1415 (Rev 5-2016).

Kidder, R., & McEwen, C. (1989). Taxpayering Behavior in Social Context: A Tentative Typology of Tax Compliance and Noncompliance. Taxpayer Compliance, 2, 46-75.

King, S. (2015, November 23). Sole Proprietors Increasing Their Use of Independent Contractors. SmallBusiness.com. Retrieved from http://smallbusiness.com/trends/contract-labor-proprietors-surging/

Kornhauser, M. E. (2007). Normative and Cognitive Aspects of Tax Compliance: Literature Review and Recommendations for the IRS Regarding Individual Taxpayers. 2007 Annual Report to Congress, Vol. 2, 138-171.

Lederman, L. (2003). The Interplay Between Norms and Enforcement in Tax Compliance. Ohio State Law Journal, 64, 1453. Retrieved from https://www.repository.law.indiana.edu/facpub/490/

Lederman, L. (2010). Reducing Information Gaps to Reduce the Tax Gap: When is Information Reporting Warranted? Fordham Law Review, 78, 4. Retrieved from http://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=4517&context=flr

Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014). Retrieved from Westlaw Academic database.

Maag, E., Peters, H.E., & Edelstein, S. (2016, March 3). Increasing Family Complexity and Volatility: The Difficulty in Determining Child Tax Benefits. Tax Policy Center. Retrieved from http://www.taxpolicycenter.org/publications/increasing-family-complexity-and-volatility-difficulty-determining-child-tax-benefits/full

Marcuss, R., Dubois, A., Risler, M. H., & Leibel, K. (2014, August). Compliance Estimates for the Earned Income Tax Credit Claimed on 2006-2008 Returns. Internal Revenue Service. Retrieved from https://www.irs.gov/pub/irs-soi/EITCComplianceStudyTY2006-2008.pdf

Marr, C., Huang, C. C., Sherman, A., & Debot, B. (2015, October 1). EITC and Child Tax Credit Promote Work, Reduce Poverty, and Support Children’s Development, Research Finds. Center on Budget and Policy Priorities. Retrieved from http://www.cbpp.org/research/federal-tax/eitc-and-child-tax-credit-promote-work-reduce-poverty-and-support-childrens

McBride v. Commissioner, 109 T.C.M. (CCH) 1036 (2015). Retrieved from http://www.ustaxcourt.gov/InOpHistoric/mcbridememo.cohen.TCM.WPD.pdfW

Montialoux, C., & Rothstein, J. (2015, December). The New California Earned Income Tax Credit. Institute for Research on Labor and Employment. Retrieved from http://irle.berkeley.edu/files/2016/IRLE-The-New-California-Earned-Income-Tax-Credit.pdf

Morse, S. C. (2009, March 24). Using Salience and Influence to Narrow the Tax Group. Loyola University Chicago Law Journal, 40, 483. Retrieved from http://www.luc.edu/media/lucedu/law/students/publications/llj/pdfs/Morse.pdf

National Taxpayer Advocate. (2002, December 13). The

National Taxpayer Advocate’s Legislative Recommendations. 2002 Annual Report to Congress, Vol. 1, 156-247.

National Taxpayer Advocate. (2012). 2012 Annual Report to Congress, Vol. 2,

National Taxpayer Advocate. (2013). Most Serious Problems: REGULATION OF RETURN PREPARERS: Taxpayers and Tax Administration Remain Vulnerable to Incompetent and Unscrupulous Return Preparers While the IRS is Enjoined From Continuing its Efforts to Effectively Regulate Unenrolled Preparers. 2013 Annual Report to Congress, Vol. 1, 61-74.

National Taxpayer Advocate. (2014). Most Serious Problems: MATH ERROR NOTICES: The IRS Does Not Clearly Explain Math Error Adjustments, Making it Difficult for Taxpayers to Understand and Exercise Their Rights. 2014 Annual Report to Congress, Vol. 1, 163-171.

National Taxpayer Advocate. (2015a). Areas of Focus: EARNED INCOME TAX CREDIT (EITC): The IRS’s EITC Return Preparer Strategy Does Not Adequately Address the Role of Preparers in EITC Noncompliance. 2015 Annual Report to Congress, Vol. 1, 261-283.

National Taxpayer Advocate. (2015b). Areas of Focus: IRS Steps to Create a Voluntary Program for Tax Return Preparer Standards in Light of the Loving Decision are Well Intentioned, but the Absence of a Meaningful Competency Examination Limits the Program’s Value and Could Mislead Taxpayers. Fiscal Year 2015 Objectives Report to Congress, Vol. 1, 71-78,

National Taxpayer Advocate. (2015c). Legislative Recommendations: MATH ERROR AUTHORITY: Authorize the IRS to Summarily Assess Math and “Correctable” Errors Only in Appropriate Circumstances. 2015 Annual Report to Congress, Vol. 1, 329-339.

National Taxpayer Advocate. (2016a). Legislative Recommendations: TAX REFORM: Simplify the Internal Revenue Internal Revenue Code Now. 2016 Annual Report to Congress, Vol. 1, 305-324.

National Taxpayer Advocate. (2016b). Legislative Recommendations: TAX REFORM: Restructure the Earned Income Tax Credit and Related Family Status Provisions to Improve Compliance and Minimize Taxpayer Burden. 2016 Annual Report to Congress, Vol. 1, 325-357.

National Taxpayer Advocate (2017). Areas of Focus: TAS Continues to Pursue Improvements to the IRS’s Administration of the Earned Income Tax Credit (EITC), Particularly with Recent Changes to the Law. 2018 Annual Report to Congress, Vol. 1, 61-69.

Nichols, A., & Rothstein, J. (2015). The Earned Income Tax Credit. National Bureau of Economic Research. Retrieved from http://www.nber.org/chapters/c13484

Oats L. M., & Onu D. (2015). Social Norms and Tax Compliance: Theoretical Overview and Practical Implications. Journal of Tax Administration, 1(1), 113-137. Retrieved from http://jota.website/index.php/JoTA/article/view/11/64

Oei, S., & Ring, D. M. (2016). Can Sharing Be Taxed? 93 Wash. U. L. Rev. 989.

Office of Management and Budget. (2015, February 2). Fiscal Year 2016 Historical Tables - Budget of the U.S. Government. Retrieved from https://www.gpo.gov/fdsys/pkg/BUDGET-2016-TAB/pdf/BUDGET-2016-TAB.pdf

Office of Tax Policy. (2016, September). Tax Expenditures FY 2018. Retrieved from U.S. Department of the Treasury website https://www.treasury.gov/resource-center/tax-policy/Documents/Tax-Expenditures-FY2018.pdf

Olson, N. E. (2015). Procedural Justice for All: A Taxpayer Rights Analysis of IRS Earned Income Credit Compliance Strategy. Advances in Taxation, 22. Retrieved from http://www.taxpayeradvocate.irs.gov/Media/Default/Documents/AdvancesTaxation_Vol22_Olson.pdf

Order, Kalokoh v. Commissioner, No. 29859-13 (T.C. March 18, 2015). Retrieved from https://www.ustaxcourt.gov/UstcDockInq/DocumentViewer.aspx?IndexID=6518054

Panuthos, P. J. (2015). The United States Tax Court and Calendar Programs. Tax Lawyer, 68, 3. Retrieved from http://www.americanbar.org/content/dam/aba/publishing/tax_lawyer/vol68/683/panuthos-the-us-tax-court-and-calendar-call-programs-article-ttl-15spring-p439.authcheckdam.pdf

Protecting Americans from Tax Hikes Act of 2015, Pub. L. No. 114-113, 129 State 3038 (2015)

Quarterman v. Commissioner, T.C.M. (RIA) 2004-241 (2004). Retrieved from Westlaw Academic database.

Quinlivan v. Sullivan, 916 F.2d 524, 526-527 (9th Cir. 1990). Retrieved from Westlaw Academic database.

Rector, R., & Hall, J. (2016, November 16). Reforming the Earned Income Tax Credit and Additional Child Tax Credit to End Waste, Fraud, and Abuse and Strengthen Marriage. The Heritage Foundation. Retrieved from http://www.heritage.org/welfare/report/reforming-the-earned-income-tax-credit-and-additional-child-tax-credit-end-waste

Rubin, G. (2016, January 20). EITC Fraud is a Matter of Debate. Morning Consult. Retrieved from https://morningconsult.com/2016/01/20/eitc-fraud-is-a-matter-of-debate/

Skaggs v. Commissioner, 148 T.C. No. 15 (2017). Retrieved from http://www.ustaxcourt.gov/USTCInOP/OpinionViewer.aspx?ID=11221

Small Business Advice (n.d.). Florida Business Resource. Retrieved from http://www.sba.com/florida/

Smyth v. Commissioner, 133 T.C.M. (CCH) 1132 (2017). Retrieved from http://www.ustaxcourt.gov/ustcinop/opinionviewer.aspx?ID=11112

Soled, J. A., & DeLaney Thomas, K. (2016, October 18). Regulating Tax Return Preparation. Boston College Law Rev. 58, 151. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2854186

State of California Franchise Tax Board. (2016, April 27). Expansion of Earned Income Tax Credit to Include Self-Employment Income. Retrieved from https://www.ftb.ca.gov/aboutftb/EITCReportToBudgetCommittee.pdf

State of California Franchise Tax Board. (2017a). California Earned Income Tax Credit. Retrieved from https://www.ftb.ca.gov/individuals/faq/net/900.shtml

State of California Franchise Tax Board. (2017b). Earned Income Refundable Credit/Increase Income Thresholds & Expand to Self-Employed. Retrieved from https://www.ftb.ca.gov/law/legis/17-18bills/sb106-FINAL.pdf

Tahk, S. C. (2017, April 24). The New Welfare Rights. Brooklyn Law Rev. (forthcoming). Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2957614##

Tax Policy Center. (n.d.). What is the tax gap? Retrieved from http://www.taxpolicycenter.org/briefing-book/what-tax-gap

Treasury Inspector General for Tax Administration. (2017, February 9). Efforts Continue to Result in Improved Identification of Fraudulent Tax Returns Involving Identity Theft; However, Accuracy of Measures Needs Improvements [Press Release]. Retrieved from https://www.treasury.gov/tigta/press/press_tigta-2017-01.htm

Trimmer v. Commissioner, 148 T.C. No. 14 (2017). Retrieved from http://www.ustaxcourt.gov/USTCInOP/OpinionViewer.aspx?ID=11185

U.S. House of Representatives Oversight Subcommittee Hearing. (2017, April 26). Hearing on the 2017 Tax Filing Season. Retrieved from https://waysandmeans.house.gov/event/hearing-2017-tax-filing-season/

United States Department of Labor. (n.d.). Misclassification of Employees as Independent Contractors. Wage and Hour Division. Retrieved from https://www.dol.gov/whd/workers/misclassification/

United States Government Accountability Office. (2016, May). Refundable Tax Credits: Comprehensive Compliance Strategy and Expanded Use of Data Could Strengthen IRS’s Efforts to Address Noncompliance. Retrieved from http://www.gao.gov/assets/680/677548.pdf

Ventry Jr., D. J. (2000, December). The Collision of Tax and Welfare Politics: The Political History of the Earned Income Tax Credit, 1969-99. National Tax Journal, 54, 4.

Whalen, J. (2016, December 15). The Children of the Opioid Crisis. The Wall Street Journal. Retrieved from https://www.wsj.com/articles/the-children-of-the-opioid-crisis-1481816178

Worstall, T. (2016, March 31). Contractors and Temps were 100% of Job Growth in U.S.: And That’s A Good Thing. Forbes. Retrieved from https://www.forbes.com/sites/timworstall/2016/03/31/contractors-and-temps-were-100-of-job-growth-in-us-and-thats-a-good-thing/#387a8bfc34c0

Wu, C. C., & Hernandez, C. (2016, March). Minefield of Risks: Taxpayers Face Perils from Unregulated Preparers, Lack of Fee Disclosure, and Tax-Time Financial Products. National Consumer Law Center. Retrieved from http://www.nclc.org/images/pdf/pr-reports/TaxTimeReport2016.pdf


Refbacks

  • There are currently no refbacks.


Copyright ©  Journal of Tax Administration. All rights reserved. | Hosted by Docuracy Ltd | Powered by Open Journal Systems