a

GAO

United States Government Accountability Office

Report to Congressional Requesters 

December 2004 EARNED INCOME 

TAX CREDIT 

Implementation of 

Three New Tests 

Proceeded Smoothly, 

But Tests and 

Evaluation Plans Were 

Not Fully Documented 

GAO-05-92
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-92.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Mike Brostek at 

(202) 512-9110 or brostekm@gao.gov. 

Highlights of GAO-05-92, a report to 

Congressional Requesters 

December 2004

EARNED INCOME TAX CREDIT 

Implementation of Three New Tests 

Proceeded Smoothly, But Tests and 

Evaluation Plans Were Not Fully 

Documented 

IRS implemented three tests in 2004 to address leading sources of EITC 

errors: a qualifying child test, where selected taxpayers were asked to 

document that their child lived with them for more than half the year in 2003; 

a filing status test, where selected taxpayers were asked to provide 

documentation to prove the accuracy of their 2003 filing status, and an 

income misreporting test, where a new screening process was used to select 

EITC returns that identify taxpayers likely to have the most significant 

changes in their assessments due to underreporting of income on their tax 

return. 

Leading Sources of EITC Errors Contributing to Overclaims in Tax Year 1999 

IRS’s implementation of the tests proceeded smoothly and largely as 

planned. However, some information, such as a key change in the filing 

status test, was not well documented and the level and quality of some 

services provided to test participants were not measured. This lack of 

documentation hindered monitoring, oversight, and did not foster a common 

understanding of the tests. For the 2005 tests, IRS made key changes to the 

qualifying child test to encourage taxpayers to certify in advance of filing 

their return and to attempt to simulate what might happen with nationwide 

implementation. IRS also changed the sample selection criteria for the filing 

status test to better target noncompliant taxpayers. 

IRS’s plans for evaluating the 2004 tests generally lacked documentation and 

detail for many key issues, which undermined their value to managers and 

stakeholders. For example, IRS did not specify how it planned to analyze 

some qualifying child survey data. In essence, an evaluation plan is the 

management plan or roadmap for the evaluation endeavor and welldeveloped plans facilitate test management and oversight. Despite the 

importance of having evaluation plans prior to implementation, IRS had not 

completed its plans for the 2005 tests before two of the tests had begun.

Research has shown that the 

Earned Income Tax Credit (EITC) 

has helped lift millions of 

individuals out of poverty. In 

recent years, the Internal Revenue 

Service (IRS) has paid 

approximately $30 billion annually 

to about 20 million EITC recipients. 

However, the program also has 

experienced a high rate of 

noncompliance. IRS estimated that 

EITC overclaim rates for tax year 

1999, the most recent data 

available, were between 27 and 32 

percent of dollars claimed or $8.5 

billion and $9.9 billion, respectively. 

We were asked to describe the 

three tests IRS has begun to reduce 

overclaims and how the funds 

appropriated for them were spent; 

assess how well IRS implemented 

the tests and describe planned 

refinements for the 2005 tests; and 

assess whether IRS’s evaluation 

plans had sufficient documented 

detail to facilitate managerial 

review and stakeholder oversight 

and describe the status of the 2005 

evaluation plans. 

What GAO Recommends

GAO recommends that the 

Commissioner of Internal Revenue 

ensure the rationale for key 

decisions is documented; 

information on the quality and use 

of all types of taxpayer assistance 

is obtained; limitations are clearly 

stated when disseminating results; 

and development of detailed 

evaluation plans for the 2005 tests 

is completed. The Commissioner 

agreed with the recommendations. 
Page i GAO-05-92 Earned Income Tax Credit

Contents

Letter 1

Results in Brief 4

Background 6

IRS Implemented Three Tests on Leading Sources of EITC 

Noncompliance and Reported Spending Most of the Funding 

Received on the Tests 10

Tests Implemented Smoothly, and Refinements for the Fiscal Year 

2005 Tests Made 24

IRS’s 2004 Evaluation Plans Lacked Sufficient Documented Detail to 

Allow for Oversight; Evaluation Plans for 2005 Tests Were Not 

Completed Before Two of the Tests Had Begun 35

Conclusions 39

Recommendations for Executive Action 40

Agency Comments and Our Evaluation 41

Appendixes

Appendix I: Scope and Methodology 43

Appendix II: Updated Results from the Income Misreporting Test as of 

September 30, 2004 45

Appendix III: Comments from the Internal Revenue Service 47

Appendix IV: GAO Contacts and Staff Acknowledgments 51

GAO Contacts 51

Staff Acknowledgments 51

Tables Table 1: EITC Requirements for Tax Year 2003 7

Table 2: Description of the Qualifying Child Certification Test and 

Subtests 13

Table 3: Criteria for Assessing IRS’s Test Implementation 44

Table 4: Status of Income Misreporting Test, June 26, 2004 and 

September 30, 2004 Results 46

Figures Figure 1: Leading Sources of EITC Errors Contributing to 

Overclaims in Tax Year 1999 9

Figure 2: Characteristics of the Test Sample for the Qualifying 

Child Test 12

Figure 3: The Qualifying Child Certification Test Process 15

Figure 4: The Filing Status Test Process 18
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Contents

Page ii GAO-05-92 Earned Income Tax Credit

Figure 5: Characteristics of the Taxpayers in the Income 

Misreporting Test by Filing Status 21

Figure 6: The Income Misreporting Test 22
Page 1 GAO-05-92 Earned Income Tax Credit

United States Government Accountability Office

Washington, D.C. 20548

A

December 30, 2004 Letr

The Honorable Amo Houghton

Chairman, Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

The Honorable Earl Pomeroy

Ranking Minority Member, Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

Researchers generally consider the Earned Income Tax Credit (EITC), a 

federal program providing tax relief to low-income workers, to be a 

successful antipoverty program. The Council of Economic Advisers 

reported that because of the EITC, an estimated 4.3 million individuals—

including 2.2 million children—were lifted out of poverty in 1997.1

 In 

recent years, IRS has paid about $30 billion annually to about 20 million 

EITC recipients. However, the EITC program has long experienced high 

rates of noncompliance. IRS’s most recent EITC compliance study 

estimated that between $8.5 billion and $9.9 billion of the EITC claims filed 

for tax year 1999 should not have been paid. This amount represents an 

estimated rate of EITC overclaims—total erroneous claims less any 

amount that IRS recovered or expects to recover—of between 27 and 32 

percent of EITC dollars claimed. 

In February 2002, when the most recent compliance study was released, a 

task force of IRS and Treasury officials was convened to find ways of 

reducing EITC overclaims. The IRS/Treasury task force found that the 

three leading errors were responsible for about $7 billion of overclaims 

each year. These errors resulted from taxpayers (1) claiming children who 

were not a qualifying child, meaning they do not meet certain requirements, 

primarily that the child did not live with them for more than half the tax 

year ($3 billion in overclaims); (2) using an incorrect filing status of either 

single or head of household, when the correct status was married filing 

jointly or married filing separately ($2 billion in overclaims); and 

1

Council of Economic Advisers, Good News for Low Income Families: Expansions in the 

Earned Income Tax Credit and the Minimum Wage (Washington, D.C.: December 1998). 

The Council of Economic Advisers gives advice directly to the President and other senior 

members of the administration on fiscal policy. 
Page 2 GAO-05-92 Earned Income Tax Credit

(3) misreporting, primarily underreporting, their income ($2 billion in 

overclaims). In all three cases, these errors resulted in taxpayers receiving 

a larger credit than they should have received. 

IRS received about $52 million in fiscal year 2004 for a new EITC five-point 

initiative to improve service, fairness, and compliance with the EITC 

program. Included in that amount were funds for three EITC tests to 

evaluate new methods for reducing the overclaim rate in the three leading 

problem areas identified by the IRS/Treasury task force—qualifying child, 

filing status, and income misreporting. After designing the tests and 

evaluation plans to guide the agency in its assessment of the tests, IRS 

implemented them beginning in fiscal year 2004. Although the tests and 

evaluation of them continued into fiscal year 2005, IRS issued a status 

report to Congress on the tests in August 20042

 to comply with a legislative 

mandate.3 IRS also decided to begin another round of EITC tests in fiscal 

year 2005 in the same three areas, but with some refinements. The 

qualifying child and income misreporting tests started in the first quarter of 

fiscal year 2005 and the filing status test will begin in the second quarter of 

2005.

Because IRS’s plans surrounding the tests have garnered much attention,4

you asked us to review each of the fiscal year 2004 tests and (1) describe 

the tests and how funds appropriated for them were spent, (2) assess how 

well IRS implemented the tests and describe IRS’s planned refinements for 

the fiscal year 2005 tests, and (3) assess whether IRS’s plan for evaluating 

the tests contained sufficient documented detail to facilitate managerial 

review and stakeholder oversight and describe the status of IRS’s 

evaluation plan for the fiscal year 2005 tests. 

To describe the tests and determine how the funds appropriated for them 

were spent, we analyzed IRS documents and interviewed IRS officials. Our 

assessment of IRS’s implementation of the tests and documentation of its 

evaluation plans for the tests was based on IRS’s stated goals for them, 

2

 Internal Revenue Service, IRS Earned Income Tax Credit (EITC) Initiative: Status 

Report to Congress (Washington, D.C.: August, 2004).

3

 Pub. L. No. 108-199, 118 Stat. 3 (2004). 

4

 We reported on this topic in 2003, focusing on the test relating to qualifying child errors. 

See GAO, Earned Income Credit: Qualifying Child Certification Test Appears Justified, 

but Evaluation Plan Is Incomplete, GAO-03-794 (Washington, D.C.: Sept. 30, 2003).
Page 3 GAO-05-92 Earned Income Tax Credit

which were that the tests reduce overclaims and, for the qualifying child 

test, also maintain EITC participation for eligible participants and minimize 

taxpayer and IRS administrative burden. 

To assess how well IRS implemented the tests and describe IRS’s planned 

refinements for the 2005 tests, we developed criteria to evaluate IRS’s 

implementation (i.e., the execution and day-to-day management) of the 

tests. Those criteria included whether IRS sent correspondence to the 

taxpayers’ correct address, where taxpayers could go to receive assistance 

about the tests and the quality of that assistance, IRS’s hiring and training 

of staff, and other aspects of administering the tests. To assess the 

implementation based on these criteria, we analyzed IRS’s status reports; 

reviewed policies and procedures; observed test operations in Kansas City, 

Missouri; Atlanta, Georgia; and Fresno, California and selected those 

locations based on a variety of reasons, including the location of key 

managers and work; interviewed IRS officials; and reviewed a judgmentally 

selected sample of cases for each test at those locations in order to review 

a variety of case types. 

To assess whether IRS’s plans for evaluating the tests contained sufficient 

documented detail to facilitate managerial review and stakeholder 

oversight, we used GAO guidance and the social science evaluation 

literature to identify key attributes of an evaluation. We shared these 

attributes with IRS officials and they generally agreed to their relevance. 

These attributes included the research design, outcome measures,5

 target 

and sample populations, data collection activities, analyses, and 

dissemination of results. We obtained all available documentation on IRS’s 

evaluation plans for each of the tests and reviewed that documentation to 

determine whether we could understand from the documentation alone 

how IRS planned to address the key attributes. Where we could not, we 

interviewed IRS officials to further understand whether and how the 

officials planned to address those key attributes. Written documentation 

should be complete, facilitate tracing of events, and be readily available for 

examination to foster a common understanding of the program and

5

 Outcome measures are used to assess the tests’ impact. Well-defined outcome measures 

clearly name and define a measure as well as the methodology used in its calculation. 
Page 4 GAO-05-92 Earned Income Tax Credit

facilitate oversight.6 To describe the status of IRS’s evaluation plan for the 

fiscal year 2005 tests, we primarily relied on interviews with IRS officials. 

Appendix I provides more detail on the scope and methodology, including a 

more detailed description of the implementation criteria used in 

conducting our work.

We reviewed documentation and interviewed IRS officials to ensure that 

the data that we received from IRS were reliable for the purposes used in 

this report and determined they were. As we conducted our work, IRS 

continued to collect and analyze significant amounts of data from each test. 

The tests continued into fiscal year 2005, primarily to finish cases where 

taxpayers had either not responded to IRS’s request for substantiation or 

the substantiation provided was deemed insufficient by IRS. Thus, the 

analyses presented in this report are based on work that we performed 

while the tests were ongoing. Final conclusions about the impact of the 

tests on overclaim rates, burden, and participation should not be made 

until all data are collected and analyzed and IRS publishes its final report, 

which is due to Congress by June 30, 2005. We performed our work from 

October 2003 to December 2004 in accordance with generally accepted 

government auditing standards.

Results in Brief IRS implemented three tests—qualifying child, filing status, and income 

misreporting—to evaluate the potential for reducing the EITC overclaim 

rate beginning in fiscal year 2004. For the qualifying child test, selected 

taxpayers were asked to document, when filing their 2003 tax return, that 

their qualifying child lived with them for more than half the tax year. The 

filing status test had selected taxpayers provide documentation to prove 

the filing status claimed on their 2003 tax return. For the income 

misreporting test, IRS employed a new screening process to select EITC 

tax returns from an existing program to identify taxpayers likely to have 

the most significant underreporting of income on their tax return and, 

therefore, the highest potential EITC overclaim amount. IRS reported 

spending about $17.5 million on the three EITC tests—about $3.2 million 

less than planned because expected workloads did not materialize. 

Because IRS spent less than planned on the tests themselves, it was able to 

6

 See GAO, Internal Control Management and Evaluation Tool, GAO-01-1008G

(Washington, D.C.: August 2001); GAO, Standards for Internal Controls in the Federal 

Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999); and GAO, 

Designing Evaluations, GAO/PEMD-10.1.4 (Washington, D.C.: May 1, 1991). 
Page 5 GAO-05-92 Earned Income Tax Credit

fund some activities under the five-point initiative that otherwise would 

have gone unfunded.

Implementation of the tests generally proceeded smoothly. IRS addressed 

the major issues that arose during implementation and based planned 

refinements for the 2005 tests primarily on lessons learned from the 2004 

tests. Some of the strengths of the tests’ implementation include that they 

were conducted largely as planned and IRS hired and provided staff with 

training. An example of an issue that arose and IRS subsequently 

addressed was when some examiners mistakenly required taxpayers who 

were part of the filing status test to complete documentation required for 

the qualifying child test. Once this problem was identified, according to IRS 

officials, internal quality reviews helped ensure it was no longer occurring. 

Although implementation generally proceeded smoothly, some important 

information about the tests, including the basis for a key policy change, 

was not well documented and the level and quality of some services offered 

to taxpayers were not measured. As a result, it was difficult for 

management or staff to gain a common understanding of the program and 

rationale for changes and to fully monitor the implementation. Further, 

developing and documenting such information would enable others to 

review the methodology. IRS made refinements to all three tests for the 

subsequent round of fiscal year 2005 tests. Two of the most significant 

refinements were to the qualifying child test, including that (1) taxpayers 

would be encouraged to certify in advance of filing their return that their 

child met the EITC residency requirement and (2) a portion of the 

taxpayers would be drawn from a single community.7

 According to IRS 

officials, earlier certification could help them process cases more quickly 

and get eligible taxpayers their refund faster. Targeting one community 

would simulate what might happen if a certification requirement were 

imposed nationwide. Another key refinement was related to the filing 

status test, whereby IRS would change the sample selection criteria to 

better target noncompliant taxpayers. 

IRS’s plans for evaluating the three 2004 tests had critically important 

strengths such as identifying test goals and linking evaluation objectives 

and outcome measure to these goals. However, IRS’s evaluation plans were 

generally not in sufficient detail to facilitate managerial review and 

7

 Although IRS mailed letters to sampled taxpayers in this community, some uncertainty 

exists about implementation because of a lawsuit that was filed to block the test as we were 

finalizing our report. 
Page 6 GAO-05-92 Earned Income Tax Credit

stakeholder oversight and help ensure that the evaluations’ results would 

be communicated in such a manner that others could understand and judge 

their strengths and limitations. In essence, an evaluation plan is the 

management plan or roadmap for the evaluation endeavor and would 

facilitate oversight. As such, the more completely a plan is developed, the 

more likely it will be useful to managers in ensuring that the evaluation is 

well-executed. IRS’s evaluation plans lacked detail, for example, about key 

planned analyses that IRS intended to conduct. For example, IRS did not 

specify how it planned to analyze some qualifying child survey data. 

Despite the importance of having detailed plans prior to implementation, 

IRS has not completed its evaluation plans for the fiscal year 2005 tests 

even though two of those tests have begun.

We are recommending that the Commissioner of Internal Revenue ensure 

that the rationale for key policy decisions and other significant events be 

documented; obtain some information on the quality and level of service 

for all types of taxpayer assistance provided as part of the EITC tests; when 

disseminating the test results ensure they clearly state test and evaluation 

limitations and complete the development of comprehensive and 

adequately detailed evaluation plans for the 2005 tests. 

We requested comments on a draft of this report from the Commissioner of 

Internal Revenue. We received written comments, which are reprinted in 

appendix III. In his comments, the Commissioner said that IRS agreed with 

the recommendations. We further discuss the Commissioner’s comments 

in the “Agency Comments and Our Evaluation” section of the report and in 

other sections where appropriate. 

Background The EITC, enacted in 1975,8

 was originally intended to offset the burden of 

Social Security taxes and provide a work incentive for low-income 

taxpayers. The credit has been modified several times since its 

introduction, and three laws9

 have been enacted in recent years aimed at 

resolving some concerns with EITC rules. Despite modifications, the 

original goal of the credit remains intact and the EITC continues to provide 

a substantial benefit to millions of American families. 

8

 26 U.S.C. Sec. 32.

9

 Pub. L. No. 107-16, 115 Stat. 38 (2001), Pub. L. No. 106-170, 113 Stat. 1860 (1999), and Pub. 

L. No. 105-34, 111 Stat. 788 (1997). 
Page 7 GAO-05-92 Earned Income Tax Credit

The EITC is a refundable tax credit, meaning that qualifying working 

taxpayers may receive a refund greater than the amount of income tax they 

paid for the year. EITC payments have a (1) phase-in range in which higher 

incomes yield higher EITC amounts, (2) plateau phase in which EITC 

amounts remain the same even as income rises, and (3) phase-out range in 

which higher incomes yield lower EITC amounts. The amount of credit a 

taxpayer receives is based on several other factors, such as the presence 

and number of qualifying children. In general, taxpayers with one or more 

qualifying children receive a higher credit than taxpayers without 

qualifying children. For tax year 2003, the amount of EITC that could be 

claimed with two qualifying children ranged from $0 to $4,204 per tax 

return filed, depending on income and filing status.

EITC requirements for tax year 2003 include rules for all taxpayers 

claiming the credit and additional rules that differ depending on whether or 

not a taxpayer has qualifying children (see table 1). 

Table 1: EITC Requirements for Tax Year 2003

Rules for all taxpayers 

claiming the EITC

Additional rules for taxpayers 

with a qualifying child

Additional rules for 

taxpayers without a 

qualifying child

Must have a valid Social 

Security number

Income less than: If one child: 

$29,666 (or $30,666 if married 

filing jointly). If more than one 

child: $33,692 (or $34,692 if 

married filing jointly).

Income less than: $11,230 

(or $12,230 if married 

filing jointly)

Cannot use married filing 

separately status

Child must meet age, relationship, 

and residency tests a

Must be at least 25 years 

old, but under 65

Must be a U.S. citizen or 

resident alien all year

Child can be claimed by one 

taxpayer only

Cannot be the dependent 

of another person

Cannot file form 2555 or 

2555-EZ

Cannot be a qualifying child of 

another taxpayer

Cannot be a qualifying 

child of another taxpayer

Must have investment 

income of $2,600 or less

Must have lived in U.S. 

more than half the year

Must have earned 

income

Source: IRS.

a

 In general, a qualifying child must be under 19 years old at the end of the tax year and have lived with 

the taxpayer for more than half the year. To meet the relationship test, the qualifying child had to be a 

son, daughter, adopted child, stepchild of the taxpayer, or a descendent of any such individual. 

Sisters, brothers, stepsisters, stepbrothers, and descendents of any such individuals also qualify if the 

taxpayer cares for the individual as they would their own child. In addition, a foster child can qualify for 

the relationship test if certain conditions are met. 
Page 8 GAO-05-92 Earned Income Tax Credit

IRS has periodically measured EITC compliance.10 For tax year 1999, (the 

most current data available), IRS estimated the EITC overclaim rates at 27 

to 32 percent of EITC dollars claimed, or $8.5 billion to $9.9 billion.11 IRS 

has limited data on underclaims, which for tax year 1999 were estimated to 

be $710 million to $765 million. Because of the persistently high rates of 

noncompliance, we also have identified the EITC program as a high-risk 

area for IRS since 1995.12

In February 2002, the compliance study was released and the Assistant 

Secretary of the Treasury, Tax Policy, and IRS Commissioner convened a 

joint IRS/Treasury task force to identify ways of reducing EITC overclaims, 

while maintaining participation among eligible claimants and minimizing 

taxpayer and IRS’s administrative burden. The task force found that the 

leading causes of errors resulting in EITC overclaims were due to 

taxpayers (1) claiming children who were not a qualifying child, (2) using 

an incorrect filing status, and (3) misreporting their income. With this 

information, the task force designed what ultimately became initial 

versions of the three tests, as show in figure 1. As envisioned by the task 

force, even if fully implemented, IRS does not plan to apply the test 

requirements to the entire EITC population because IRS can use available 

data to verify the eligibility of certain taxpayers.

10 IRS measured EITC overclaim rates in the past using differing methodologies. In 1997, 

IRS estimated the overclaim rate at 23.8 to 25.6 percent of EITC dollars claimed. 

11 Department of the Treasury, Internal Revenue Service, Compliance Estimates for Earned 

Income Tax Credit Claimed on 1999 Returns (Washington, D.C.: Feb. 28, 2002).

12 Prior to 2001, EITC was part of a broader IRS tax filing fraud high-risk area that we 

defined. Beginning in 2001, the focus of that designation was narrowed to EITC. GAO, HighRisk Series: An Update, GAO-01-263 (Washington, D.C.: January 2001).
Page 9 GAO-05-92 Earned Income Tax Credit

Figure 1: Leading Sources of EITC Errors Contributing to Overclaims in Tax Year 

1999

Taxpayers who use an 

incorrect filing status

Taxpayers who misreport 

their income

Source: GAO.

Children who do 

not meet the EITC 

residency or 

relationship 

requirements

$3 billion

$7 billion

$2 billion $2 billion

Qualifying Child Test Filing Status Test Income Misreporting Test

According to IRS research, three types of errors comprised approximately $7 billion 

of the $8.5 billion to $9.9 billion in overclaims estimated in tax year 1999.

= 1040

$33,000

Marriage

certificate W-2

$37,000

Because a new analysis of EITC compliance using 2001 tax return 

information is not expected to be complete until spring 2005, IRS did not 

know whether compliance has significantly changed since 1999 when 

developing the EITC tests. However, IRS officials do not think EITC 

compliance has improved substantially since then. In October 2004, 

Congress passed a new law to make the definition of a qualifying child 

uniform in various IRS provisions, but those changes are not effective until 

tax years after December 31, 2004. In general, the revised definition 

appears to mainly affect other tax situations, such as claiming dependents, 

more than just affecting the EITC.13 IRS is studying whether the change 

would affect any testing that may be done in 2006.

13 Pub. L. No.108-311, 118 Stat. 1166 (2004).
Page 10 GAO-05-92 Earned Income Tax Credit

Having a Complete 

Evaluation Plan Before 

Implementation Helps to 

Ensure Success 

IRS completed its initial evaluation plans for the three EITC tests in 

December 2003. In September 2003, we recommended that IRS accelerate 

the development of its qualifying child evaluation plan to help ensure the 

success of the test. 14 

An evaluation plan ideally should be completed and disseminated for 

review and feedback before beginning the research activity (or in this case, 

test). As we reported, although an evaluation plan need not precisely 

identify all issues and how they will be evaluated before implementation, 

the more complete a plan is, the more likely the evaluation will be 

sufficient and support future decisions. IRS’s Internal Revenue Manual15

also recognizes the desirability of having an evaluation plan in place before 

a project is implemented; for example, it requires such plans before 

reorganizations.

IRS Implemented 

Three Tests on Leading 

Sources of EITC 

Noncompliance and 

Reported Spending 

Most of the Funding 

Received on the Tests

In an effort to implement the joint IRS/Treasury task force 

recommendations, IRS implemented three new tests—qualifying child 

certification, filing status, and income misreporting—in 2004. IRS reported 

spending about $17.5 million on the three EITC tests—about $3.2 million 

less than planned. Because IRS spent less than planned on the tests, it was 

able to fund some activities under the five-point initiative that otherwise 

would have gone unfunded.

Qualifying Child 

Certification Test Required 

Substantiation of Child 

Residency

The purpose of the qualifying child certification test was to evaluate the 

impact on the test goals of asking taxpayers to substantiate—when filing 

their tax return—that their qualifying child lived with them for more than 

half the tax year, as required by the EITC (see table 1). Under current rules, 

taxpayers are only required to substantiate that their child satisfied this 

residency requirement if they are being audited by IRS on this issue. 

14 GAO-03-794.

15 See Internal Revenue Manual 1.1.4. 
Page 11 GAO-05-92 Earned Income Tax Credit

This test involved two random samples of 25,000 taxpayers who claimed 

one or more qualifying children for tax year 2002: a test sample, whose 

members were asked to substantiate their qualifying child’s residency, and 

a control sample, whose members had similar characteristics to the test 

sample, but were not asked for any substantiation. Both samples were 

designed to include taxpayers (1) most likely to make errors and (2) whose 

qualifying child eligibility could not be verified from information available 

to IRS. IRS used prior research results to determine which taxpayers 

would be most likely to incorrectly claim a qualifying child. 

The research showed that with those taxpayers most likely to make errors, 

the errors often correlated with the taxpayer’s relationship to the child and 

the taxpayer’s gender and filing status. Taxpayers most frequently making 

qualifying child errors included both fathers and males and females who 

were not the child’s parents and who filed as single or head of household. 

IRS also used available data to obtain evidence about taxpayers and 

whether their qualifying children met residency and relationship 

requirements. For example, a child’s residency could be established with 

some certainty by using the Department of Health and Human Services’ 

Federal Case Registry, and a child’s relationship to the taxpayer could be 

established with some certainty using the Social Security Administration’s 

KIDLINK.16 When this available evidence supported the taxpayers’ EITC 

claim that they had a qualifying child, those taxpayers were excluded from 

the qualifying child test. 

Prior research showed that taxpayers who comply with the residency 

requirement also comply in most cases with the relationship requirement. 

Thus, if a taxpayer’s child met the residency requirement, there was a high 

probability that the relationship requirement would be met as well. Given 

this analysis and difficulties IRS encountered in identifying documents that 

taxpayers could readily obtain to prove their relationship to the child, any 

taxpayer whose EITC eligibility was not verified from available data 

became eligible to be selected for the qualifying child test in which they 

would be asked to substantiate that the child lived with the taxpayer for 

16 The Federal Case Registry compiles court and other records that indicate who is the 

custodian for a child. IRS assumes that children live with the custodian of record. KIDLINK 

ties parents’ and children’s Social Security numbers for children born after 1998 in U.S. 

hospitals.
Page 12 GAO-05-92 Earned Income Tax Credit

more than 6 months during the year. Our September 2003 report contains a 

more detailed explanation on how the sample was designed.17

As figure 2 shows, males filing as single or head of household comprised 

the majority of the test sample. The control group had characteristics 

similar to the test group. 

Figure 2: Characteristics of the Test Sample for the Qualifying Child Test

Married filing jointly

Single or head of household females

Single of head of household males

5%

63% 32%

Source: GAO analysis of IRS data.

The qualifying child test had three components—a general test and two 

subtests. Under the general test, taxpayers received test documentation in 

English only18 and could have provided substantiation in one or any 

combination of three ways—records, letters, or a Schedule A, also known 

as the general affidavit.19 Records that a taxpayer could provide included 

school, medical, landlord, or child-care provider documentation. Letters 

were statements from certain individuals, such as a member of the clergy 

or a community based organization official, on official letterhead. 

17 GAO-03-794.

18 Taxpayers were told on the forms that they could request that documents be provided in 

Spanish. 

19 Schedule A, referred to as the general affidavit, can be signed by parties including an 

attorney, child care provider, clergy, court official, employer, health care provider, Indian 

tribal official, landlord, school official, or social service agency or other government official. 
Page 13 GAO-05-92 Earned Income Tax Credit

Affidavits were legal documents in which an individual attests that the 

taxpayer’s qualifying child resided with the taxpayer for a certain period of 

time. To be accepted, the document(s) had to contain various data, such as 

the names of the qualifying children and the dates the child lived with the 

taxpayer.

In response to concerns that taxpayers may have difficulty obtaining 

certification through the official sources cited on the Schedule A, such as 

through an attorney or landlord, and that English-only documents might 

weaken participation among taxpayers with limited English proficiency, 

IRS also implemented two subtests. The Schedule B, also known as the 

friends and neighbors affidavit subtest, for 1,000 of the 25,000 taxpayers, 

broadens the definition of the individuals allowed to certify the child’s 

residency to include those who have personal knowledge of a taxpayer’s 

circumstances, such as certain family members.20 The purpose of this 

subtest was to determine whether such individuals could facilitate an 

increase in residency certification for eligible taxpayers. The taxpayers in 

the Spanish subtest, 1,000 of the remaining 24,000, received documents in 

both English and Spanish. The purpose of this subtest was to determine 

whether Spanish language documents would increase the number of 

taxpayers attempting to certify their child’s residency. Table 2 describes 

the test and subtests.

Table 2: Description of the Qualifying Child Certification Test and Subtests

Test or Subtest Description of Test 

General Test 

(23,000 taxpayers)

• Documentation sent in English only

• Only General Affidavit (Schedule A) provided

Schedule B Subtest 

(1,000 taxpayers)

• Documentation sent in English only

• Friends and Neighbors Affidavit (Schedule B) provided

Spanish Subtest 

(1,000 taxpayers)

• Documentation sent in English and Spanish

• Only General Affidavit (Schedule A) provided

Source: GAO analysis of IRS data.

20 The Schedule B affidavit, referred to as the friends and neighbors affidavit, differs from 

the Schedule A affidavit in that it broadens the list of individuals who can sign the affidavit 

to anyone who has records or personal knowledge, other than the taxpayer’s spouse, 

dependent, qualifying child, or parent of the qualifying child. 
Page 14 GAO-05-92 Earned Income Tax Credit

IRS sent the selected taxpayers21 five documents in December 2003 

informing them about the test, including: 

1. Notice 84-A, a letter informing the taxpayer about the new certification 

requirements; 

2. Form 8836, Qualifying Children Residency Statement, to be 

completed by the taxpayer and returned to IRS; 

3. Schedule A or B (an affidavit) that could be used for certification; 

4. Publication 3211M, Earned Income Tax Credit Questions and 

Answers; and 

5. Publication 4134, Free/Nominal Cost Assistance Available for Low 

Income Taxpayers.

Under the test and subtests, once taxpayers received the documents from 

IRS, they were supposed to obtain supporting documents to prove their 

qualifying child’s residency and send that documentation back to IRS in the 

same envelope as their 2003 tax return. IRS would withhold, or “freeze,” the 

EITC portion of the taxpayers’ refund until acceptable documentation 

proving a child’s residency was received. Once IRS received the 

documentation, IRS examiners in Kansas City, Missouri, would review it 

and send a letter to the taxpayer accepting the claim, asking for additional 

information, or rejecting the claim. If the taxpayers provided acceptable 

documents, IRS would release the taxpayer’s EITC portion of their refund. 

If acceptable documentation was not provided or if no response was 

provided following a second notification letter, the taxpayer’s EITC claim 

would be denied and the taxpayer would be informed of his or her right to 

appeal to the U.S. Tax Court.22 This process is depicted in figure 3. 

21 Some taxpayers were removed from the 25,000 sample and not replaced because IRS 

learned that they had mitigating situations, such as serving in combat or living in a disaster 

zone. The true sample size (i.e., the number of taxpayers IRS required documentation from) 

was actually 24,711.

22 IRS allowed for internal appeal hearings only if the taxpayer maintained contact with IRS 

and requested such a hearing. In the original contact letter, IRS told taxpayers they could 

request an internal appeal hearing.
Page 15 GAO-05-92 Earned Income Tax Credit

Figure 3: The Qualifying Child Certification Test Process 

Source: GAO.

Taxpayer collected 

documentation to verify 

proof of residency

Taxpayer sent 

supporting 

documentation 

to IRS

IRS sent out 

a second letter asking for 

proof of child’s residency

IRS denies 

EITC claim

IRS examiners 

reviewed the 

taxpayer’s 

documentation, 

seeking 

clarification or 

additional proof, 

if needed

IRS released EITC 

portion of refund to 

taxpayer

Taxpayer 

received a letter 

from IRS in 

December 2003 

asking for proof 

of child’s 

residency

Where to 

get help

Form taxpayer

must complete

Letter to 

taxpayer

Frequently asked

questions + answers

Taxpayer 

claimed EITC, 

but did not 

respond to 

IRS’s letter

Documentation 

accepted

Taxpayer 

responded to 

IRS’s letter 

Taxpayer did not respond 

to IRS’s letter

Documentation 

rejected

Refund

Assessment

Filing Status Test Required 

Substantiation That the 

Correct Filing Status Was 

Used 

Another cause of EITC errors is when taxpayers claim an incorrect filing 

status. EITC filing status errors occur when married taxpayers incorrectly 

use single or head of household. Married taxpayers who incorrectly file 

individually as single or head of household could qualify for a larger EITC 

than they would otherwise be entitled to if they claimed the correct filing 

status. This is because, pursuant to statute,23 IRS considers the combined 

income of married taxpayers who file jointly for purposes of determining 

the amount of EITC for which the taxpayer(s) qualifies.24 Using combined 

23 I.R.C. Section 32(b)(2)(B).

24 Taxpayers who file as married filing separate are not eligible for the EITC. 
Page 16 GAO-05-92 Earned Income Tax Credit

income may result in taxpayers exceeding the EITC income ceiling, 

therefore receiving no credit at all, or qualifying for a lesser credit amount. 

For example, in tax year 2003, married taxpayers filing jointly with $17,500 

of income each, or a combined earned income of $35,000, and four 

qualifying children would not be eligible for the EITC. However, if each 

taxpayer incorrectly filed as head of household, claimed two qualifying 

children, and their $17,500 income, they would each receive a credit of 

$3,405 or a combined total of $6,810. IRS’s databases offer limited ability to 

independently or systematically identify taxpayers who may be claiming an 

incorrect filing status. 

The primary purpose of the filing status test was to evaluate the impact on 

overclaims of requiring taxpayers whose filing status has changed from 

married to single or head of household any time between 1999 through 2002 

to substantiate the filing status they claimed on their 2003 tax return. To 

select the population for the filing status test, IRS started with a computer 

file of approximately 1.6 million taxpayer returns, or a 10 percent sample of 

all taxpayers who claimed the EITC with one or more qualifying children 

on their 2002 return. IRS eliminated the qualifying child and income 

misreporting test populations and, applied other exclusions, such as 

taxpayers subject to an audit examination, or taxpayers with more than 

one potential EITC-related issue. From that population, IRS selected 

taxpayers whose returns showed a filing status of married at least once in 

the previous 3 years. This resulted in a sample of 69,000 taxpayers, which 

IRS sorted by gender, zip code and filing status. Using a random sampling 

method, IRS selected 36,000 of these taxpayers for this sample who filed as 

single or head of household on their 2003 tax return. Females filing as 

single or head of household comprised 96.9 percent of the test sample. 

The taxpayers in the 36,000 sample who filed a 2003 tax return claiming the 

EITC received a letter from IRS about 2 weeks after filing their return 

informing them that the EITC portion of their refund would be delayed 

until IRS reviewed their return. Within 30 days, IRS sent a second letter 

asking taxpayers to verify their filing status, using the enclosed Form 886-

FS, Filing Status Information Request and send it back to the IRS. This form 

requires taxpayers to provide documentation as to why they did not file as 

married for tax year 2003. Taxpayers were asked to provide IRS with 

documentation that they were divorced or legally separated as of 

December 31, 2003, they did not live with their spouse for the last 6 months 

of the year, the spouse was deceased, or some other reason existed to
Page 17 GAO-05-92 Earned Income Tax Credit

warrant a change of filing status.25 IRS examiners reviewed the form and 

accompanying documentation and sought clarification or additional proof, 

if needed. If IRS examiners accepted the documentation, they released the 

EITC portion of the taxpayer’s refund and closed the case. 

If a taxpayer did not respond or IRS found the taxpayer’s documentation 

unacceptable, then IRS sent the taxpayer a notice stating that IRS (1) 

changed the taxpayer’s filing status from single or head of household to the 

married filing separate status, (2) disallowed the EITC, and (3) changed the 

taxpayer’s standard deduction to the appropriate amount. In addition, IRS 

forwarded the taxpayers a letter informing them of their right to appeal the 

changes to U.S. Tax Court.26 This process is depicted in figure 4.

25 This is the same documentation IRS would request in an audit if filing status were an 

issue.

26 Similar to the qualifying child test, IRS allowed for internal appeal hearings only if the 

taxpayer maintained contact with IRS and requested such a hearing.
Page 18 GAO-05-92 Earned Income Tax Credit

Figure 4: The Filing Status Test Process 

Source: GAO.

Taxpayer collected 

documentation 

to verify 

filing status

Taxpayer sent 

supporting 

documentation 

to IRS

IRS denies 

EITC claim

IRS examiners 

reviewed the 

taxpayer’s 

documentation, 

seeking 

clarification or 

additional proof, 

if needed

IRS released 

EITC portion 

of refund to 

taxpayer

Taxpayer 

received a letter 

from IRS asking 

for proof of filing 

status.

Form taxpayer

must complete

Letter to 

taxpayer

Taxpayer 

claimed EITC, 

but did not 

respond to 

IRS’s letter

Documentation 

accepted

Documentation 

rejected

Refund

Taxpayer filed 

a tax return 

and received 

a letter from 

IRS stating 

the EITC 

refund would 

be delayed.

Assessment

Letter to 

taxpayer

The filing status test also included a subtest to gather additional 

information on EITC claimants who used the head of household filing 

status. The IRS/Treasury task force found that taxpayers using the head of 

household filing status were more likely to misstate their filing status than 

taxpayers using a different one. IRS selected 500 taxpayers who filed as 

head of household on their 2003 tax return. The sample of 500 taxpayers 

showed 99 percent females and 1 percent males with the head of household 

filing status.

Unlike the test for the 36,000 sample, IRS did not ask taxpayers in the 

subtest of 500 who filed a 2003 return to provide supplemental 

documentation to support their filing status until after they had received 

their EITC refunds. And, unlike taxpayers in the 36,000 sample, where IRS 

had some information they had filed as married at least once from 1999 - 

2002, IRS did not have such information on the taxpayers in the 500 sample. 
Page 19 GAO-05-92 Earned Income Tax Credit

In fact, IRS could not determine whether these taxpayers were ever 

married. As a result, IRS asked these taxpayers to confirm their eligibility 

for the head of household filing status, which they claimed on their 2003 

tax return, by either (1) calling IRS on a special toll-free number and stating 

that they used the correct filing status or (2) completing a stub that was 

attached to the letter they received, checking yes or no, and mailing or 

faxing it to IRS. IRS did not ask these taxpayers to provide substantiation 

to support the filing status they claimed. This was, in part, because IRS had 

not identified any documentation that would be available to support a 

taxpayer’s claim that he or she had never been married. If taxpayers 

indicated they were not eligible to use the head of household filing status, 

they could correct their filing status by sending in an amended tax return 

either by mail or fax.27 IRS asked taxpayers to provide the information 

within 45 days from the date on the letter. All taxpayers who did not 

respond would be subject to an examination before their 2004 EITC refund 

would be released. 

In another aspect of the filing status test, IRS planned to determine 

whether a third-party service that attempted to locate the address of 

taxpayers could be as reliable as the filing status test in identifying 

taxpayers who had used an incorrect filing status. The locator service used 

information from credit bureaus to determine whether taxpayers were 

living together and possibly married. The information from the locator 

service had no impact on taxpayers for this year’s filing status test. 

Income Misreporting Test 

Used New Screening 

Process to Find Cases 

Likely to Yield the Highest 

Assessments

Although some taxpayers could receive a larger EITC by over-reporting 

their income, misreporting of income for EITC is generally an 

understatement, according to IRS, resulting in the taxpayer receiving a 

higher credit amount than entitled. The purpose of the income 

misreporting test was to evaluate the impact on the test goal of a new 

screening process to select EITC tax returns 28 that identify taxpayers likely 

to have the most significant changes in their tax assessments due to 

underreporting of income on their tax return. 

27 IRS did not assess any penalties, interest, or additional tax due if the taxpayer sent an 

amended return. This decision was for the 2004 test only. 

28 Unlike the other two tests, the income misreporting test was based on 2002 tax returns. 

This was because IRS does not match information returns from third parties until several 

months after April 15th.
Page 20 GAO-05-92 Earned Income Tax Credit

Income misreporting is a component of an existing program known as 

Automated Underreporter (AUR). 29 Under that program, IRS attempts to 

match income information as reported by the taxpayer on the tax return to 

information reported by third-party sources, such as a taxpayer’s employer 

or bank. In instances where this matching process identifies discrepancies, 

IRS may assess additional taxes on the taxpayer. The annual AUR 

matching program identifies far more cases than IRS has staff to work. In 

determining which cases to work, IRS selects not only cases that it believes 

will generate the highest probable assessment, but also cases involving 

taxpayers who underreport different types of income (e.g., wages, 

interest). In the past, some of those cases—roughly 300,000 per year—

involved the EITC. However, EITC was not one of the different types of 

categories from which IRS historically had chosen cases. 

For the income misreporting test, IRS attempted to select---from all the 

EITC cases for which AUR found an income mismatch on 2002 tax 

returns—300,000 EITC cases expected to provide the highest EITC 

assessments. IRS employed a computer selection tool that used variables 

such as the taxpayer’s filing history, filing status, and number of children to 

rank the cases in terms of the highest probable EITC assessments. 

Additionally, IRS designed the test to determine whether certain 

characteristics of the selected cases made them more likely to yield higher 

assessments. Thus, IRS placed each of the selected cases in one of four 

groups: (1) “repeater egregious,” cases in the same income category for the 

third year in a row and were assessed an additional tax for the previous 2 

years; (2) “repeater worked,” cases worked at least once during the last 3 

years; (3) “repeater not worked,” cases in the income misreporting 

inventory at least once in the last 3 years, but not worked; and (4) “other 

criteria,” cases randomly selected from the other three categories and 

other criteria, such as first-time underreporters. 

As figure 5 shows, the majority, 62 percent, of the taxpayers selected for 

the income misreporting test filed their return using the head of household 

filing status, while 30 percent claimed married filing jointly and 8 percent 

claimed a single filing status. 

29During fiscal year 2003, the AUR program assessed taxpayers about $2.9 billion.
Page 21 GAO-05-92 Earned Income Tax Credit

Figure 5: Characteristics of the Taxpayers in the Income Misreporting Test by Filing 

Statusa

Single and others

Head of household females

Married filing jointly

8%

62% 30%

Source: GAO analysis of IRS data.

a

IRS was unable to provide characteristics by gender. 

IRS added the income misreporting test cases back into the general AUR 

inventory, and examiners in Atlanta, Georgia; Austin, Texas; and Fresno, 

California worked the test cases using the same processes as for all other 

AUR cases. Examiners manually screened all cases for simple math errors 

or errors that could not be picked up by a computer (e.g., placing an 

amount on the wrong line). If such an error was found and resolved, the 

tax return was accepted, and the case was closed. If the examiner could 

not resolve the discrepancy, the examiner sent a notice30 to the taxpayer 

explaining that IRS found a discrepancy on his or her return. The taxpayer 

was given 30 days to respond to the notice. If no response was received, 

IRS sent another notice informing the taxpayer that the IRS had determined 

there was a deficiency in the return and the taxpayer must pay an 

assessment based on the deficiency or file a petition with the U.S. Tax 

Court within 90 days. If IRS received a response that took issue with IRS’s 

assessment, the examiner would then determine whether the response was 

sufficient to support the taxpayer’s original tax return.31 If the response 

was sufficient, the examiner would close the case with no additional tax 

assessed. If the response was not sufficient or a response was not 

30 In most of these cases, a CP-2000 notice, “We Are Proposing Changes to Your Tax Return”, 

is sent to the taxpayer; however, IRS sends a different notice in rare instances, such as when 

there was an income discrepancy of at least $100,000. 
Page 22 GAO-05-92 Earned Income Tax Credit

received, the IRS examiner would assess the taxpayer the additional tax. 

This process is depicted in figure 6. 

Figure 6: The Income Misreporting Test 

Examiners 

work 2 million 

cases 

(1.7 million + 

300,000) at 

each of the 

three sites: 

Atlanta, Austin 

or Fresno.

Taxpayers file 

individual tax

returns. Taxpayer 

notified of 

potential 

underreporting 

issue for 

assessments 

and IRS’s 

proposed 

change.

Taxpayer 

responds and 

either accepts or 

rejects changes. 

Taxpayer may 

provide 

documents 

supporting the 

claim.

Examiners 

verify taxpayer’s 

response and 

documentation, 

if provided.

IRS uses an 

inventory 

selection tool 

utilizing 5 years 

of historical data 

to select cases

in certain 

categories with 

the highest 

potential 

assessment 

(1.7 million).

IRS closes the 

case with no 

change.

Examiner resolves 

discrepancy after 

screening case.

IRS assesses 

additional

tax.

IRS computer 

matches 

taxpayer and 

third party data 

and then 

identifies 

taxpayers who 

are income 

“underreporters” 

(8 million).

Third parties, 

such as 

employers and 

financial 

institutions, file 

informational 

returns.

Source: GAO and Art Explosion (image).

New computer 

screening 

process 

identifies the 

300,000 EITC 

cases with the 

highest potential 

EITC 

assessment.

Documentation

accepted

Documentation

rejected

Taxpayer 

did not 

respond

to IRS 

letter

Cases are sorted by previous years’ 

EITC history and other variables 

such as filing status and number of 

children.

Then, cases are placed into one 

of four categories:

• Repeater egregious

• Repeater worked

• Repeater not worked

• Other

Income 

misreporting 

test

General AUR process

Income misreporting test

31 IRS officials said the Internal Revenue Manual guides this determination and that 

examiners receive months of training in how to make this determination. 
Page 23 GAO-05-92 Earned Income Tax Credit

IRS Reported Spending Less 

on Tests Than Anticipated

IRS reported spending about $17.5 million on the three EITC tests—about 

$3.2 million less than planned.32 This funding was part of the Consolidated 

Appropriations Act of 2004,33 which provided IRS with $52 million in fiscal 

year 2004 for a five-point initiative to improve service, fairness, and 

compliance with the EITC program. IRS announced the new initiative in 

June 2003. The initiative addresses:

• reducing the backlog of pending EITC examinations to ensure that 

eligible taxpayers whose returns are being examined receive their 

refunds quickly; 

• minimizing burden and enhancing the quality of communications with 

taxpayers by improving the existing audit process; 

• encouraging eligible taxpayers to claim the EITC by increasing outreach 

efforts and making the requirements for claiming the credit easier to 

understand; 

• ensuring fairness by refocusing compliance efforts on taxpayers who 

claimed the credit, but were ineligible because their income was too 

high (or filing status was incorrect); and

• piloting a certification effort to substantiate qualifying child residency 

eligibility for claimants whose returns are associated with a high risk of 

error. 

Of the $52 million budgeted, IRS reported spending or obligating 

$51.8 million in fiscal year 2004. Of that, IRS officials said they spent about 

$17.5 million on the tests---$7.4 million was spent on the income 

misreporting test, $5.6 million on the filing status test, and $4.5 million on 

the qualifying child test. IRS officials noted that, in some cases, the 

amounts they reported spending differed from what they budgeted. For 

example, IRS originally budgeted $7.2 million on the filing status test, but 

reported spending $5.6 million on direct costs for that test. 

32 We could not verify these figures because IRS does not have a cost accounting system. 

See GAO, Financial Audit: IRS's Fiscal Years 2004 and 2003 Financial Statements, GAO05-103 (Washington, D.C.: Nov. 10, 2004). 

33 Pub. L. No. 108-199, 118 Stat. 3 (2004). The Act did not earmark a specific amount for the 

tests. 
Page 24 GAO-05-92 Earned Income Tax Credit

According to IRS officials, they spent about $3.2 million less than 

anticipated on the tests primarily because some planned work did not 

materialize. For example, for the filing status test, IRS originally planned to 

work more cases but about 10,000 taxpayers who were originally selected 

for the filing status test were not included for various reasons, such as they 

did not claim the EITC. IRS officials said that, as a result, they redirected 

funding to improvement projects within the five-point initiative that would 

otherwise have gone unfunded. 

Tests Implemented 

Smoothly, and 

Refinements for the 

Fiscal Year 2005 Tests 

Made 

IRS’s implementation of the tests generally proceeded smoothly because of 

IRS actions including use of a detailed project plan and management 

involvement. IRS addressed most of the major issues that arose during 

implementation and released a status report to Congress in August 2004. 

IRS’s plans for most refinements for the 2005 tests are based on the lessons 

that it learned from the 2004 tests.

Tests Were Executed 

Largely as Planned, Thus 

Meeting the Original Intent 

The implementation plans for all three tests generally followed the 

recommendations of the IRS/Treasury task force, and IRS’s only significant 

departure from those recommendations was based on an informed 

decision. The task force recommended that taxpayers claiming the EITC 

(1) provide IRS with documentation to prove a qualifying child’s residency 

prior to payment of the credit (the qualifying child test), (2) submit 

additional data to establish that they are claiming the correct filing status 

(the filing status test), and (3) use a new screening process to select tax 

returns from an existing program to identify taxpayers likely to have the 

most significant underreporting of income on their tax return and, 

therefore, the highest potential EITC overclaim amount (income 

misreporting test). In all three tests, IRS gathered information needed to 

determine whether the task force recommendations have potential for 

reducing the EITC overclaim rate without undue adverse effects. It was 

important that IRS followed the task force recommendations; otherwise, 

the validity of those recommendations would remain unknown. 

IRS made an informed choice in not implementing one recommendation. 

The task force had also recommended that taxpayers certify the child’s 

relationship to the taxpayer. However, IRS determined that this was a 

lesser compliance problem than residency and that it could be difficult for 

taxpayers to provide some of the documentation that IRS planned to 
Page 25 GAO-05-92 Earned Income Tax Credit

request for certification of the relationship. In addition, since both 

residency and relationship requirements had to be met to claim the EITC, if 

taxpayers fail residency certification, which is more likely according to the 

compliance study, there would be no need to test for relationship. 

To implement each test, IRS prepared a detailed project plan with time 

frames for numerous action items such as developing notices, creating 

organization charts, hiring staff, developing training materials, working on 

systems needs, and determining samples. We found that IRS officials used 

these plans extensively. For example, initially, IRS managers checked the 

plan daily to determine if the schedule was being followed and less often as 

the tests progressed. For a task to be marked as completed, certain 

information had to be provided to the person in-charge of monitoring the 

plan, including validation from a senior manager that the task had been 

completed. According to IRS officials, the extensive use of the project plan 

helped them execute and effectively monitor the implementation of the 

tests. 

Through Hiring, Training, 

and Management Actions, 

IRS Facilitated a Smooth 

Implementation 

Implementation went smoothly, in part because IRS hired sufficient 

numbers of staff and provided adequate training to them. IRS hired about 

410 staff, primarily examiners who processed cases and answered 

telephones, to implement the three EITC tests in total. About 260 of the 

staff were for the qualifying child and filing status test, while about 150 

were for the income misreporting test. The majority of the qualifying child 

and filing status test staff were new to IRS, were hired on a temporary 

appointment, and worked in Kansas City, Missouri. The income 

misreporting staff worked in Atlanta, Georgia; Austin, Texas; and Fresno, 

California. According to IRS officials, these staffing levels were appropriate 

to manage the workload, thus contributing to the overall smooth 

implementation of the tests. 

IRS provided specific training for the qualifying child and filing status tests. 

Among other things, the training included a history leading up to the tests, a 

description of the test processes, the roles and responsibilities of staff, 

several examples of how to determine whether taxpayer substantiation 

was acceptable, and information on how to use the Earned Income Credit 

Proof of Concept (EICPC) database, the database IRS used to manage the 

qualifying child and filing status tests. Examiners we met with in Kansas 

City told us the training was sufficient. However, there was a gap between 

the time examiners first received training and when they actually started 

doing the work. According to IRS officials, this gap caused the staff to lose 
Page 26 GAO-05-92 Earned Income Tax Credit

some knowledge before they were able to apply it. To remedy this 

problem, IRS provided the staff refresher training and a staff-developed job 

aid. Examiners we interviewed said, that as a result, they felt confident in 

making decisions to accept or reject taxpayer substantiation. 

IRS did not provide specific training for the income misreporting test, and 

instead relied upon the AUR program training because the process for 

working cases remained the same—only how IRS selected the cases 

changed. In our visits to Atlanta and Fresno, we found consistency in the 

training that staff received for the income misreporting test, including how 

the procedures were used when screening and working cases. 

Management took steps to foster staff members’ understanding of the 

importance of the tests. Once the current EITC program director was 

installed in late 2003, management oversight became more apparent for the 

tests. Senior IRS management responsible for EITC were involved in 

managing many details of implementation of the tests. To help garner staff 

support, when the tests first began, IRS managers held meetings with the 

examiners and took action based on their expressed concerns, such as 

making key revisions to the EICPC system. In addition, front-line managers 

with whom we spoke in Kansas City said the EITC director’s involvement 

helped marshal staff support at that location. Managers said this was 

critical for smooth implementation of the tests, since they were the ones 

dealing directly with the taxpayers. The examiners we interviewed also 

said team meetings with managers helped them understand and effectively 

convey information about the tests to taxpayers. 

IRS Monitored 

Undeliverable Mail and 

Attempted to Resend It to 

Corrected Addresses to 

Help Ensure Taxpayers’ 

Response to Tests

IRS tracked undeliverable mail, mail that was sent to taxpayers and 

returned to IRS by the U.S. Postal Service, which was critical to the success 

of the tests. If taxpayers did not receive IRS’s correspondence—letters, 

forms, and notices—they would not have known they needed to respond. 

And, had there been large volumes of undeliverable mail, the feasibility of 

the tests could have been undermined. Ensuring that those selected for the 

tests received the correspondence could have been particularly difficult 

because research has shown that some EITC claimants are highly mobile. 

Although IRS used the most current address for test populations—in most 

cases the address taxpayers provided on their 2002 tax returns—IRS 

officials anticipated some mail being returned as undeliverable because the 

taxpayer no longer lived at that address. IRS first learned that it had a 

taxpayer’s incorrect address when it received the undeliverable mail from 
Page 27 GAO-05-92 Earned Income Tax Credit

the U.S. Postal Service. As it typically does for undeliverable mail, IRS 

employed a locater service to attempt to find the taxpayer’s new address by 

using other kinds of information, such as addresses associated with any 

credit cards. When the locator service found a new address, IRS resent 

correspondence to the affected taxpayer. 

IRS Provided Several Means 

to Help Answer Taxpayers’ 

Questions and Found Strong 

Performance Where Data 

Were Available

IRS provided several means for taxpayers selected for any of the three tests 

to contact the agency for assistance. For example, in the initial contact 

letter for the qualifying child test, taxpayers were informed that they could 

get help from a toll-free telephone number where examiners could answer 

their questions, any local IRS office—commonly known as walk-in sites, 

and any of the approximately 200 low-income taxpayer clinics (LITCs) in 

the U.S. In addition, the National Taxpayer Advocate34 was prepared to 

assist taxpayers selected for all three tests as needed. 

Determining whether taxpayers received the correct information is an 

important aspect of implementation. IRS’s performance in terms of the 

percentage of callers getting through to the agency and the quality of the 

answers given was strong and comparable to similar IRS operations. IRS 

received about 100,000 telephone calls from taxpayers about the qualifying 

child test and about 75,000 calls about the filing status test, as of September 

30, 2004.35 Common questions about the qualifying child certification test 

included “What documentation is acceptable?” and “When will my refund 

be released?” According to IRS’s telephone data, about 86 percent of 

callers got through and received service. Based on historical data, IRS 

officials considered this level acceptable. Based on our annual reviews of 

IRS’s telephone performance during the filing season,36 we have reported 

comparable levels of service. For example, in 2003, 85 percent of taxpayer’s 

calling IRS’s main toll-free telephone lines got through and received 

service. IRS’s internal quality reviews showed that, as of September 30, 

34The National Taxpayer Advocate is available to help taxpayers when a hardship arises or 

when their problem has not been resolved in a reasonable time period. 

35 IRS received calls about the income misreporting test on the general AUR telephone line. 

IRS did not think it was necessary to track the test calls separately from the general AUR 

because taxpayers were treated the same under both the test and the program. 

36 GAO, Tax Administration: IRS’s 2003 Filing Season Performance Showed 

Improvements, GAO-04-84 (Washington, D.C.: Oct. 31, 2003) and GAO, IRS’s 2002 Tax 

Filing Season: Returns and Refunds Processed Smoothly; Quality of Assistance 

Improved, GAO-03-314 (Washington, D.C.: Dec. 20, 2002).
Page 28 GAO-05-92 Earned Income Tax Credit

2004, test examiners provided accurate responses to taxpayers seeking 

assistance for the EITC tests via the telephone about 96 percent of the time, 

which was somewhat higher than the quality of IRS’s responses on its tollfree telephone lines. 

Because outside stakeholders expressed much concern about the tests, the 

National Taxpayer Advocate decided to assist any taxpayer selected for the 

tests, even if the assistance did not meet its established criteria.37 The 

Advocate expected to assist about 2,600 taxpayers based on a needs 

assessment, which was rooted in historical data. However, as of 

September 30, 2004, the Taxpayer Advocate assisted a total of 837 EITC 

taxpayers participating in these tests. Most of the assistance provided 

included helping taxpayers receive an expedited refund due to a financial 

hardship. Internal quality reviews showed that the Advocate met its quality 

standards 100 percent of the time for the test cases selected as part of those 

reviews.

Steps Taken to Ensure 

Procedures Used by 

Examiners Led to 

Consistent Decisions 

For each test, IRS took several steps that were designed to ensure 

consistency among the examiners making decisions about whether to 

accept taxpayers’ substantiation. The qualifying child and filing status 

cases were worked in one location—Kansas City, Missouri—to make it 

easier to ensure consistency among examiners. The income misreporting 

test cases were worked in three locations—Atlanta, Georgia; Fresno, 

California; and Austin, Texas. IRS officials said they did not believe there 

would be a consistency problem in having the income misreporting test 

conducted across these locations because the test was not a significant 

departure from the general AUR work that had been done in these 

locations for the past several years. Other examples of steps IRS took to 

ensure consistent decision-making by examiners included holding multiple 

team meetings with staff, sending out notices to staff when errors were 

noted, having certain groups work only certain kinds of cases, preparing a 

job aid for examiners, and conducting extensive quality reviews. 

According to IRS managers and examiners we spoke with, these steps 

helped examiners make consistent decisions in the cases they were 

reviewing.

37 The Taxpayer Advocate uses seven criteria to categorize and determine the severity and 

level of attention that taxpayers require to resolve their tax issue. For example, some issues, 

such as eviction or bankruptcy, are categorized as imminent hardships for taxpayers and 

receive the most prompt attention.
Page 29 GAO-05-92 Earned Income Tax Credit

Another step IRS took to ensure consistency was to have managers in 

Kansas City review all those cases where taxpayers provided 

substantiation for the qualifying child test prior to filing their tax return—a 

total of about 800 reviews. This review helped IRS identify and correct 

problems that arose early in the tests. IRS officials stated that the review 

helped provide for a smooth implementation because it identified 

problems, which IRS corrected, and enabled IRS to issue supplemental 

guidance to ensure repeat errors did not occur. For example, for the 

qualifying child test, taxpayer substantiation did not always clearly indicate 

the exact dates of a child’s residency with the taxpayer—for example, some 

may have shown “July through December 2003.” Some examiners 

interpreted that to mean July 1 through December 31, giving taxpayers the 

time needed to certify for the qualifying child’s residency. Other examiners 

interpreted this same information to mean July 1 through December 1, 

therefore not giving taxpayers the time needed to qualify their child. This 

review identified the inconsistent interpretation of dates, and IRS 

developed a policy decision and issued guidance on how to interpret the 

dates when the dates provided were vague.

IRS Internal Reviews 

Showed Few Significant 

Implementation Problems

The several on-going internal quality reviews during the tests generally 

found few significant implementation problems. IRS managers conducted 

reviews at the test sites, which examined accuracy, timeliness, and staff 

professionalism. For the qualifying child and filing status tests, these 

reviews showed generally high performance—case file documentation was 

correct 87 percent and 93 percent of the time, respectively, as of September 

30, 2004. IRS did not capture this data for the income misreporting test; 

however, IRS data show that, as of September 30, 2004, 95 percent of all 

AUR cases, which included the income misreporting cases, contained 

correct documentation. The EITC Program Office also conducted a review 

that assessed whether policies and procedures for the qualifying child and 

filing status cases were being timely, accurately, and consistently followed. 

According to IRS, the review showed good results. For example, for the 

filing status test, the time between an examiner’s decision to accept 

taxpayers’ documentation and the issuance of the taxpayers’ refund 

averaged fewer than 30 days. 
Page 30 GAO-05-92 Earned Income Tax Credit

IRS Addressed All But One 

Significant Problem That 

Arose During 

Implementation 

Although several problems surfaced during implementation, particularly in 

the qualifying child test, IRS officials said that because they were able to 

take quick actions to address the problems, the problems did not adversely 

affect the tests or taxpayers selected for them to any great extent. It was 

not surprising that most of the problems involved the qualifying child test 

because it was a greater departure from past practice than were the other 

two tests. For example, although IRS had previously asked taxpayers to 

provide documents substantiating their qualifying child upon audit, IRS has 

not previously allowed taxpayers to provide affidavits to prove their claim; 

therefore, examiners had never reviewed such documents. In contrast, IRS 

considers the filing status and income misreporting tests expansions of 

existing IRS programs. 

Examples of problems and IRS’s actions to address them include: 

• Early in the implementation of the test, some examiners advised 

taxpayers who had called about letters received from IRS to complete 

documentation for the qualifying child test even though they were 

selected for the filing status test. Examiners were instructed via an email alert to use the EICPC database to determine the test for which the 

taxpayer was selected. 

• Some qualifying child and filing status case files (paper and electronic) 

had documentation deficiencies, such as not getting a taxpayer’s phone 

number for the case file or not obtaining complete/required information 

for cases where the taxpayer agreed with IRS’s proposed changes. 

Through an e-mail alert, IRS officials reminded examiners of the 

procedures they must follow to properly document files.

• Some files were missing for the qualifying child and filing status tests. 

IRS established a new procedure that when a file could not be located 

within 2 weeks after the taxpayer had submitted correspondence, a new 

file would be created and marked “Possible Duplicate Folder.” 

In all three cases, IRS officials stated that the on-going quality reviews 

helped ensure that examiners followed the correct procedures. 

Although IRS addressed problems that arose during the implementation of 

the tests, one significant problem still lingers. Some important information 

about all three tests, including a key policy decision regarding the filing 

status test, were either not well documented or not documented at all. 

Internal control standards state that significant decisions and events 
Page 31 GAO-05-92 Earned Income Tax Credit

should be documented and readily available for examination.38 When 

documentation is lacking, it is difficult for management or staff to gain an 

understanding of the program, refine work processes, or fully monitor the 

implementation. Further, developing and documenting such information 

would help ensure that test results are accurately determined and would 

enable others to review the methodology. 

IRS developed various management documents to organize, direct, and 

monitor the test operations. However, while some important decisions 

about the tests were made after these documents were developed and after 

test implementation began, IRS did not explain the decisions by making 

additions to the documents. For example, IRS’s initial plan required that 

the filing status subtest involving taxpayers who had never filed as married, 

but had filed as head of household on their 2003 return, include 5,000 

taxpayers. Several months later, IRS reduced the sample to 500, but did not 

document the rationale for this decision until much later and at our 

request. Also, certain other key information, such as when and how 

information from a third- party locator service for the filing status test 

would be used, was not fully developed or sufficiently detailed. The 

Treasury Inspector General for Tax Administration (TIGTA) found similar 

deficiencies in IRS’s documentation about the tests occurring during 

implementation.39 As a result, this lack of documentation hindered not only 

test monitoring and oversight, but also did not foster a common 

understanding of the tests.

According to IRS officials, time or other priorities caused some significant 

decisions about the test not to be documented at the time those decisions 

were made. Further, they said that changes to tests are common during 

implementation and that they focused attention on ensuring the tests were 

carried out correctly, rather than on documenting the reasons for changes 

and other decisions as the tests proceeded. However, IRS officials 

acknowledged that documenting significant events was important. 

In some correspondence to taxpayers about the tests, IRS referred 

taxpayers to LITCs or walk-in sites for assistance. However, IRS did not 

gather information on or measure the level or quality of assistance 

38 GAO-01-1008G and GAO/AIMD-00-21.3.1.

39 Treasury Inspector General for Tax Administration, The Statistical Sampling Method 

Used in the Earned Income Tax Credit Proof of Concept Test Appears Valid, 2004-40-100 

(Washington, D.C.: May 2004). 
Page 32 GAO-05-92 Earned Income Tax Credit

provided to test participants at LITCs or walk-in sites. IRS officials said 

they did not collect these data because they thought taxpayer use of this 

assistance would be minimal and there was no practical or cost effective 

way to gather the information. In his response to our draft report, the 

Commissioner echoed this sentiment, noting that because qualifying child 

test participants were randomly selected from around the country, efforts 

to measure services would be extremely difficult. Further, IRS officials did 

not view this as an implementation problem, but instead viewed it as a 

limitation of the tests. Whether it is a problem with implementation or test 

design, there are some important reasons why it would be useful to know 

the level and quality of services provided. For example, our prior work 

found that the quality of service IRS walk-in sites provided taxpayers was 

unknown.40 Further, face-to-face assistance is costly, especially when 

compared to telephone services, which were used extensively in the 2004 

tests. Recognizing that options for providing taxpayer assistance and 

outreach efforts are important, if IRS had data on the level and quality of 

service provided, it would be in a better position to determine the cost and 

benefit of providing this assistance. Officials recognize that information on 

use of these forms of assistance would be useful and indicate that they will 

collect information in conjunction with a planned 2005 simulation of a 

nationwide test. The simulation is discussed later in this letter. 

Lessons Learned from 2004 

Tests Prompt Most 

Refinements for New Round 

of Tests 

IRS officials identified lessons learned from the 2004 tests that were 

implemented to help improve the 2005 tests. For example, IRS officials 

plan to use of its automated telephone responses, which is important 

because most taxpayers contacted IRS by telephone to obtain information 

about the tests. 

Changes to forms and letters based on case reviews and examiner 

input. IRS officials told us that their modifications to letters and forms for 

the qualifying child and filing status tests to be used for the 2005 tests were 

primarily based on case file reviews and discussions with IRS examiners 

who interacted with the taxpayers selected for the 2004 tests. In April 2004, 

for example, EITC program officials reviewed case files and met with 

examiners to discuss common taxpayer errors and questions about letters 

and forms for the qualifying child and filing status tests. Examples of 

taxpayer questions were: “How do I prove I did not live with my spouse?” 

40 See GAO-04-84. 
Page 33 GAO-05-92 Earned Income Tax Credit

or “Who can fill out the affidavit?” Examples of taxpayer errors on forms 

included no signature, incomplete dates to prove residency, and either no 

Social Security number listed on the form or an incorrect number. As a 

result of their review, IRS officials revised the forms containing such 

information (Form 8836, Qualifying Children Residency Statement and the 

accompanying affidavit). For example, IRS changed the layout of the 

affidavit to help reduce taxpayer errors involving dates and the amount of 

time a child resided with the taxpayer. IRS did not make changes to the 

letters and forms for the income misreporting test because they were the 

same ones used under the general AUR program. 

Improvements to key database based on examiner suggestions. 

Examiners in Kansas City, the site responsible for the qualifying child and 

filing status cases, suggested about 30 updates or other improvements to 

the EICPC system that they said would either reduce errors in the 

database, help IRS better manage the cases and workload, or improve 

subsequent data analyses. For example, examiners noted they were lacking 

computer fields to record certain information such as the taxpayer’s 

telephone number, whether the case was worked by the Taxpayer 

Advocate’s Office, or if an amended return had been received. As a result, 

examiners suggested ways to capture these data, which have been 

incorporated into the EICPC. IRS is continuing to update and make 

improvements to the EICPC. 

Use of automated telephone voice response expanded. For the fiscal 

year 2004 qualifying child and filing status tests, IRS did not use automated 

responses to answer routine telephone calls and did not have a mechanism 

in place to obtain taxpayers’ views about telephone services provided. 

Both options were available for the income misreporting test and are 

available for users of IRS’s other toll-free telephone numbers. Officials 

recognized that commonly asked questions, such as “Where do I mail the 

required documentation?” or “Who can sign an affidavit?” could be 

answered via automated responses, and plan to provide this option for the 

fiscal year 2005 tests, leaving only the more difficult questions to be 

answered by an examiner. IRS also decided to implement a random 

feedback survey of taxpayers on the quality of service they received for the 

qualifying child and filing status tests when they called the toll-free number. 

The survey is a modified version of the one that IRS uses for its regular tollfree telephone operations.

Changes made to the qualifying child test encourage early 

certification and simulate implementation across the country. There 
Page 34 GAO-05-92 Earned Income Tax Credit

are two major changes to the qualifying child test for 2005: (1) taxpayers 

will be encouraged to certify in advance of filing their return that their child 

met the EITC residency requirement; and (2) a portion of the taxpayers will 

be drawn from a single community—Hartford, Connecticut, while the rest 

will be drawn randomly from across the nation. 

IRS officials contend that an early certification could help reduce delays in 

releasing EITC refunds because examiners would be able to validate cases 

before the start of the tax filing season when workloads reach their peak. 

Eligible taxpayers who provide acceptable documentation before the start 

of the tax filing season could get their EITC refund more expeditiously, IRS 

officials say, because the documentation would already be validated at the 

time taxpayers file their tax returns. IRS has some evidence that taxpayers 

are willing to certify in advance of the filing season because about 800 

taxpayers did so as part of the 2004 qualifying child test, even though they 

were only asked to do so when filing their returns. 

Regarding the targeting of the single Hartford, Connecticut community, IRS 

officials told us that they intend to simulate what might happen if an early 

certification requirement were imposed across the country. This change 

was the result of a recommendation from a contractor’s review of the 2004 

test’s sampling methodology. As part of this test, IRS plans to mount an 

outreach campaign to include partnering with local governmental and 

community-based entities to provide taxpayers assistance. 

Need for refinement prompts reduction in filing status sample size.

Based on its experience with the sample selected for the 2004 filing status 

test, IRS decided to dramatically reduce the sample size for next year’s test, 

while simultaneously trying to improve the criteria for selecting the 

sample. As this year’s test was implemented, IRS officials realized that the 

test was yielding a high number of taxpayers claiming the correct filing 

status, suggesting that the criteria for selecting them could be improved 

and the burden on taxpayers to prove their filing status was high, relative to 

the benefits gained. As a result, IRS officials reduced the sample size from 

36,000 to 5,000 for the 2005 test to minimize taxpayer burden as IRS works 

to improve the selection criteria. 

IRS also is testing two refinements in the sample selection criteria for the 

2005 filing status tests to determine whether the selection criteria can be 

improved. First, IRS plans to apply TIGTA’s finding, which IRS officials 

said that they had also identified, that IRS could better use information it 

possesses to verify the filing status of some taxpayers, such as those whose 
Page 35 GAO-05-92 Earned Income Tax Credit

spouses have died or those who have submitted an amended return. Any 

such taxpayers whose filing status could be verified using such information 

would not be included in the sample. Second, IRS also plans to refine the 

sample selection to not include taxpayers whose filing status of single or 

head of household can be corroborated by information from the third-party 

locator service, which was tested in 2004. 

Income misreporting changes designed to improve sample selection. 

IRS has planned minimal changes for the 2005 income misreporting test 

because it found few issues that needed to be addressed. Changes were 

made to selection criteria to help identify cases with a potentially higher 

assessment amount. For example, IRS will no longer select cases where 

the taxpayer’s adjusted gross income is over the maximum amount for 

claiming the EITC and EITC is claimed anyway because IRS found those 

cases yielded a lower assessment than other cases. 

IRS’s 2004 Evaluation 

Plans Lacked Sufficient 

Documented Detail to 

Allow for Oversight; 

Evaluation Plans for 

2005 Tests Were Not 

Completed Before Two 

of the Tests Had Begun

IRS’s plans for evaluating the three 2004 tests lacked sufficient documented 

detail to facilitate managerial review and stakeholders’ oversight and 

thereby help ensure that the evaluation of the tests’ results would be as 

sound as possible and the results would be communicated with full 

recognition of their strengths and limitations. For many aspects of IRS’s 

evaluation plans, we were able to discern IRS intentions by piecing 

together information from multiple sources, including interviews with IRS 

officials. In essence, an evaluation plan is used to manage the evaluation 

endeavor. As such, the more completely a plan is developed, the more 

likely it will be useful to managers in ensuring that the evaluation is wellexecuted. Despite the importance of having detailed plans prior to 

implementation, IRS had not completed its evaluation plans for the 2005 

tests before two of those tests had begun. 

Evaluation Plans Had 

Strengths Including Linkage 

Among Test Goals, 

Evaluation Objectives, and 

Outcome Measures 

Considering the written evaluation plans themselves, interviews with IRS 

officials, IRS’s status report to Congress and other documents, we found 

that IRS’s plans for assessing the three tests had important strengths. For 

instance, IRS’s evaluation plans: 

• had clear goals for each the three tests. The primary goal of all three 

tests was to reduce overclaim rates. There were additional goals for the 

qualifying child test—maintaining EITC participation for eligible 

participants and minimizing taxpayer and IRS administrative burden. 
Page 36 GAO-05-92 Earned Income Tax Credit

• linked evaluation objectives and outcome measures—which determine 

the extent to which the goals were met—to the test goals. For example, 

the income misreporting test had outcome measures that included the 

percentage of cases where an EITC claim was reduced or disallowed 

and the average amount of the change. These measures were clearly 

linked to the test’s goal of reducing EITC overclaim rates. 

• selected samples to provide information that could be generalized to the 

EITC population being targeted. Both TIGTA and an outside consultant 

reviewed the samples for the qualifying child test and found that the 

23,000 sample for the general test was sufficient—a conclusion with 

which we also agree. TIGTA also reviewed the samples for the income 

misreporting test and found that it should provide reliable results.41 

Lack of Detail and 

Documentation in 

Evaluation Plans 

Undermined Their Value

IRS’s evaluation plans for the 2004 tests lacked sufficient documented 

detail for us to determine how IRS planned to conduct key aspects of the 

evaluations. When we were able to determine how key aspects of the 

evaluations would be conducted, we often did so based on interviews and 

analyses of various documents. The general lack of detail and 

documentation undermined the value of the plans by, for example, limiting 

IRS’s and stakeholders’ ability to oversee the evaluations, identify and 

address limitations in the evaluations, and ensure that limitations will be 

clearly communicated when the results are disseminated. 

IRS’s written evaluation plans for the three tests were essentially outlines 

that were not comprehensive, meaning that they did not fully document all 

key aspects of the evaluation. For example, IRS’s written plans did not 

provide information on the sampling methodologies used in all three tests. 

These were not articulated until IRS issued its August 2004 status report to 

Congress. In addition to the status report, which also provided additional 

insights into the types of analyses IRS plans to conduct, we relied on 

multiple other sources to gain a complete understanding of IRS’s planned 

evaluation activities. We interviewed IRS officials and reviewed other 

information and documents they provided, such as the contractor’s report 

on the qualifying child test’s sampling methodology. According to IRS 

officials, the lack of comprehensive and detailed written plans was due to 

41 TIGTA 2004-40-100. 
Page 37 GAO-05-92 Earned Income Tax Credit

other priorities, such as undertaking the numerous steps needed to 

implement the tests themselves. 

While we recognize competing demands on the EITC program office, 

striking a balance between documenting evaluation plans and 

implementing and evaluating the tests helps ensure all parties understand 

the evaluations and the managers and stakeholders are able to oversee 

implementation and evaluations. Well-developed evaluation plans have a 

number of benefits, perhaps most importantly, increasing the likelihood 

that evaluations will yield methodically sound results, thereby supporting 

effective policy decisions. Such plans help (1) ensure that the agency has 

addressed the principal aspects of the evaluation, including the research 

design, outcome measures, target and sample populations, data collection 

activities, analyses, and dissemination of results, (2) officials monitor 

changes to tests and assess the impact of those changes on the planned 

evaluations, and (3) facilitate management and stakeholder review. Having 

comprehensive and detailed evaluation plans helps ensure that all those 

working directly on the evaluation have a common understanding of how 

data will be collected, analyzed and impacts assessed. Concerns or 

weaknesses can be identified and corrected, and plans can be updated to 

reflect any changes during implementation and afterwards, as the 

evaluation plan could be considered to be a “living document.” Finally, a 

well-developed plan helps ensure that evaluation results can be 

communicated with appropriate recognition of the evaluation’s strengths 

and limitations so stakeholders can better understand how to use the 

results when making decisions.

The following are illustrations of the overall lack of detail and 

documentation in IRS’s evaluation plans for the 2004 tests. 

• Evaluation objectives were not documented in one place. 

Although we found that IRS’s evaluation plans had objectives linked to 

the test goals, the objectives were not identified in any single location 

for any of the three tests nor specifically identified as objectives. Thus, 

we pieced together the information from multiple sources, including 

interviews with IRS officials. For example, we had difficulty identifying 

the evaluation objectives pertaining to the use of the third-party locator 

service for the filing status test. 

• Key outcome measures lacked important detail. IRS’s evaluation 

plans lacked important information for all the key outcome measures, 

such as their definition and purpose, formula/methodology, data source 
Page 38 GAO-05-92 Earned Income Tax Credit

and collection method. For example, IRS’s evaluation plans for the 

qualifying child test did not identify the specific data that would be used 

to produce the outcome measure—the number of taxpayers who claim 

(or do not claim) the EITC. IRS has provided this type of information 

about its measures for other programs. For example, for its telephone 

and other operations, IRS annually prepares a comprehensive document 

known as a data dictionary, which includes items such as the definition 

and purpose of the measure and its formula/methodology. IRS officials 

agreed that providing such information in the evaluation plans could 

have been valuable in managing the EITC tests. Without knowing details 

on outcome measures, stakeholders do not have enough information 

about a measure to know whether it is valid and reliable. 

• Limited information was provided on planned analyses. The 

evaluation plans also lacked specificity with regard to the key analyses 

planned and what those analyses were intended to accomplish. For 

example, IRS conducted a survey to obtain information about a 

taxpayer’s experience with the qualifying child test. IRS originally 

planned to survey these taxpayers in April 2004. The survey was not 

conducted until September 2004, primarily due to delays in selecting a 

contractor and developing the survey instrument. The 5-month delay 

may substantially reduce the number of taxpayers who accurately 

remembered the actions they took and thus affect the quality of the 

responses (i.e., recall bias). The accuracy of individuals’ survey 

responses declines the further away those responses are from the date 

of the actual events. IRS and the contractor are aware that such recall 

bias could exist and stated that they will consider it when analyzing the 

survey results, but no detail was available on how they would do so. 

This is critical because the potential utility of the survey results could be 

in question.

The lack of detail in IRS’s evaluation plans also increased the risk that 

reports disseminating the results of the tests would not fully disclose the 

evaluations’ potential limitations. In its August status report to Congress, 

IRS did not make clear that the qualifying child test results could only be 

generalized to taxpayers IRS had reason to believe were most likely to 

make an erroneous claim for the EITC when filing for the EITC in 2002. 

Absent such clarity, stakeholders might incorrectly assume that test results 

apply to all taxpayers claiming qualifying children for the EITC. Also, IRS 

did not describe potential limitations of the outcome measures, 

specifically, how non-respondents would be accounted for in measure 

calculations. 
Page 39 GAO-05-92 Earned Income Tax Credit

IRS officials recognize that their final 2005 report will need to include 

information on the evaluation limitations, and expect to provide sufficient 

detail and explanation of limitations in that report. 

Evaluation Plans for 2005 

Tests Not Completed Before 

Two of the Tests Began 

As of early December 2004, IRS had not completed evaluation plans for the 

2005 testing, even though the qualifying child and income misreporting 

tests began in November. According to IRS officials, they had not yet 

completed an evaluation plan for the 2005 tests because final decisions 

about the testing were still being deliberated in October. In their view, it 

was less important to finish an evaluation plan for these tests by the time 

testing began, because IRS could use the 2004 evaluation plans in the 

interim. IRS officials acknowledge that evaluation plans are important and 

have started to develop them for the 2005 tests. 

IRS can build upon the 2004 evaluation plans for all three tests. However, 

IRS made substantial changes for the qualifying child and filing status tests, 

which would need to be taken into account in developing comprehensive 

and detailed evaluation plans for the 2005 tests. Therefore, while we 

recognize that there will be similarities with the 2004 evaluation plans, the 

importance of having evaluation plans in place as testing begins or soon 

thereafter is heightened because of planned changes to the test. 

Conclusions The EITC program lifts millions of low-income taxpayers and their families 

out of poverty. However, its high rates of noncompliance—overclaims for 

the credit—could potentially undermine the credibility of the program 

because billions of dollars are annually paid out that should not have been. 

IRS’s three tests—qualifying child certification, filing status, and income 

misreporting—are major initiatives to reduce overclaims by addressing the 

leading errors taxpayers make. Given the importance of the EITC to many 

low-income households and concerns about high overclaims, these tests 

are being closely watched by numerous stakeholders.

Although IRS has generally implemented each of the tests smoothly, it did 

not fully document some key management decisions and other significant 

events. Documentation supports a common understanding among staff 

about the program they are administering—particularly one as complicated 

as the EITC—and helps managers monitor whether a program is 

implemented as planned. Having adequate documentation during the 2005 

tests could help foster a better understanding of the tests, ensure results 
Page 40 GAO-05-92 Earned Income Tax Credit

are accurately determined, and facilitate review and oversight. In addition, 

while IRS told taxpayers selected for the qualifying child test they could 

visit various physical locations for assistance, including LITCs and IRS 

walk-in sites, IRS did not collect information from those sites to determine 

the level and quality of services provided. Because officials believe 

relatively few taxpayers used these sites, collecting information from the 

sites may not have been practical. However, the single city simulation of 

nationwide implementation may offer an opportunity to gather some 

information on these services. 

The evaluations that IRS is conducting of each test are likely to yield some 

useful information and results that will help IRS officials and other 

stakeholders judge whether and how to proceed with further 

implementation of the new approaches to reducing EITC overclaims. 

Nevertheless, the lack of detail and documentation in the evaluation plans 

impeded officials’ ability to manage the evaluations as well as external 

stakeholders’ ability to review and understand the evaluations’ strengths 

and limitations. 

As of early December 2004, IRS had not completed its 2005 evaluation 

plans, although testing was underway for the qualifying child and income 

misreporting tests. A well-developed and timely plan would help IRS to 

improve on the 2004 evaluation plans and take into account changes in the 

tests themselves. 

Recommendations for 

Executive Action

The Commissioner of Internal Revenue should

• adopt a policy of documenting the rationale for key policy decisions and 

other significant events as the 2005 tests are implemented;

• develop a means of gathering information during the 2005 tests on the 

use of such locations as LITCs and walk-in sites on the level and quality 

of service provided by those sites, particularly in light of IRS’s plans to 

draw its sample from a single community for the qualifying child test;

• ensure that reports disseminating the results of the 2004 and 2005 test 

evaluations clearly outline aspects of test design and evaluation 

shortcomings that limit the interpretation and utility of the results; and

• complete the development of comprehensive and adequately detailed 

evaluation plans for the 2005 tests.
Page 41 GAO-05-92 Earned Income Tax Credit

These actions should be done as soon as possible, with any significant 

changes to the evaluation plan appropriately documented as the evaluation 

unfolds. 

Agency Comments and 

Our Evaluation

In his December 22, 2004 letter, the Commissioner of Internal Revenue 

agreed with our recommendations. Regarding the issue of documenting 

significant policy decisions, he noted competing demands that can often 

affect the quality of documentation, which we acknowledge in our report, 

and that IRS has implemented a process to meet this recommendation. The 

Commissioner noted that providing taxpayers with assistance is a top IRS 

priority. As such, the Commissioner reported that IRS has plans to identify 

the level and quality of services provided to taxpayers at LITCs and walk-in 

sites in the single test community. Regarding dissemination of results, the 

Commissioner reported that IRS is committed to ensuring all aspects of the 

test design and evaluation will be clearly described to stakeholders. 

Finally, the Commissioner reported that IRS intends to complete the 2005 

evaluation plans, in part, based on GAO’s recommendations about what a 

plan should contain. He also noted that IRS may need to assess whether 

any modifications to the 2004 qualifying child test criteria are appropriate 

in light of public events and community leadership reaction in the single 

test community. 

We are sending copies of this report to the Chairmen and Ranking Minority 

Members of the Senate Committee on Finance and the House Committee 

on Ways and Means. We are also sending copies to the Secretary of the 

Treasury; the Commissioner of Internal Revenue; the Director, Office of 

Management and Budget; and other interested parties. We will make copies 

available to others on request. In addition, the report will be available at no 

charge on the GAO Web site at http://www.gao.gov.

This report was prepared under the direction of Joanna Stamatiades, 

Assistant Director. Other major contributors are acknowledged in 
Page 42 GAO-05-92 Earned Income Tax Credit

appendix IV. If you have any questions about this report, contact Ms. 

Stamatiades at (404) 679-1900 or me on (202) 512-9110.

Michael Brostek

Director, Strategic Issues
Page 43 GAO-05-92 Earned Income Tax Credit

Appendix I

Scope and Methodology ApApenednxidexiIs

For all three objectives, we reviewed and analyzed documents including 

Treasury’s EITC compliance study of 1999 tax returns; a joint IRS/Treasury 

task force report; monthly status reports for each of the tests; draft and 

final letters, forms, and notices for each of the tests; implementation and 

evaluation plans; our prior reports; status results of the tests reported by 

IRS and its contractors; and reports and EITC literature by external 

stakeholders. We also interviewed Department of the Treasury and IRS 

officials involved in the EITC tests, including the National EITC Director, 

National Taxpayer Advocate, Director of Research Analysis and Statistics, 

and other IRS officials involved with implementing the tests. Additionally, 

we interviewed external stakeholders such as individuals at the TIGTA, 

Center for Budget and Policy Priorities, and Urban Institute, and reviewed 

and analyzed their reports. 

We took steps to ensure that the data we received from IRS were reliable 

for the purposes of this report and determined that they were. Some of 

those steps included interviewing IRS officials knowledgeable about the 

computer systems where the data we obtained came from and reviewing 

documentation, such as system manuals and flowcharts. We identified and 

assessed potential data limitations and compared those results to our data 

reliability standards, noting no significant weaknesses. 1

 

In addition, to describe the three tests and determine how IRS was 

spending the money appropriated it for the tests, we interviewed managers 

and budget officials in the EITC Program office and reviewed and analyzed 

IRS’s fiscal year 2004 budget request and compared its planned to actual 

EITC spending plan. Because IRS does not have an adequate cost 

accounting system, we could not verify the accuracy of the figures IRS 

provided to describe how funds appropriated for the tests were spent. 

We identified attributes of sound program implementation based on 

reviews of the social science literature, our prior work, and interviews 

conducted with IRS research and program management officials and 

external stakeholders, such as the Urban Institute.2

 We tailored these 

1

 GAO, Assessing the Reliability of Computer-Processed Data, GAO-03-273G (Washington, 

D.C: October 2002). 

2

 The three key sources we used to develop our implementation and evaluation plan criteria 

were: P.H. Rossi, and H.E. Freeman. Evaluation: A Systematic Approach, 4th ed. 

Newbury Park, Calif.: Sage, 1989, P.H. Rossi, H.E. Freeman, and M.W. Lipsey. Evaluation: 

A Systematic Approach, 6th ed. Thousand Oaks, Calif.: Sage, 1999, and GAO/PEMD-10.1.4.
Appendix I

Scope and Methodology

Page 44 GAO-05-92 Earned Income Tax Credit

attributes to apply them specifically to IRS’s tests as shown in table 3. 

Finally, to assess how well IRS implemented the tests and determine IRS’s 

planned refinements for further testing in fiscal year 2005, we reviewed 

policies, procedures, and training documents; observed procedures and 

operations in Kansas City, Missouri; Atlanta, Georgia; and Fresno, 

California; and interviewed front line IRS managers and examiners in these 

locations. We reviewed several case files for each test. Additionally, we 

analyzed relevant interim reports prepared by IRS and its contractors; and 

identified key results, and discussed them with IRS officials. 

Table 3: Criteria for Assessing IRS’s Test Implementation

Did IRS implement the test largely as planned? 

Did IRS provide the necessary staff and training to accomplish the workload associated 

with each test? 

Did IRS monitor the delivery of taxpayer correspondence?

Were taxpayers provided with a way to contact IRS or another entity if they had questions 

and, if they did, did IRS assess the quality of the interactions and the accuracy of the 

information provided?

Did IRS implement quality control procedures to ensure the quality of decisions IRS staff 

made?

Source: GAO.

To assess whether IRS’s plan for evaluating the tests contained sufficient 

documented detail to facilitate managerial review and stakeholder 

oversight, we used GAO guidance and the social science evaluation 

literature to identify key attributes of an evaluation. These attributes 

included the research design, outcome measures, target and sample 

populations, data collection activities, analyses, and dissemination of 

results. We obtained all available documentation on IRS’ s evaluation plans 

for each of the tests and reviewed that documentation to determine 

whether we could understand from the documentation alone how IRS 

planned to address the key attributes. Where we could not, we interviewed 

IRS officials to further understand whether and how the officials planned 

to address those key attributes. Written documentation should be 

complete, facilitate tracing of events, and be readily available for 

examination to foster a common understanding of the program and 

facilitate oversight. To describe the status of IRS’s evaluation plan for the 

fiscal year 2005 tests, we primarily relied on interviews with IRS officials. 
Page 45 GAO-05-92 Earned Income Tax Credit

Appendix II

Updated Results from the Income 

Misreporting Test as of September 30, 2004 ApendxiI

In August 2004, IRS issued a status report to Congress, which was 

mandated by the Consolidated Appropriations Act of 2004.1

 The report 

presents an overview of each of the three EITC tests, along with the design, 

status, and preliminary findings as of June 2004. According to the EITC 

National Director, the report contained some of the types of information 

that will be needed to support future decisions about the full 

implementation of the tests. Additionally, the EITC National Director noted 

that IRS also used the status report to provide information on such items as 

the sampling strategy that have been lacking in other documents. 

IRS had updated results for the income misreporting test as of September 

30, 2004. Updated results were not available for the qualifying child or 

filing status tests. As IRS stated in its status report, which showed data as 

of June 26, 2004, it is important to note that because the results are interim, 

no conclusions should be drawn from the information provided and no 

analyses about the impact of the tests were included. 

As table 4 shows, IRS has screened all 300,000 tax returns for the income 

misreporting test, and slightly more than half have been closed with 

taxpayer agreement. 

1

Pub. L. No. 108-199, 118 Stat. 3 (2004). 
Appendix II

Updated Results from the Income 

Misreporting Test as of September 30, 2004

Page 46 GAO-05-92 Earned Income Tax Credit

Table 4: Status of Income Misreporting Test, June 26, 2004 and September 30, 2004 

Results 

June 26, 2004 September 30, 2004

Number Percent Number Percent

Total number of cases in AUR EITC test 300,000 100% 300,000 100%

Number of notices sent 261,169 87% 261,188 87%

Total number of cases closed a 102,545 34% 196,600 66%

Number of cases closed with taxpayer 

agreement b 66,981 22% 155,446 52%

Number of cases screened out c 38,831 13% 38,812 13%

Number of cases closed with no change d 35,564 12% 41,154 14%

Source: GAO analysis of IRS data.

a Total number of cases closed includes the number of cases closed with taxpayer agreement and 

number cases closed with no change.

b

 Number of cases closed with taxpayer agreement includes cases when an examiner determines a 

discrepancy in the case, and after sending a notice to the taxpayer, an additional tax assessment is 

made and the taxpayer agrees with this assessment. 

c Number of cases screened out includes cases when an examiner reviews the case and determines 

the computer mismatch (i.e., a math or other error) can be resolved and thus closes the case without a 

change to the tax. According to IRS officials, the number of cases declined slightly during the period 

shown because some of the cases were transferred to examination. 

d Number of cases closed with no change includes cases when the taxpayer is able to provide 

substantiation and thus the change is closed without a change. 
Page 47 GAO-05-92 Earned Income Tax Credit

Appendix III

Comments from the Internal Revenue Service ApendxiI
Appendix III

Comments from the Internal Revenue Service

Page 48 GAO-05-92 Earned Income Tax Credit
Appendix III

Comments from the Internal Revenue Service

Page 49 GAO-05-92 Earned Income Tax Credit
Appendix III

Comments from the Internal Revenue Service

Page 50 GAO-05-92 Earned Income Tax Credit
Page 51 GAO-05-92 Earned Income Tax Credit

Appendix IV

GAO Contacts and Staff Acknowledgments ApendxiIV

GAO Contacts Michael Brostek (202) 512-9110

Joanna Stamatiades (404) 679-1900

Staff 

Acknowledgments

In addition to those named above, Tom Beall, Evan Gilman, Veronica 

Mayhand, Susan Mak, Donna Miller, Libby Mixon, Chris Moriarity, Ed 

Nannenhorn, Cheryl Peterson, Michael Rose, and Robyn Trotter made key 

contributions to this report.

(450249) 
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