Department of Health and Human Services 

OFFICE OF


INSPECTOR GENERAL


UNPAID CHILD SUPPORT AND INCOME


TAX DEDUCTIONS


# SERVICE$ 

& “G$ 

~+ 9 

JUNE GIBBS BROWN g

4 Inspector General 2

‘3 

% $

$+, DECEMBER 1996 %’d~~ > OIG-05-95-00070 

3’ 
OFFICE OF INSPE(XOR GENERAL 

The mission of the Ofilce of Inspector General (OIG), as mandated by Public Law 95-452, as 

amended, is to protect the integrity of the Department of Health and Human Services’ (HHS) 

programs as well as the health and welfare of beneficiaries served by those programs. This 

statutory mission is earned out through a nationwide network of audits, investigations, and 

inspections conducted by three OIG operating components: the Office of Audit Services, the 

Office of Investigations, and the Office of Evaluation and Inspections. The OIG also informs 

the Secretary of HHS of program and management problems and recommends courses to 

correct them. 

OFFICE OF AUDIT SERVICES 

The OIGS Office of Audit SeMces (OAS) provides all auditing services for HHS, either by 

conducting audits with its own audit resources or by overseeing audit work done by others. 

Audits examine the performance of HHS programs and/or its grantees and contractors in 

carrying out their respective responsibilities and are intended to provide independent 

assessments of HHS programs and operations in order to reduce waste, abuse, and 

mismanagement and to promote economy and efficiency throughout the Department. 

OFFICE OF INVESTIGATIONS 

The OIGS Office of Investigations (01) conducts criminal, civil, and administrative 

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of 

unjust enrichment by providers. The investigative efforts of 01 lead to criminal convictions, 

administrative sanctions, or civil money penalties. The 01 also oversees State Medicaid fraud 

control units which investigate and prosecute fraud and patient abuse in the Medicaid program. 

OFFICE OF EVALUATION AND INSPECTIONS 

The OIGS Office of Evaluation and Inspections (OEI) conducts short-term management and 

program evaluations (called inspections) that focus on issues of concern to the Department, 

the Congress, and the public. The findings and recommendations contained in these inspection 

reports generate rapid, accurate, and up-to-date information on the efficiency, vulnerability, 

and effectiveness of departmental programs. 

This report was prepared under the direction of W. Mark Krushat and Joseph Penkrot, Office 

of Evaluation and Inspections (OEI), Richard Mencl, Office of Audit Services (OAS) and 

Frank Burgess, Internal Revenue Service (IRS). Participating in this project were the 

following people:


Michelle Adams


Raymond Balandron


Natalie Coen


William Moran


Ann O’Connor


Marieann Ballerino


Roy Carter


Ray Cordahl


John Drake


Jay Gavens


Clark Geiger


Joseph Green Gale Smith


Paul Nay Joan Dean


Anita Parker


James Pervisky


Leon Skros

Department of Health and Human Services 

OFFICE OF


INSPECTOR GENERAL


UNPAID CHILD SUPPORT AND INCOME


TAX DEDUCTIONS


@ SERVICE$ 

.#+ ha,


*


$ JUNE GIBBS BROWN


< Inspector General
 %


‘b


% $

++ DECEMBER 1996 %d~a > OIG-05-95-OO070 
EXECUTIVE SUMMARY


PURPOSE 

This review examines a new method to identify noncustodial parents with delinquent 

child support obligations who incorrectly claim the Earned Income Tax Credit (EITC), 

the rates for head of household tax filing status, tax exemptions related to children no 

longer in their custody, or the child care credit. 

BACKGROUND 

This review was a joint effort between the Office of Inspector General (OIG) and the 

Internal Revenue Service (IRS). 

Tu Creds and De&dons Claikned by Noncustodial Parents 

The EITC is a refundable tax credit available to the working poor. The credit amount 

depends on earnings and the number of children, and rises with earnings until a 

maximum is reached. Historically, the EITC enjoyed wide bipartisan support in 

Congress as a means to assist the working poor and encourage employment in lieu of 

welfare programs. 

A taxpayer qualifies as head of household and may use a lower tax rate and a higher 

standard deduction if they provide more than half the cost of keeping up the main 

home of a child claimed as a dependent. In addition to this dependency test, a 

noncustodial parent must pay more than the combined total of any Aid to Families 

With Dependent Children paymentsl and resources provided by the custodial parent 

in keeping up the home for the child. 

Taxpayers are permitted to claim an exemption for their children if they provide half 

of their children’s support. The custodial parent is generally assumed to provide the 

majority of a child’s total support. However, a noncustodial parent providing support 

can sometimes claim a child as a dependent if the custodial parent or the court has 

awarded the exemption to the noncustodial parent. 

Federal tax laws allow parents a tax credit for some of their child care expenses if the 

expenses are necessa~ in allowing them to work or seek employment. Divorced or 

separated parents cannot claim credit for child care unless the children are living with 

them. 

1 Recent weljhre reform Iegklah”onreplaces the AIWC program with Temponmy Assistance for Needy Families. 

i 
cm Supprt collections 

Annually, State child support agencies forward a list of noncustodial parents who have


not met their child support obligations to the Office of Child Support Enforcement


(OCSE), the Federal ageney responsible for administering the child support


enforcement program, The OCSE reconciles any discrepancies, merges the States’


files, and forwards the national file to IRS. The IRS withholds any tax refund due


these individuals and forwards this money to the States to reduce or eliminate the


child support arrears for these noncustodial parents. In 1994, OCSE sent 3.6 million


cases to IRS.


We decided to test the feasibility of using OCSE data to identify the incorrect claiming


of child custody and support on Federal tax returns. We drew a sample from the 1993


OCSE national file of delinquent noncustodial parents prepared for IRS. The OIG


examined State child support enforcement files for 2,000 randomly selected


noncustodial parents from this list, gathered information from State and local records,


and sent a comprehensive database to IRS for their analysis.


FINDINGS 

An administratively simple and coordinated approach between OCSE and IRS ean 

help identi& noneustodial parents misrepresenting their children’s living arrangements 

on their tax returns. 

Children’s Social Security Numbers and related data routinely collected by child 

support enforcement agencies, commonly called IV-D agencies, can be used effectively 

and efficiently by IRS. In many cases, IV-D agencies are aware of the living 

arrangements of children routinely claimed by noncustodial parents on their tax 

returns. While it would be prohibitively expensive for IRS itself to collect this data, 

IV-D agencies can supply this information simply and inexpensively. 

States currently are making efforts to comply with Federal OCSE requirements to 

establish certified child support enforcement computer systems by the 1997 deadline. 

When certified, State IV-D agencies can systematically identify common data elements 

that disclose children’s living arrangements and whether their parents are entitled to 

claim them for income tax purposes. 

In 32 pereent of the cases reviewed additional tax liabilities resulted from the El’T’C, 

tax rates for head of household filing status and/or exemptions that were claimed 

immrrectly. These eases result in projeeted additional tax liabilities of $212 million for 

1993. 

Based on child support data obtained by OIG and the detailed IRS review of the 

custodial and noncustodial parents’ 1993 tax returns, we estimate there were over 

640,000 cases where noncustodial parents did not meet their child support obligations. 

ii 
Approximately lin3 of these cases would have resulted inadditional t=liabilities 

based on our review. Nationally, IRS and OIG estimate that $212,118,000 in 

additional Federal income taxes would have been collected in 1993 had this category 

of taxpayers filed correctly. 

It is important to note that similar incorrect claims could also be made by a 

noncustodial parent not delinquent in child support payments. We limited our review 

to those in arrears because there is no readily available data source to examine the 

broader universe. Additionally, while outside the scope of this review, this incorrect 

Federal tax information is often used in preparing State tax returns, thereby.- depriving 

States of tax revenues due them. 

RECOMMENDATION 

The OCSE and the States should work with IRS to identify data available from State 

welfare agencies and child support record systems which would assist in the 

identification of inappropriate tax benefits claimed by noncustodial parents. 

The OCSE and the States should work with IRS to determine the additional data 

needed and available from State welfare agencies and child support records systems. 

As State data systems are certified by OCSE, the data exchange with IRS will become 

easier and should minimize the staff work involved for child support agencies. Once 

States have certified child support enforcement systems, national and uniform 

collection of this data can be easily coordinated between these agencies. 

Potentikl Savings 

It is difficult to make accurate projections because varying assumptions can be applied 

to the broader population. However, based on the size of this population, the data 

collected here, and other information independently developed by IRS, we believe 

there could be total annual tax losses of $1.4 billion or more as a result of 

noncustodial parents inappropriately claiming custody of children on Federal income 

tax returns. By applying the revenue protection strategy used in this review to identi~ 

all noncustodial parents, not just the ones known to IV-D agencies, IRS can disallow 

incorrect exemptions and tax credits. 

AGENCY COMMENTS AND OIG RESPONSE 

We received written comments from the Administration for Children and Families 

(ACF). The ACF favors delaying system changes pending a possible need for 

legislation to permit the data exchange we proposed. However, we feel strongly that 

States and OCSE should build the capacity for this exchange while they are developing 

new systems. We incorporated other technical changes they suggested into this final 

report, where appropriate. Appendix C contains the ACF response. 

111 
TABLE OF CONTENTS


PAGE


EXECUTIVE SUMMARY


INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1


FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...6


�IRS Proposed Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..7


. Child Support Profile ofNoncustodial Parents in the Sample . . . . . . . . . . . . . . 9


RECOMMENDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...10


APPENDICES


k Sampling Methodology and Estimation Procedures . . . . . . . . . . . . . . . . . . . . A-1


B: Variances and Estimated Confidence Internals . . . . . . . . . . . . . . . . . . . . . . . B-1


c Agency Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..C-1

INTRODUCTION


PURPOSE 

This review examines a new method to identify noncustodial parents with delinquent 

child support obligations who incorrectly claim the Earned Income Tax Credit (EITC), 

the rates for head of household tax filing status, tax exemptions related to children no 

longer in their custody, or the child care credit. 

BACKGROUND 

Earned hC07’W Tax Credii 

The EITC is a refundable tax credit available to the working poor even if the family 

has no tax liability. Until 1994, only working parents with custody could qualify for the 

EITC; now a small credit is available for those without dependent children. The 

credit amount depends on earnings and the number of children residing at home. The 

EITC rises with earnings until a maximum is reached and is phased out as income 

increases. After the earnings limit is exceeded, no EITC is payable. (In 1993, working 

parents of one child, with earnings under $23,050 could quali& for the EITC.) 

Historically, the EITC enjoyed wide bipartisan support in Congress as a means to 

assist the working poor and encourage employment in lieu of welfare programs. In 

1993, 14.7 million people claimed $15 billion from the EITC. In its current form, it is 

expected to credit more than $30 billion annually to poor, working families by the turn 

of the century, more than the projected costs of the Food Stamp program, or 

Temporary Assistance for Needy Families, which replaces the Aid to Families With 

Dependent Children program (AFDC)2. 

In October 1994, the General Accounting Office (GAO) issued a report summarizing 

problems with noncompliance with EITC requirements. The GAO reported an IRS 

statement that 92 percent of questionable electronically-filed returns were returns with 

EITC claims. As a result of these problems, IRS began more careful scrutiny of all 

tax returns claiming the EITC. 

Ta Rates for Head of Howehoki Filing Statur 

A taxpayer who qualifies as head of household may use a tax rate that is lower than 

individuals filing as single or married with separate returns. In addition, heads of 

household receive a higher standard deduction. To use the head of household filing 

status, the taxpayer must be considered unmarried on the last day of the year and 

2 Recent welfare reform legislation replaces the AFDC program with Temporary Assistance for Needy Families. 

Throughout this report, we refer to AFDC since that program was in place at the time of our study. 

1 
must have provided more than half the cost of keeping up the main home of a child 

who lived with the taxpayer for more than 6 months during the year. To achieve head 

of household status, a parent must pay more than the total of AFDC payments plus 

resources provided by the other parent in keeping up the home for the child. An 

unmarried child does not have to qualify as the taxpayer’s dependent in order for the 

taxpayer to qualify for head of household filing status. 

Tax Exernptiom for Chikiren 

The Tax Code generally allows a parent to claim an exemption for a dependent child 

if the parent provides half of the child’s total support. Generally, a noncustodial 

parent cannot claim children not living with them as dependents since the custodial 

parent is assumed to provide the majority of a child’s total support: However, under 

certain circumstances a noncustodial parent providing support can claim a child as a 

dependent. 

Most commonly, the noncustodial parent claims the child as an exemption when: 

�	 the custodial parent agrees, in writing, not to claim the child as a tax 

exemption; or, 

�	 a pre-1985 divorce decree specifies that the noncustodial parent can claim the 

exemption, and the noncustodial parent contributes at least $600 towards the 

child’s support that year. 

It should be noted that subsequent to 1985, no minimum dollar amount is required. 

Hence, the noncustodial parent could receive the benefit of a tax exemption even if no 

support is provided. 

Chikl care credit 

Federal tax law allows parents to deduct some of their child care expenses if the 

expenses are necessary in allowing them to work or seek employment. Parents can 

claim this credit for children under age 13. Divorced or separated parents cannot 

claim credit for child care for children not living with them. 

cm Supp?t Coili?ctiom 

Title IV-D of the Social Security Act requires noncustodial parents to support their 

children by paying periodic child support determined by a court order. Many 

3 Payments made to the mother on behalf of the child under the Aid to Families W2thDependent Children 

(AFDC) are n@ considered support provided by the custodial parent. 

4 Typically, the custodial parent completes Form 8332 for IRS. The Form 8332 does not have to be renewed, 

but a copy must be submitted with the tax return. 
noncustodial parents have their child support automatically withheld from their wages


by their employer. Automatic wage withholding of child support payments began in


1985 on cases in arrears. Since 1989, on all new and modified child support court


orders, employers must withhold child support due from wages of noncustodial


parents. Noncustodial parents who do not have this automatic wage withholding must


make periodic payments to the child support agency themselves.


Despite these requirements, child support enforcement agencies report that $6.1


billion of the $13 billion owed for child support went uncollected in 1993. According


to U.S. Census Bureau data, only 4.5 million of the 6.1 million noncustodial parents


required to pay child support are handled by child support enforcement agencies.


Child support enforcement agencies, commonly called IV-D agencies, fonvard the


collected child support to the custodial parent. In the case of families receiving


AFDC, the first $50 of collected child support is forwarded to the custodial parent5,


with the balance used to partially offset AFDC benefits paid to that family.


Annually, the State IV-D agencies forward lists of noncustodial parents in arrears to


the Office of Child Support Enforcement (OCSE), the Federal agency responsible for


administering the child support enforcement program.b This list includes arrears


carried over from previous years. The OCSE reconciles any discrepancies, merges the


States’ files, and forwards the national file to the Internal Revenue Service (IRS). In


1994, OCSE sent 3.6 million cases to IRS. The IRS withholds any tax refund due


these individuals, deducts costs of collections, and forwards this money to the States to


reduce or eliminate the child support arrears for these noncustodial parents. In 1994,


this joint IRS-OCSE project intercepted over one million tax refunds and recovered


$720 million in overdue child support payments.


METHODOLOGY 

This review was a joint effort between the Office of Inspector General (OIG) and


IRS. Both agencies agreed that the major issues to be resolved by this effort would be


limited to:


� how many delinquent noncustodial parents incorrectly claim the EITC, child 

care credit, head of household filing status, and exemptions for children; 

�	 what is the extent of loss to the Federal Government as a result of these 

incorrect claims; and, 

5 Beginning in October Z99~ States no longer are required to “@ss through” the first $50 collected. 

6 For AFDC cases, the amount in arrears must be over $150, for non AFDC cases, the amount must exceed 

$500. 

-J 
s	 whether it is practical to use OCSE data on delinquent noncustodial parents to 

identify and prevent tax losses that would result from inappropriate claiming of 

child custody and support. 

It is important to note that similar incorrect claims could also be made by a 

noncustodial parent not delinquent in child support payments. We limited our review 

to those in arrears because there is no readily available data source to examine the 

broader universe. Additionally, while outside the scope of this review, this incorrect 

Federal tax information is often used in preparing State tax returns, thereby depriving 

States of tax revenues due them. 

The OIG also enlisted OCSE support in gaining State cooperation. The OCSE 

provided the tax refund intercept tape. Also, the OCSE sent a letter to the sampleselected States explaining the joint OIG-IRS efforts and requesting their help. All of 

these States cooperated in the project. 

Sampling Rocedhres 

We initially selected 2,000 child support obligors from lists submitted by the States to 

IRS for income tax refund offset, using a two stage random sample. The 1993 tax 

refund offset lists were used since they were the most recent lists available at the time 

of this review. We first selected eight States (New York, Pennsylvania, Florida, 

Georgia, North Carolina, Michigan, Iowa and Texas) with probability proportional to 

the number of obligors per State. By accessing the Social Security earnings records 

for 1993, we eliminated those obligors with less than $3,000 in earned income. From 

among the remaining individuals, we selected 250 per State using simple random 

sampling. 

We collected detailed case information in the eight States about each obligor selected 

(described in the next section.) The IRS was able to identify 1,390 noncustodial 

parents for whom 1993 tax returns were filed. This is in keeping with IRS experience 

which has found that first, up to 30 percent of taxpayers subjected to offsets fail to file 

subsequent returns, second, this is a low income population that may not need to file, 

and finally, it is a population that has already demonstrated noncompliance with 

Federal rules. Of these noncustodial parents, the IRS reviewed 698 returns where the 

noncustodial parent was delinquent for child support in 1993. An additional 344 

returns for custodial parents associated with noncustodial cases were identified and 

reviewed to determine whether duplicate exemptions were claimed. Of the remaining 

692 noncustodial parents, 129 returns were not available and 563 had arrearages from 

previous years. See Appendix A for a detailed description of the sampling 

methodology. 

4

Gatherihg Data 

The OIG reviewed child support records at State IV-D offices during April and May 

1995. Specifically, recollected infomation about eve~noncustodial parent, custodial 

parent andchild involved with the case. Redetermined the amount ofchild support 

owed and collected from the noncustodial parent for each child in 1993. We 

examined whether the child lived with the noncustodial parent at any time during 1993 

and if any events took place that year that would affect child support obligations, like 

the child marrying or reaching the age of majority. We traced the custodial parent’s 

AFDC status during 1993 as well. 

We sent a database with this comprehensive child support information to IRS for their 

analysis. The IRS reviewed the tax returns for both custodial and noncustodial 

parents and calculated the tax liability based on our four criteria. The results were 

used for research purposes only, not for enforcement. 

Rojectiom 

To account for the sampling plan and provide results that accurately reflect the 

distribution of cases in the population studied, all percentages in the report reflect the 

proper weighting of the data. This will also be true of the totals presented. When 

sample based results are presented, we will identi& them. 

Our review was conducted in accordance with the QualdyStandardsfor Inspections 

issued by the President’s Council on Integrity and Efficiency. 

5

FINDINGS


An administratively simple and coordinated approach between OCSE and IRS can 

help identi@ noncustodial parents misrepresenting their children’s living arrangements 

on their tax returns. 

Children’s Social Security Numbers and related data routinely collected by IV-D 

agencies can be used effectively and efficiently by IRS. In many cases, IV-D agencies 

are aware of the living arrangements of children routinely claimed by noncustodial 

parents on their tax returns. While it would be prohibitively expensive for IRS itself 

to collect this data, IV-D agencies can supply this information simply and 

inexpensively. 

States currently are making efforts to comply with Federal OCSE requirements to 

establish certified child support enforcement computer systems by the 1997 deadline. 

When certified, State IV-D agencies can systematically identi& many of the data 

elements needed to disclose children’s living arrangements and whether their parents 

are entitled to claim them for income tax purposes. 

In 32 percent of the cases reviewe~ additional tax liabilities resulted from the EITC, 

tax rates for head of household filing status and/or exemptions that were claimed 

incorrectly. These cases result in projected additional tax liabilities of $212 million for 

1993. 

Based on child support data obtained by OIG and the detailed IRS review of the 

custodial and noncustodial parents’ 1993 tax returns, we estimate there were over 

640,000 cases where noncustodial parents did not meet their child support obligations. 

Approximately 1 in 3 of these cases would have resulted in additional tax liabilities 

based on our review. 

Nationally, IRS and OIG estimate that $212,118,000 in additional Federal income 

taxes would have been collected in 1993 had this category of taxpayers filed correctly. 

The appendices following the body of this report provide details regarding the 

projections. The breakout for the adjustment projections is depicted in Table A on 

the following page. 

The scope of this review was limited to Federal tax loss projections. However, States 

also use Federal tax data to calculate State tax liability. Accordingly, these States may 

be losing substantial State tax revenues as well. 

6

IRS Ikyxwd Adjwtnwrm 

In accomplishing this review, IRS intensively reviewed 698 tax returns (and 344 returns 

of related custodial parents) of the 1,390 cases. When possible IRS made side by side 

analyses of noncustodial and custodial parents’ returns. The IRS found that 475 cases 

appeared to have correctly handled the issues related to the children. The IRS 

projected tax adjustments for the 223 remaining returns, 32 percent of the sample 

reviewed. The returns with erroneous handling of the child-related issues showed a 

total of $233,075 in tax adjustments, equating to an average adjustment of $1,045. 

It was apparent from the review that the erroneous dependency exemptions, which 

serve as the basis for each of the adjustments described below, were almost entirely 

claimed as “Children at Home.” This claim avoids the extra documentation required if 

the dependents are claimed “Children Away from Home”. In fact, 88 percent of the 

cases resulting in tax adjustments claimed the dependents lived at home in error. This 

figure was 98 percent for those claiming the EITC in error, 85 percent for those cases 

on AFDC, 95 percent for those with no valid documentation, 96 percent for those 

claiming head of household status in error, and 100 percent for those claiming child 

care credits in error. It is apparent that the self-reporting compliance features on the 

IRS tax forms are not being consistently followed by taxpayers in this population of 

child support delinquents. 

Table A 

Number Projected 

cases+ Population+ 

Total 223 202.703 

NoneustodialReturns 

Disallow EITC claim. 119 104,362 

Disallow exemptions due to AFDC 96 85,387 

payments for child. 

Disallow exemption due to lack of 80 75,044 

documentation. 

Projected Percentof 

Revenues Total 

$212.118.892 

$100,371,530 47 % 

$42,949,588 2070 

$35,138,845 16 YO 

Disallow head of household status. 78 72,546 $20,777,243 1070 

Disallow child care credit. 7 5,170” $2,605,1O9* 1 fzo 

CustodialReturns


+ 

Disallow exemption due to AFDC 29 24,884 $9,688,103 570 

payments for child. 

Deny custodial exemption, 2 1,675” $588,466” <1 70 

noncustodial parent exemption 

allowed. 

*The 95percent confidence interval includes the value O. 

Due tothepossibility ofmultiple adjustments percase, thesum oftheindividual valuesdo not 

addtothetotal, 

7 
EITCAdjmtments 

We found that 37 percent of the noncustodial parents whose 1993 tax returns were 

reviewed claimed the EITC. However, over 44 percent of those cases who claimed 

the EITC, had an error in the amount of the EITC claimed.7 We projected the EITC 

adjustments to exceed $100 million based on the number and magnitude of the errors 

IRS identified. The EITC errors represent the most significant dollar adjustments 

noted in this review. We estimated that the total EITC claimed by this population 

exceeded $270 million; thus, at least 37 percent of the total EITC claimed by this 

population was in error. The remainder of the EITC which was allowed in this review 

was based on children other than those owed the delinquent child support; therefore, 

additional EITC errors could exist in the cases. 

Adjustments for Parent Exernpticw for Children 

Overall, 58 percent of the noncustodial parents (An estimated 375,494 cases) claimed 

children for tax exemptions, In 48 percent of these cases, the claim was not allowable 

because either the child was supported by AFDC, the child did not live with the 

noncustodial parent, or there was no valid evidence allowing the noncustodial parent 

to claim the exemption, such as an IRS Form 8332. We also estimate that in over 

24,000 cases, custodial parents claimed children for tax exemptions that were 

unallowable due to AFDC support. 

Adjw~ for Head of Howehokl jiling status 

We estimate that in about one-third (over 209,000) of the cases with arrearages in 

1993, the noncustodial parents filed using the tax rates associated with head of 

household status. In over 34 percent of those cases, noncustodial parents claimed 

head of household status erroneously because the children did not live in their 

household for more than 6 months. We did not challenge the claim of head of 

household status if other children (for example, by a subsequent marriage) were shown 

on the return; therefore, overall compliance on this issue can not be determined. 

Adjustments for Chiki Care Credits 

Although we looked for noncustodial parents claiming the child care credit incorrectly, 

we found very few instances where this took place. Errors associated with claiming 

the child care credit for the sampled noncustodial children only constitute an 

estimated one percent of the total error amount. 

7 In their 1994 report, “Earned Income Credit -- Data on Noncompliance and Illegal Alien Recipient% the 

General Accounting Ofice estimated that 29 percent of all EITC claims were in ewor. (GA O/GGD-95-27) 
ChiM Suppmt Ik@e of Noncustodial Pare@ in the Sampik 

The 1,390 noncustodial parents in our sample paid 66 percent of the $3,388,356 in 

child support they owed for their 2,420 children in 1993. On average, they have child 

support orders covering 1.47 children, 44 percent of whom receive AFDC payments. 

These noncustodial parents averaged $922 in payments of the $1,400 in child support 

they owed per child in 1993. Roughly, they paid just $77 of the $117 in child support 

they owed each month. 

Table B provides the distribution of the cases reviewed, by the reported Adjusted 

Gross Income. The figures are projected to the studied population. The data shows 

that the majority of the adjustments are in the income catego~ of $5,000 to $14,999 

per year. 

Table B 

Adjusted
Gross Projected Projected TaxAdjustments


Income Total Total Projected Projected Percent


Category Number AGI Number Amount ofAGI


Total 640,162 $11,206,393,398 202,704 $212,118,8921.9%


$1-$4,999 36,204 $146,600,226 5,885 $2,562,670 1.7%


$5,000-$14,999 285,957 $2,819,643,842 91,103 $117,022,636 4.2%


$15,000-$24,999 198,877 $3,892,242,070 65,494 $61,962,027 1.6%


$25,000-$34,999 69,386 $2,052,079,020 23,452 $16,913,046 0.8%


$35JIOO+ 49,738 $2.295,828.240 16.770 $13.658.513 0.6%


9

RECOMMENDATION


Over the years, IRS offset of income tax refunds recovered millions in unpaid child 

support, benefiting children, custodial parents, State IV-D agencies and the Federal 

Government. The IRS/OCSE/State partnership should be reviewed to determine the 

feasibility of expanding the exchange of information so that noncustodial parents not 

meeting their child support obligations cannot benefit from their delinquency when 

they file their income tax returns. 

Besides IRS collections increasing as a result of fewer incorrect claims for the EITC, 

head of household, exemptions, and child care, we believe child support enforcement 

may be enhanced as a result. Some noncustodial parents may be deterred from falling 

behind in child support payments if they realize that IRS scrutiny of their tax returns 

will increase. 

At present, taxpayers in this population of child support delinquents do not 

consistently provide the accurate, self-reporting compliance data required on the IRS 

tax forms. This speaks for the need of an IRS return processing mechanism to protect 

government revenue. In the absence of timely and effective data sharing, these 

parents may continue to claim they are providing support for their children (44 

percent of whom receive welfare), or otherwise claim certain tax advantages that IRS 

cannot easily verify or disprove. 

THE OCSE AND THE STATES SHOULD WORK WITH IRS TO IDENTIFY 

DATA AVAILABLE FROM STATE WELFARE AGENCIES AND CHILD 

SUPPORT RECORD SYSTEMS WHICH WOULD ASSIST IN THE 

IDENTIFICATION OF INAPPROPRIATE TAX BENEFITS CLAIMED BY 

NONCUSTODIAL PARENTS. 

The identification of additional data that would be useful to the IRS would improve 

the collection of delinquent child support. However, for this proposed exchange to be 

effective, it must be fair and work to the mutual benefit of both the Department of 

Treasury and the Department of Health and Human Services (DHHS). For example, 

once the data elements have been identified and the appropriate system approved and 

in place, OCSE could provide the data for IRS enforcement purposes without charge. 

The IRS, in turn, could provide tax refund offset services using OCSE data without 

charge. In this fashion, both Departments could economically meet their fiscal 

collection obligations. 

Some examples of data that IRS will need to identi& incorrect returns include the 

custodial parent’s Social Security Number (SSN), the child’s SSN, welfare status and 

amounts, and the child support owed and paid by a noncustodial parent in a calendar 

year. This data already is available routinely now to the State IV-D agencies, and will 

be an integral part of the OCSE-designated certified data systems scheduled to be 

fully operational by October 1, 1997, 

10 
As State data systems are certified by OCSE, the data exchange with IRS will become 

easier and should minimize the staff work involved for child support agencies. Once 

States have certified child support enforcement systems, national and uniform 

collection of this data can be easily coordinated between the two Departments. The 

OCSE will generate data to assist the IRS in identifying tax filers claiming dubious 

exemptions or head of household status. 

Potential Savin@ 

We estimate a potential 1 year savings of just more than $212 million based on our 

results. According to data provided by the Bureau of the Census, there were 

approximately 6.1 million noncustodial parents with court orders for child support in 

1991. Based upon this, the data collected here and other information independently 

developed by IRS, we believe there could be total annual tax losses of $1.4 billion or 

more as a result of noncustodial parents inappropriately claiming custody of children 

on Federal income tax returns. 

Whether this amount, or any fraction of this money, can be collected will depend on 

many factors. For instance, since most of the cases involve low income tax payers, it 

may not be effective to conduct audits and attempt to collect taxes due. The most 

cost efficient revenue protection strategy would be to intercept a tax refund, if one 

exists. We recognize that our projection may overestimate the actual amounts that are 

available to be collected using this method. 

However, the amounts we project may also represent a lower limit. For one thing, we 

only reviewed a population of noncustodial cases that have, or had, arrears at one 

time, and were above the IRS intercept dollar thresholds. The larger population of 

noncustodial parents may also include inappropriate claims like we found. For 

example, a non custodial parent not delinquent in paying child support could falsely 

claim the child as a dependent. This could happen if the child is not residing in the 

taxpayer’s home. Furthermore, we did not verify the validity of other children in the 

household. In addition, IRS only reviewed tax returns for cases with arrears for 1993. 

About half the cases in the sample did not have arrears for that specific year and may 

represent additional errors should they be reviewed. Also, the knowledge that tax 

returns claiming the EITC are subject to this level of review may provide a sentinel 

effect for this population. Although no funds may be collected in the first year of such 

scrutiny, subsequent filings may be more accurate and we thus avoid future losses. 

With the recent passage of the Personal Responsibility and Work Opportunity 

Reconciliation Act (Act), Congress established a Federal Case Registry of Child 

Support Orders (Section 311 of the Act). This regist~ will include a minimum set of 

data as prescribed by regulations established by the Secretary of DHHS. With the 

proper data elements outlined here, and by applying the revenue protection strategy 

used in this review to identify all noncustodial parents, not just the ones known to 

IV-D agencies, IRS could use this data to disallow incorrect exemptions and tax 

credits. In doing so, we believe that additional annual tax loses can be prevented. (It 

11 
should be noted that any pending legislation would need to be reviewed to insure that 

it presents no legal impediments to IRS access to the data for this purpose.) 

In any event, this review demonstrates the feasibility of an administrative approach to 

increase tax compliance without the need for extensive and expensive IRS auditing. 

Besides potentially saving substantial funds for the U.S. Treasury, we believe we have 

found an economical incentive to increase child support payments and enhance 

responsible behavior by noncustodial parents. 

Agency Response 

In their response to our draft report, staff from the Administration for Children and 

Families (ACF) provided a number of technical corrections and other suggestions. 

Where appropriate, we incorporated these changes into this final report. 

The ACF referred us to recommendations in a 1996 Office of Management and 

Budget’s Benefit Systems Review Team report. These recommendations suggest that 

any system changes calling for matches, such as proposed here, be delayed until after 

implementation of the expanded Federal Parent Locator System. 

We defer to IRS as to whether legislative action may be necessary to allow the IRS to 

obtain custodial data in a revenue protection program. However, we believe that 

action to pursue such legislation and to make any necessary adaptations to the Federal 

Parent Locator system or any other data system should take place as soon as possible. 

Once States and OCSE implement new data collection systems, it may be a very 

difficult, costly, and lengthy process to change the components of those systems. A 

better approach is to incorporate identified needs at the design stage and save future 

costs as well as the inevitable inertia that accompanies ad hoc system changes. 

A key element in the design of all the underlying data systems is the inclusion of the 

SSN of each child for whom child support payments have been ordered. It is crucial 

that this data element be included to perform the matches that will be needed--not 

only to prevent inappropriate income tax deductions which we have described in this 

report, but for other potential matches that might be designed in the future to help in 

the child support collection process. This step alone would go a long way to insuring 

the feasibility of efficacious data matches in the future, but if not tended to now, could 

forestall important matches for many years to come. 

We have identified a substantial loss to the U.S. Treasury as a result of this lack of 

custodial data for IRS. The sooner we can halt these losses, the sooner we can boost 

the integrity of the EITC program. Finally, by halting these inappropriate deductions 

and credits, non custodial parents will be encouraged to fulfill their child support 

obligations. 

12

APPENDIX A 

SAMPLING METHODOJX)GY AND ESTIMATION PROCEDURES 

A-1 
To identi& noncustodial parents, in arrears for their child support payments, we


obtained the 1993 Office of Child Support Enforcement (OCSE)/Internal Revenue


Service (IRS) Tax Offset file. This file is generated by the OCSE from data provided


by the States. This file provides IRS with the means to identi~ individuals who are


delinquent in child support. The IRS intercepts any Federal income tax refunds to


offset arrearages in child support payments. The cases are identified by their Social


Security Numbers and were verified as present on the IRS Master File.


There were 3,282,960 cases listed on the Tax Offset file. However, since a


noncustodial parent may be identified as delinquent in more than one State or


multiple times within a State, we created an unduplicated count by consolidating


occurrences of the same SSN within the database. This left us with 2,762,398


unduplicated Social Security Numbers. Based on the unduplicated counts in each


State, we then drew a sample of eight States with probability proportional to size using


the Rao-Hartley-Cochran method (RAO).8 These eight States produced a list of


937,534 unduplicated SSNS. We then submitted this list of SSNS to the Social Security


Administration to determine the earned income associated with each of these SSNS for


1993. All individuals with less than $3,000 in earned income were eliminated as these


individuals were considered unlikely to file a tax return. The results of this procedure


are presented in the following table.


Table 1 

TotalNumberof NumberwithEarned Proportion
 with


Caseson Offset Pereent Incomeof$3,000+ $3,000+Earned


State File ofTotal (Source:
 SSA) Income


Texas


Iowa


Georgia


Pennsylvania


Florida


Michigan


NorthCarolina


New York


Total


Population
 Total


Overall, roughly two-thirds 

132,901 4.81% 92,715 69.76% 

43,970 1.59% 34,703 78.92% 

74,323 2.69% 51,713 69.58% 

134,776 4.88% 87,970 65.27% 

126,742 4.59% 85,912 67.78% 

204,076 7.39% 145,594 71.34% 

62,950 2.28% 57,440 91.25% 

157,7% 5.71% 79,070 50.11% 

937,534 33.9470 635,117 67.74% 

2,762,398 1,871,200 

of the unduplicated cases were found to have a reported 

earned income of over $3,000. For purposes of our projections, we are accounting for 

8 CochrW W?G. (1977). Somulin~ Technimes. John UWeyand Sons, New York third editio~ p.266 

A-2 
approximately 1,871,200 noncustodial parents appearing on the refund offset file 

produced by OCSE. 

At the second stage of sampling, we drew a simple random sample of 250 Social 

Security Numbers from each of the eight selected States. Each of these represents a 

case for our purposes. For each of the individuals associated with each number, we 

went to the appropriate State or local Child Support Enforcement Office and 

obtained, among other data, the name and Social Security Number of all custodial 

parents and children associated with each noncustodial parent and information on the 

arrears related to 1993. Therefore, each case selected for this review will have one 

noncustodial parent, one or more custodial parents and one or more children included 

in the case file. All results, including any estimated potential losses, are calculated on 

a case basis. The results of this second stage sampling are presented in Table 2. 

Table 2 

SSNS Returns Returns 

State Sampled Found Reviewed 

Texas


Iowa


Georgia


Pennsylvania


Florida


Michigan


North Carolina


New York


Total 

250 179 140 

250 172 67 

250 178 84 

250 184 72 

250 166 72 

250 171 77 

250 164 113 

250 176 73 

2,000 1,390 698 

The data gathered from the case files was automated and given to the National Office 

for Research and Analysis, Office of Tax Compliance, IRS. The IRS reviewers located 

1,390 of the 2,000 returns called for. They reviewed the 1993 tax returns for each 

noncustodial parent and all corresponding custodial parents where the parent had 

child support arrears related to 1993. A total of 698 cases out of the 1,390 met this 

criteria. For the 698 cases where tax returns were reviewed for the noncustodial 

parent, an additional 344 tax returns for the custodial parent were identified, found 

and reviewed. 

Projections were made appropriate to the sampling methodology using the Two-stage 

RHC subroutine from the RAT-STATS Statistical Software.g 

9 Department of Health and Human Services, Ofice of Inspector General, Ojj%e of Audit Services, RAT-STATS 

Statktical Software. 

A-3

APPENDIX B 

VARIANCE AND ESTIMATED CONFIDENCE INTERVALS 

B-1 
Variancesand EstimatedConfidenceIntervals 

Foreachoftheestimated totals presented inTable A in the report,we provide the standarderrors and the95percent confidence
 intervals. 

We alsoprovide anestimate oftheprecision ofthese totals. Theprecisionsdefined asthesemi-width oftheconfidence internalasa percent


w 

N 

oftheestimate.


Class
ofError


NonCustodialParentsReturnx 

Disallow
 EITC claims.


Disallow exemptions
 duetoAFDC


payments.


Disallow exemption
 duetolackof


documentation.


Disallow headofhousehold
 status.


Disallow child
carecredit.


Custodial
 ParentaRe95% Confiden@Interval


Estimate Standard
 Error LowerLimit UpperLimit Precision


$100,371,530 27,246,178 $46,970,111 $153,772,948 53.2% 

$42,949,588 6,289,626 $30,621,921 $55,277,255 28.7% 

$35,138,845 9,284,912 $16,940,417 $53,337,273 51.8% 

$20,777,243 4,460,100 $12,035,625 $29,518,861 42.1% 

$2,605,109 1,632,034 ($593,678) $5,803,896 1228% 

Disallow exemption
duetoAFDC payments. $9,688,103 3,148,093 $3,517,841 $15,858,365 63.7%


Disallow custodial exemption,
oncustodial $558,466 489,614 ($401,177) $1,518,109 171.8%


exemption
allowed.


I 
APPENDIX C 

AGENCY COMMENTS 

c-1 
,. .-*“IQ, 

*0+ 

4<

% 

~’ 

: DEPARTMENT OF HEALTH& HUMAN SERVICES ,

8 

%.wdm 

September 24, 1996 

TO:	 June Gibbs Brown 

Inspector General 

FROM : Mary Jo Bane 

Assistant Secretary 

for Children a 

SUBJECT :	 OIG Draft Report C~Unpaid Child 

Deductions, ’’-(O105z95900070)O) 

Thank you for the opportunity ‘to respond


findings concerning unpaid Child Support


ADMINiSmATKIN FORCHILDRENANDFAMILIE: 

Office of the AssistantSecretary,,Suite 600 

370L’Enfant Promenade, S.Vd 

WasWwton, D.C.20447 

Support and Income Tax 

‘-


to your draft report of


and Income Tax


Deductions. If you have questions, please contact David Ross of


my staff at (202) 401-9370.


General Comments:


This draft report presents findings that cross-matching data


sources to identify federal tax-filing errors among noncustodial


parents in child support cases can yield savings to the federal


treasury.


We would defer to the Department of the Treasury, and especially


the Office of the Assistant Secretary for Tax Policy, in


estimating the impact of the proposed course of action on the


federal treasury.


From a timing standpoint, we would also note, as referenced


below, the views of the Benefit Systems Review Team convened by .


the Office of Management and Budget.


Technical Comments:


Page iii says the annual IRS offset file may have to be expanded


to accommodate IRS needs.


specific reference to the


means by which IRS obtain


on the restrictions on use


Registries, and in Federal


these data sources should


We recommend the report delete


IRS tax offset file and not specify the


these data. Further research i.s needed


of data in State and Federal Case


New Hire provisions of statute, before


be promoted.


Page iii also says that legislation now pending i.n Congress


includes establishing a national registry of child support court


orders. When the final report is updated to reflect passage of


the Personal Responsibility and Work Opportunity Reconciliation


c-2 
--

--

Page 2 - June Gibbs Brown 

Act (PRWORA), we ask that you note that data of use to IRS reside 

in the State Child Support Case Registries which includes nonIV-D cases not necessarily the Federal Case Registry. 

Section 316 (f) of PRWORA gives the Secretary of the Treasury 

access to information in the National Directory of New Hires for 

the purposes of administering section 32 of the Internal Revenue 

Code of 1986 (the advance payment of the earned income “tax credit 

under section 35o7 of such Code, and verifying a claim with 

respect to employment in a tax return) . 

The Office of Management and Budget issued a report by the 

Benefit Systems Review Team (BSRT), Inmrovinq the Coordination of


.Government Information Resources, (June 1996) . In Chapter 4:


Data Resources --The Tools to Fight Fraud and Reduce Error, the


BSRT noted that the National Directory of New Hires and the


companion Federal Case Registry, are powerful tools to ensure


payment accuracy and maintain overall program integrity in


Federally-sponsored income maintenance, annuity, disability


benefit, and student loan programs. The BSRT recommended that


the FPLS consider permitting Federally-sponsored income support


programs with the opportunity to verify their benefit payments


and debt collection efforts with data contained in Expanded FPLS.


The report noted that the recommendation should be considered for


legislative action after the initial Directory has been


implemented and should be given careful congressional


deliberation, similar to the review given by Congress to proposed


modifications to access to IRS databases.


Page 2 says income withholding by employers began in 1989. In


1985, states were required to withhold earning for arrearages


equal to one month~s worth of support, or less, and in IV-D


cases, they were to do so without returning to court to file a


withholding order. In 1989, in all new and modified IV-D orders,


withholding was required whether there was an arrearage or not. 

Exceptions were permissible where the parties agreed otherwise or


a court found good cause to waive the withholding requirement. - -


c-3