The Earned Income Tax Credit (EITC) is a federal tax credit that was enacted in 1975. The credit is provided to low-income individuals and families who are U.S. citizens or resident aliens. The amount of the credit for which an individual is eligible varies, as it depends on factors such as taxable income and number of dependents. Notably, the credit is “refundable,” meaning that an individual can receive a credit greater than the federal income tax he or she paid that year. For example, a man who pays $400 in federal income tax and qualifies for a $1,000 EITC will receive a $600 check from the IRS.
In October 2013, the IRS admitted that between 2003 and 2012, it paid out at least $110 billion and as much as $132 billion in “improper” EITC payments. Most of the payments were the result of inaccurate information provided by taxpayers claiming the credit. While this is somewhat understandable given the complexity of the U.S. tax code, in recent years the government has attempted to crack down on the cottage industry of unethical tax preparers who falsify tax returns to obtain the EITC.
Because taxpayers who claim the EITC virtually always report low income, their tax returns may not draw the same scrutiny by IRS auditors as the returns of much wealthier taxpayers. But increased scrutiny may be coming. The IRS reported that a staggeringly high percentage- roughly between 20 and 25 percent- of EITC payments are improper. While an individual EITC claim by itself is not much, the abuse of the credit has reached a point where the Treasury is losing more than $11 billion a year. Even in Washington, D.C., that is a lot of money.