Many years ago I had a tax client who told me that when she was a fresh-faced young lawyer in DC she had worked on the EITC’ s enabling legislation. According to her, the legislative intent was to mitigate the highly regressive nature of Social Security taxes – because the large majority of working poor paid much more in FICA than they paid in income taxes. Today, of course, any practitioner can tell you that the EITCs reflected on many tax returns far outweigh the Social Security taxes paid by those clients. The program has become a cash benefit program with a one-page application (A $2,400 EITC for a taxpayer in the ‘sweet spot’ of income and dependents is more than a single individual receives in food stamps in a year – and no state’s food stamp program has an application as easy as Form EITC).
The ease of application and the speed with which refunds are issued make the program an easy target for abuse and fraud. And because the abuse and fraud takes place $500, $1,000 or $2,000 at a time, enforcement is never really cost effective unless IRS can find an organized scheme involving the preparers. In addition, IRS – already suffering an image problem after the exposure of political corruption that goes to the very top – would suffer a public relations nightmare by attempting to claw back billions paid out to the (supposedly) deserving working poor.
Much like combating any other fraud, then, the answer has to lie with prevention. Reducing benefit levels to something more in line with the EITC’s original intent might reduce the financial incentive for abuse, but no Congress will consent to what will be seen as punishing the poor. Simple safeguards like limiting payments to US-only addresses might help some, too. And auto-delaying the disbursement of the EITC portion of refunds (my state uses two disbursements for many refunds) for the next tax season or two to allow IRS some time to understand the problem would be a little unpopular but somewhat effective.
But my strong, if unscientific, opinion is that the bulk of questionable EITC payments go to individuals, not to rogue preparers or criminal gangs. Plenty of savvy taxpayers manage their income carefully with part-time or temp work to hit the sweet spot at the top of the EITC curve and then stop working for the year. And plenty simply take advantage of a basket of federal and state benefit programs of which the EITC (and some state EITCs) are just components.
In other words, there will be no legislative or technological solution to this. We have raised two or more generations of Americans for whom benefit programs are just part of the household budget. They may equal or even outnumber the “poor” that you and I think of as “poor.” Virtually every benefit program pays a significant percentage to people who shouldn’t be on the program, either because it’s easier to go along with the flow or because of the political backlash for attempting reform. And until our culture undergoes a change of heart, then every program – the EITC included – will suffer.