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Empire Justice Comments on Proposed EITC Pre-Certification Process

July 14, 2003

 

 

CC:PA:RU (Announcement 2003-40)

Room 5226

Internal Revenue Service

POB 7604

Ben Franklin Station

Washington DC 20044

 

To:   Internal Revenue Service (IRS) and Treasury Department

Thank you for the opportunity to share our thoughts and concerns with you regarding the proposed IRS Form 8836 and the proposed Earned Income Tax Credit (EITC) pre-certification process, which would apply to selected low income wage earners beginning in August of 2004. These comments are submitted on behalf of the Greater Upstate Law Project and the New York State Child Care Coordinating Council, and have been prepared with the pro bono assistance of Elizabeth Opalka, Esq. and Anthony Brindisi an Albany Law School student intern.

The Greater Upstate Law Project, Inc.

The Greater Upstate Law Project is a support center for legal aid and legal services organizations across New York State. We have three offices (Rochester, Albany and White Plains) and provide training, litigation support, and information clearinghouse services to 20 legal aid offices from Long Island to Chautauqua County. In addition, we assist hundreds of community groups that serve low income clients, and represent low income clients who are referred to us. Finally we engage in policy analysis and legal research on issues affecting poor New Yorkers.

Our office has been involved the particular concerns of low income taxpayers for a number of years. We are counsel in two class action law suits involving the taking of tax refunds (including the EITC) from low income taxpayers to recover alleged public assistance and food stamp overpayments. In these cases, we seek to have the taxpayers receive adequate due process before their refunds are taken. The food stamp case, which involves the offset of federal tax refunds including the federal EITC, is entitled Thompson v. Wing 98 Civ. 7628, and is pending in the United States District Court, Eastern District of New York. The public assistance case, Dantzler v. Wing (01-CV-137), involves the interception of state tax refunds and the state EITC, and is pending in the United States District Court, Northern District of New York. Both cases are currently in the final stages of settlement negotiations. Additionally, the Greater Upstate Law Project assisted many low income taxpayers who intervened in Butler v. Wing, and Watts v. Wing, two tax offset cases, commenced in the New York State Courts involving the interception of state tax refunds and the state EITC. The Watts case is still pending. See Butler v. Wing, 177 Misc. 2d 779 (1998), reversed by 275 A.D.2d 273 (2000), leave to appeal dismissed by 95 N.Y.2d 770 (2000).

The Greater Upstate Law Project has also successfully convinced both houses of the New York State legislature to introduce legislation (S. 1823/A.5992) which would limit the amount of non-fraudulent tax offsets to 10% of the tax overpayment (including the EITC). Said offsets would continue until the debt is paid in full.

Finally, for many years the Greater Upstate Law Project has worked closely with the Brookdale Center on Aging regarding low income grandparents who have become the caregivers of their grandchildren, primarily because of the death, disability or incarceration of the parents of the grandchildren. We have provided training to low income grandparent caregivers, on a number of occasions, regarding the economic supports available to them. Our trainings always highlight the EITC as an income support that low income working grandparent caregivers can access which does not have the stigma that is all too often attached to cash public assistance.

The New York State Child Care Coordinating Council

The New York State Child Care Coordinating Council (NYSCCCC) is a statewide, non-for-profit membership organization which aims to promote excellence in early care and education. The NYSCCCC does this in partnership with a strong network of community based organizations that provide Child Care Resource and Referral Services. One of the goals of the NYSCCC is to advance the professional status of child care providers. Currently child care providers are very poorly paid. In New York State, the average starting salary of a child care provider is $14,530,[1] which is under the poverty level for a family of three. Many child care providers are therefore eligible for the EITC and depend on it to supplement their low wages. Also, given the role that child care providers are requested to have in the pre-certification process, the NYCCCC believes that its concerns need to be presented.

We direct our comments to the EITC pre-certification procedures being proposed by the IRS beginning in Tax Year 2003. The procedures, initially applicable to some 45,000 tax filers and subsequently expanded over several years, will require certain EITC claimants (grandparents, aunts, uncles, single fathers and foster parents) unlike any other individual tax filers, to pre-certify their eligibility for the EITC by demonstrating that the child they are claiming for EITC purposes lived with them for more than half the year. This pre-certification procedure would be accomplished by completing proposed IRS Form 8836, which is both complicated and intimidating.

RECONSIDER OR DELAY UNTIL 2004

Our overall recommendation is that the IRS not go forward with these precertification requirements at all until there is more current data on error rates than those from the 1999 IRS study.[2]  Many statutory changes to the EITC, aimed directly at lowering error rates (denying EITC claims to non-custodial fathers listed with the National Child Support Case Registry, conforming of income definitions and changes to simplify the “AGI tiebreaker rules”) have been enacted since the 1999 IRS report. The impact of these changes on EITC error rates should be studied prior to initiating these cumbersome and daunting pre-certification procedures.

The process may discourage eligible filers

As counsel in the Dantzler and Thompson cases, we interviewed scores of low income taxpayers and were very surprised that a large percentage of them who only had W-2 income to report, used paid tax preparers to file their returns. This is born out by the 2002 Report of the National Taxpayer Advocate which reports that nearly 70% of EITC filers use paid tax preparers. [3] Although the reasons for using paid tax preparers are multiple, including the desire for a refund anticipation loan, our experience indicates that even when taxpayers learn that their refund, including their EITC will be intercepted, they use paid tax preparers because they find the tax forms intimidating.  The pre-certification procedures, which require documented proof of the child’s residency, create a burdensome, confusing and embarrassing barrier for low income taxpayers which may make compliance impossible for many filers, particularly grandparents, single fathers or other relatives raising a child.

Low income wage earners will now have to make others in positions of authority aware of their economic status, and as with the welfare system, may come to find the process demeaning and humiliating. The precertification process will change the character of the EITC from a wage supplement that allowed low income taxpayers to keep their dignity to one in which a particular class of taxpayers is treated differently - stigmatized by having to reveal their status as low income to persons from whom they may wish to keep their economic status private. Our fear is that either because of confusing forms, or the stigma, or both, low income taxpayers will forgo this important benefit.

Further, since the New York State EITC is tied on a percentage basis to the federal EITC, those who do not file for the federal EITC or are unable to comply with the federal pre-certification procedures, despite their good faith attempt to do so, will also not receive their New York State EITC.

Other Efforts May Lower the Error Rate

We believe that there are a number of other steps that the IRS could take to lower the error rate before it imposes precertification.

  • Use a portion of the $100 million committed to this pre-certification effort to instead beef up the IRS audit/review capacity in error prone EITC cases and to reduce or eliminate the current long review periods for such audits. This would be preferable to launching an unprecedented pre-certification process (in reality a pre-audit) for the EITC that is not required of any other individual taxpayers. For instance, no pre-certification process is proposed for the claiming of charitable deductions by taxpayers despite evidence of significant over-claiming in this area.
  • Use a portion of the funding to better regulate, train and monitor commercial tax preparation businesses, particularly in low income communities. As indicated previously, commercial tax preparation firms are responsible for nearly 70% of EITC returns and errors are high within these commercially prepared returns.[4]
  • Increase outreach and education efforts to EITC filers and greatly broaden the availability of free tax preparation sites and low income tax clinics where EITC filers can receive trained help in accurately completing their tax returns.

More Written Guidance Needed

Announcement 2003-40 and Form 8836 (with its instructions) raise many unanswered questions. How will the pre-certification requirements be applied to taxpayers who receive advance payments of their EITC in their paychecks because they gave completed Forms W-5 to their employers? If the IRS pre-certification process determines that one of two claimed children is not a qualifying child for EITC purposes, will the claimant lose the entire EITC amount that he claimed or only the portion attributable to the second child? If the pre-certification process determines that there are no qualifying children for a particular claimant, will that claimant still receive any otherwise available EITC (a smaller amount) because he is childless?

Such questions may have been answered if this change had been promulgated in the form of a regulation instead of an IRS announcement. The process for issuing a proposed regulation involves a greater number of IRS reviewers than are required to issue an announcement. The document submission requirements of the EITC precertification program are a substantial change from prior EITC rules. Indeed, the documentation is unprecedented in the tax law. And a significant number of taxpayers will be affected by this change. If this change is to be accomplished at all, the IRS should pursue it by proposing a regulation to provide more guidance and greater authority to the substantive changes reflected in the EITC pre-certification program.

COMMENTS ON FORM 8836 AND THE PROCESS

If the IRS will not delay precertification, we have outlined in some detail below our primary concerns with the proposed form 8836 and the pre-certification procedures as well as changes we would suggest. 

A Simpler Form May Solve the Problem

Form 8836, which has been developed to correct an error rate problem, is a much more complicated solution to the problem than is necessary. Based upon our experience with low income taxpayers who use paid prepares, we believe that they rely heavily on the preparer to understand the rules, and based on that trust, they simply sign their 1040 on the dotted line. They may not even look at the Schedule EIC. We have attached a Schedule EIC which includes a simple amendment: a taxpayer certification that would require taxpayers to certify that their children reside with them parents for at least 6 months of the year to be eligible for the EIC. Taking two steps - checking a box and signing one’s name will assure that taxpayers clearly understand the residency requirement.

The use of a simplified taxpayer certification is likely to reduce error rates, especially when combined with the statutory provisions enacted since the 1999 IRS study of EITC error rates that prompted these pre-certification procedures. Such a self declaration should be a first step before moving into a convoluted third party affidavit procedure along similar lines.

How Will Precertification Affect Taxpayers Who Already Are Receiving the Advance EITC?

The advance receipt of the EITC is a way that taxpayers can obtain the benefit in a timely way. Many EITC recipients are already reluctant to file the W-5s to obtain the advance EIC, because if they have made an error, they will have to pay the advance back. The precertification process will be applied to people who have already filed an advance EIC for tax year 2003. These taxpayers will suffer a special harm in the event that they are daunted by the procedure or simply unable to obtain the proper documentation. They will not be told they are ineligible, they will be assessed an overpayment. A special effort should be made to assist these families in complying with the precertification process, since the end result of non-compliance will be an overpayment.

How Will Taxpayers Obtain Assistance in Completing Form 8836?

When pre-certification forms are sent out in August of 2003 to the initial 45,000 targeted households under these proposed IRS procedures, help in complying by the December 31, 2003 deadline will be quite difficult for most EITC filers to locate. For the most part, neither free tax preparation sites nor commercial preparation sites are operating at this time of year.

Affected filers struggling to understand the form and meet their obligation to precertify will often have no one to turn to for assistance. Beginning this pre-certification procedure now will likely lead to many of these filers failing to submit the form or completing it inadequately. As a result many claims for EITC benefits from this population will either be denied or delayed. While an IRS (800) number is provided and filers are also urged to contact their “IRS Taxpayer Assistance Center” for help, we are not convinced that staff at these offices will be adequately trained to assist taxpayers in securing the necessary documentation.

Form 8836 will be particularly difficult for those with limited literacy or whose primary language is not either English or Spanish. It will also be difficult for first-time filers for the EITC who fall within the target group. Many others may not fully understand what information they are being asked to provide or may be confused in regard to which tax year they are meant to address in providing documentation.

The IRS must be more explicit on Form 8836 about its purpose, the tax year in question, the pre-certification filing deadline in order for refunds to not be delayed, and how the taxpayer can receive assistance in complying. It must also be clear in stating why the particular taxpayer is receiving Form 8836 and that receipt of the form is not an indication of any wrongdoing. Finally, after a filer submits Form 8836, there must be a clear and prompt way to communicate to the filer that they have successfully complied with the pre-certification procedures.

Taxpayers Are Limited in the Proof They Can Offer

Proving through various records that a child resided with the taxpayer for more than half the year will be quite problematic. The problem is compounded by the fact that the IRS pre-certification procedures allow only for certain documentation (school records, medical records, child care provider records, leases, utility bills, or social service agency records) that may be difficult to secure or inconclusive in establishing child residency.

As an alternative, perhaps in recognition of the often, inconclusive nature of such records, either alone or in some combination, the IRS allows for an affidavit from a third party. The affidavit must be signed under penalty of perjury attesting that the signer has “personal knowledge” of records showing that the filer and the child resided together at a specific address for more than half the year. It is likely that most filers will not be able to produce documentary records and so will be more likely to seek such an affidavit from a third party. As a result, we have several concerns with the proposed limitations as to who can sign such a third party affidavit.

There Is No Rational Reason For The Exclusion of Neighbors

Neighbors and relatives are expressly excluded from signing the affidavit. There is no rational reason for the exclusion of neighbors who are most likely to have knowledge of the joint residency of the filing adult and the child for more than half the year. Other federal programs that rely on third party verification allow and encourage neighbors as a source of reliable information. For rural poor working families neighbors may be the only third party able to sign such an affidavit. It is also unclear from the IRS proposal who is considered a neighbor and who is not, adding confusion to the affidavit procedure.

Informal Child Care Providers Are Most Likely to Have Personal Knowledge of a Child’s Residency And Should Not Be Excluded From Signing The Affidavit

The proposed procedures allow certain individuals to sign an affidavit such as ministers, landlords or property managers, health care providers, or child care providers. Yet, child care providers are the only individuals who are disqualified from signing an affidavit if they are also a neighbor (informal care providers would be excluded from signing if they are a neighbor but licensed or regulated providers would not be). As the attached chart indicates, in New York State, a significant number of families receiving child care subsidies utilize “informal” or legally exempt providers.

In New York City, 68% of parents not on pubic assistance who receive child care subsidies use legally exempt care. Although the percentages vary dramatically in upstate counties, ranging from 9% in Putnam County to 66% in Lewis County, the numbers are significant. Statewide, 12,606 children receive full time subsidized child care in legally exempt settings and 4,956 child receive part time subsidized child care in legally exempt settings.[5]   Legally exempt providers, who by law can not care for more than two children other than their own,[6] are likely to be relatives or neighbors.

Excluding these informal providers from signing a third party affidavit will likely result in the denial of EITC benefits to sizable numbers of eligible filers. Ironically, it is these informal providers who are most likely to have first hand knowledge of where and with whom the child lives, precisely because they are a friend or neighbor.

Most Regulated Family Day Care Providers Will Be Unable to Comply With Option Two

Option two on form 8836 allows the taxpayer to submit a letter on “official letterhead” from child care providers. In New York State there are 8,055 family day care providers and 2,417 group family child care providers which nearly exclusively operate out of the provider’s homes.[7]  Most of these providers do not have “official letterhead,” making it unlikely that they could assist the taxpayer with option two.

Regulated Day Care Providers Will Be Reluctant to Sign Under Penalty of Perjury

Licensed child care centers or regulated family day care homes have the data that the family has given them on the state form, called a “blue card,” but usually do not have actual personal knowledge as to the family’s residence. Thus these providers are unlikely to sign a third party affidavit verifying the residency of the child under the penalty of perjury. No other federal program that utilizes third party information requires this. Many otherwise reliable third parties may be intimidated by this proviso and, therefore, reluctant to sign for fear that they may be in error.

Pre-certification Will Be Particularly Harmful to Grandparents

Working grandparents who are raising a child will find these procedures invasive, confusing and daunting. Research shows that among older low income individuals there is often a reluctance to apply for traditional entitlement programs because of the perception of stigma attached to them. To date, the EITC as a self-declaration program, has not discouraged older eligible filers. Including these provisions that will require grandparents to approach school officials or other public officials or private providers in the community to obtain documentation may have a chilling effect on their continuing participation.

Pre-certification May Be Discriminatory Towards Single Fathers

The IRS includes single custodial fathers under this procedure without providing any compelling evidence that the error rate within this filing universe is higher than among single custodial mothers. If the issue is that non-custodial fathers are claiming to be custodial fathers and filing for EITC benefits on behalf of a child who does not reside with them for at least half the year, the IRS already has avenues to deal with such filers by matching them against the National Child Support Registry and denying their claim for the EITC. We urge that without additional proof of a reason for including single custodial fathers, that they be dropped from the list of affected households.

An Evaluation Should Be Done Prior to Any Expansion

If these pre-certification procedures are to take effect, they must be treated as a pilot program. Currently, the IRS contemplates expanding the pool of those covered by these pre-certification procedures each year after Tax Year 2003 prior to any final evaluation of the success and problems associated with the initial pool of 45,000 targeted filers.

While the IRS does plan to evaluate the initial year as to the effect of precertification on overpayments as well as how many filers simply do not respond, it will not have any final data available before the next phase of planned expansion. It seems unreasonable to us to move forward on any expansion of the pilot effort until final results of the initial evaluation are compiled and analyzed. We urge that the initial evaluation be expanded in scope to study various aspects of the pre-certification procedures, particularly focused on which elements cause the most difficulty in compliance and keep eligible filers from participating. No expansion should occur until such an evaluation is completed.

The EITC is our country’s most effective program to help lift working families out of poverty. In 1999, the EITC lifted 4.7 million individuals out of poverty including 2.5 million children. At the same time, the EITC is a compelling work incentive that augments welfare to work efforts. Both the anti-poverty and work incentive benefits are greatly enhanced in New York by a generous state EITC set at 30% of a tax filer’s federal EITC. Reducing errors is important to the integrity of the EITC and significant progress has already been made through changes in the law over the last several years. We are concerned that many eligible EITC filers may be denied federal and state EITC benefits as a result of these pre-certification procedures. With that in mind, we urge the IRS to seriously consider suspending or delaying implementation of the proposed changes, to pursue any change of this magnitude through the regulatory process, treat any imposed change as a pilot effort and include a thorough evaluation of such effort before any expansion to a broader cohort of tax filers. We also hope you will consider our specific comments regarding improvements and alternatives before you proceed.

Cc: Senator Hilary Rodham Clinton

Senator Charles Schumer

New York Delegation, United States House of Representatives



 

[1] New York State Department of Labor, Occupational Employment Statistics (OES).  Wage data are from the 1999 and 2000 OES survey and have been adjusted to first quarter 2002 levels using the Employment Cost index.

 

[2] See R. Greenstein, What is the Magnitude of EITC Overpayments?, Center on Budget and Policy Priorities, 5/20/03.

[3] In 2000 65% of EITC claimants used paid preparers and of 161,000 EITC returns audited in 2002, 67% used paid preparers. National Taxpayer Advocate, FY 2002 Annual Report to Congress, p. 69 available at http://www.irs.gov/pub/irs-utl/arc2002_section_one.pdf.

 

[4] Thirty-three percent of all math errors related to the EITC were made by paid preparers in 1999. Sixty-seven percent of the returns selected to EITC examination in 2002, representing returns that the IRS believed had a high probability of error, were preparer filed. National Taxpayer Advocate, FY 2002 Annual Report to Congress, p. 69, available at http://www.irs.gov/pub/irs-utl/arc2002_section_one.pdf

 

[5]  Office of Children and Family Services, Schedule G-2 Child Counts, October 2000-September 2001.

 

[6]  18 NYCRR 415.1(c).

 

[7]  FIS 2000 District Summary Report from Local Social Services Districts , report ending date 3/31/00.

 

 

 

 

For more information, please contact:


Susan C. Antos

Empire Justice Center
119 Washington Avenue
Albany, NY  12210 


(518) 462-6831
(518) 935-2852
santos@empirejustice.org