United States General Accounting Office

GAO Briefing Report to the Chairman,

Committee on Governmental Affairs,

U.S. Senate

March 1995 EARNED INCOME

CREDIT

Targeting to the

Working Poor

GAO/GGD-95-122BR

GAO United States

General Accounting Office

Washington, D.C. 20548

General Government Division

B-260826 

March 31, 1995

The Honorable William V. Roth, Jr.

Chairman, Committee on Governmental Affairs

United States Senate

Dear Mr. Chairman:

This is our second report responding to your interest in the Earned

Income Credit (EIC).1

 In this report, which follows our briefing for you, we

present information on EIC noncompliance and assess changes and

administrative issues that might result from potential changes to EIC

eligibility criteria. These criteria would take into account (1) measures of

taxpayer wealth and (2) more sources of income when determining who

qualifies for the credit.2

 We also provide information on illegal alien

recipients of the EIC and describe the administration’s proposal, which is

similar to your 1994 proposal, to exclude such aliens from eligibility.

Results in Brief EIC noncompliance has been a continuing concern of the Internal Revenue

Service (IRS). Current, reliable noncompliance measures do not exist for

the entire EIC program. An IRS study of noncompliance for returns filed

electronically during two weeks in January 1994 found that an estimated

29 percent of these recipients received too much EIC, and 13 percent

intentionally claimed too much. The extent of such noncompliance for

paper returns is unknown but also of concern to the IRS.

Concerned about EIC noncompliance and refund fraud generally, IRS has

taken steps to detect and prevent erroneous refund payments. These

include developing and applying improved criteria for detecting

noncompliant returns and checking for the use of the same Social Security

number (SSN) on multiple tax returns. These steps have resulted in many

more taxpayers being asked to provide evidence of EIC eligibility and in

delaying refunds to at least 2.9 million EIC claimants as of March 17, 1995.

In addition, as of March 17, IRS had sent out almost 4.1 million notices

primarily when returns did not appear to contain valid SSNs for dependents

or, in the case of EIC, for qualifying children. Although these steps may

1

Tax Administration: Earned Income Credit—Data on Noncompliance and Illegal Alien Recipients

(GAO/GGD-95-27, Oct. 25, 1994) focused on EIC noncompliance.

2

As you requested, we initially assessed the magnitude of change likely to result from taking wealth

and additional sources of income into account when awarding the EIC. On the basis of this work, you

requested that the Joint Committee on Taxation (JCT) provide official revenue estimates. We present

those estimates in this report.

Page 1 GAO/GGD-95-122BR Earned Income Credit
B-260826 

inconvenience or burden taxpayers, if implemented effectively, they could

help IRS improve EIC compliance.

Taxpayers’ earned income, and in some cases their adjusted gross income

(AGI), as well as whether they have children meeting certain age and

residency tests, determine EIC eligibility and credit amounts. Unlike certain

federal welfare programs, taxpayers’ wealth (e.g., the value of property or

other investments they own) does not affect EIC eligibility. In addition, the

EIC does not consider certain forms of income in determining how much, if

any, credit taxpayers will receive. EIC eligibility criteria could be changed

to take into account wealth and additional forms of income.

The JCT estimates that denying the EIC to taxpayers who have some wealth,

as indirectly measured by their asset-derived income, could yield $318 to

$971 million in revenue savings in fiscal year 1997, depending on the

wealth test design. These revenue savings represent potential reductions

in EIC program costs resulting from changing EIC eligibility criteria. In

addition, taking nontaxed Social Security income, tax-exempt interest, and

nontaxed pension distributions into account in taxpayers’ AGI for credit

calculations could yield $1.449 billion in revenue savings in fiscal year

1997, according to JCT estimates. Also, taking child support payments into

account would increase revenues in fiscal year 1997 by $686 million.

However, adding an indirect wealth test or an expanded AGI definition to

the EIC eligibility criteria would add to the EIC’s complexity. Complexity

has been a continuing EIC issue because it can lead to increased errors and

dissuade deserving taxpayers from claiming the credit. Of the potential

changes to EIC criteria, adding child support payments to taxpayers’ AGI

likely would cause the greatest complexity because information on such

income is not collected by IRS and systems may not exist to

comprehensively generate the information.

Although an indirect wealth test for the EIC that uses tax return data might

be more practical than a more comprehensive test, it would have

significant limitations in measuring potential EIC recipients’ actual wealth.

For instance, such a test would not measure the value of taxpayer assets

like capital stock funds that yield little, if any, annual income. These

limitations could raise concerns that taxpayers with similar wealth would

be treated differently for the EIC.

Page 2 GAO/GGD-95-122BR Earned Income Credit
B-260826 

Background The EIC is a refundable tax credit available to low-income working

taxpayers with children and, beginning in tax year 1994, certain taxpayers

without children. Congress established the EIC in 1975 to achieve two

long-term objectives: (1) to offset the impact of Social Security taxes on

low-income workers with families and (2) to encourage low-income

individuals with families to seek employment rather than welfare.

For tax year 1993, about 14.7 million taxpayers claimed about $15 billion

in EIC benefits. To be eligible for any EIC in tax year 1993, a taxpayer must

have had earned income of less than $23,050 and had one or more

qualifying children who met the age, relationship, and residency tests. The

Omnibus Budget Reconciliation Act (OBRA) of 1993 increased the number

of taxpayers eligible for the EIC and the credit amount. These changes

began in tax year 1994 and will be fully effective in tax year 1996. The

maximum income qualifying for the EIC will rise to $27,000 in tax year

1996, the maximum credit will rise to $3,370 for tax year 1996,3

 and total

EIC cost in fiscal year 1996 is expected to reach nearly $25 billion (in 1994

dollars).

Objectives, Scope,

and Methodology

Our objectives were to (1) present information about EIC noncompliance

and what steps IRS is taking to control such noncompliance and (2) review

the impact on the amount of EIC paid that might result from potential

changes to the EIC eligibility criteria that would reflect taxpayer wealth and

additional sources of income and administrative issues which could arise

due to these changes. In addition, we were asked to provide information

about illegal aliens receiving the EIC and to describe the administration’s

proposal to exclude illegal aliens from eligibility.

To review the effects of possible changes to EIC eligibility criteria, we

obtained and analyzed data from the IRS’ Statistics of Income Division (SOI)

and from the Bureau of the Census’ Current Population Survey (CPS). For

our various objectives, we also met with Treasury, IRS, JCT, and

Congressional Budget Office officials; visited IRS Service Centers in

Cincinnati, OH, and Fresno, CA; and reviewed relevant literature on the

EIC. See appendix I for more details on our methodology.

We did our work from August 1994 through February 1995 in accordance

with generally accepted government auditing standards. On March 21, 22,

and 23, 1995, we discussed our draft report with Department of the

3

All monetary figures are in 1994 dollars. Under OBRA 1993, amounts would be higher in 1995 and 1996

than shown here because of annual inflation adjustments.

Page 3 GAO/GGD-95-122BR Earned Income Credit
B-260826 

Treasury and IRS officials who are responsible for administering the EIC,

ensuring compliance, and analyzing potential policy changes. The officials

generally agreed with the material in the report but offered updated data

and suggestions for improving the clarity of presentation. We made

appropriate changes to the report to reflect their comments.

As agreed with your office, unless you publicly announce the contents of

this report earlier, we will not distribute this report until April 4, 1995. At

that time, we will send copies of this report to various interested

congressional committees, the Secretary of the Treasury, the

Commissioner of Internal Revenue, and other interested parties. We will

also make copies available to others on request.

The major contributors to this report are listed in appendix II. Please

contact me on (202) 512-8633 if you have any questions about this report.

Sincerely yours,

Lynda D. Willis

Associate Director, Tax Policy and

 Administration Issues

Page 4 GAO/GGD-95-122BR Earned Income Credit
Page 5 GAO/GGD-95-122BR Earned Income Credit
Contents

Letter 1

Briefing Section I 

Background

8

Targeting the EIC 8

Ensuring That the Working Poor Receive the EIC 9

Range of EIC Recipients With Two Qualifying Children (1996) 10

How the EIC Is Awarded 11

Growth in EIC Program Costs (1988-2000) 12

Broader Coverage and Larger Credit Amounts Increase EIC

Program Costs

13

Briefing Section II 

Noncompliance

14

IRS Studies 14

IRS Is Studying EIC Noncompliance 14

1994 Filing Season Enforcement Results 16

IRS’ 1994 Enforcement Efforts Address Noncompliance 16

1995 Interim Enforcement Results 18

IRS’ 1995 Countermeasures for Addressing Noncompliance 18

Briefing Section III 

Better Measuring EIC

Filers’ Resources

20

Wealth 20

Options for Measuring Wealth 20

Wealth Thresholds 22

Wealth Thresholds for Qualifying for the EIC 22

Wealth Test Results 24

Lower Wealth Thresholds and Broader Measures Reduce EIC

Program Costs

25

Income 26

AGI Criteria Could Be Expanded 27

Expanded AGI Results 28

Results of Expanding AGI to Include Nontaxed Social Security

Income, Tax-Exempt Interest, and Nontaxed Pension

Distributions

29

Additional Considerations 30

Complexity Increases With Wealth and Income Tests 30

Child Support Data Not Reported 32

Including Child Support Payments in AGI Reduces Costs but

Imposes Greater Administrative Difficulty

32

Page 6 GAO/GGD-95-122BR Earned Income Credit
Contents

Briefing Section IV 

EIC Eligibility

34

Illegal Alien Recipients 34

Some Illegal Aliens Receive EIC 34

Excluding Illegal Aliens 36

Proposals to Exclude Illegal Aliens From EIC Eligibility 36

Appendix I 

Objectives, Scope,

and Methodology

38

Appendix II 

Major Contributors to

This Report

41

Glossary 42

Abbreviations

AFDC Aid to Families With Dependent Children

AGI Adjusted Gross Income

CPS Current Population Survey

EIC Earned Income Credit

IRS Internal Revenue Service

JCT Joint Committee on Taxation

OBRA Omnibus Budget Reconciliation Act

SOI Statistics of Income

SSA Social Security Administration

SSN Social Security number

TIN taxpayer identification number

Page 7 GAO/GGD-95-122BR Earned Income Credit
Briefing Section I 

Background

GAO Targeting the EIC

How can we better ensure that only 

the working poor receive the EIC?

Reduce noncompliance

Revise EIC eligibility

Wealth test

Income test

Illegal aliens

Page 8 GAO/GGD-95-122BR Earned Income Credit
Briefing Section I 

Background

Ensuring That the Working

Poor Receive the EIC

As requested by the Chairman, Senate Committee on Governmental

Affairs, this report addresses how the federal government can better

ensure that only the working poor receive the EIC. Specifically, the report

• presents information about noncompliance with the EIC and what the IRS is

doing to increase compliance and thus exclude ineligible taxpayers from

receiving the credit;

• assesses changes that may result from potential changes to the criteria

used in determining EIC eligibility. These changes would take into account

more of the resources that taxpayers could use to support themselves and

their families (resources not taken into account when determining EIC

eligibility include taxpayers’ wealth and certain forms of income);4 and

• presents information about how many illegal aliens receive the EIC and

discusses the administration’s proposal, which is similar to Senator Roth’s

1994 proposal, to exclude illegal aliens from eligibility.

4

EIC recipients’ wealth would include the value of assets like savings, stock or property that they may

own. Additional income sources not taken into account in determining how much, if any, EIC to award

include, for example, nontaxed Social Security income, tax-exempt interest income, and nontaxed

pension distributions.

Page 9 GAO/GGD-95-122BR Earned Income Credit
Briefing Section I 

Background

GAO Range of EIC for Recipients With Two 

Qualifying Children (1996)

0

1,000

2,000

3,000

4,000

Phase in Maximum Phase out

$1 $8,424 $8,425 $10,999 $11,000 $27,000

Range of recipient's income

Phase in: recipient receives

$.40 for each $1 dollar of 

income

Maximum range: recipient

receives fixed $3,370 EIC

Phase out: recipient

receives $.21 less for

each $1 of income

Earned income credit (1994 dollars)

Source: Congressional Research Service

Page 10 GAO/GGD-95-122BR Earned Income Credit
Briefing Section I 

Background

How the EIC Is Awarded The EIC is a refundable tax credit available to low-income working

taxpayers with children and, beginning in 1994, certain taxpayers without

children. Congress established the EIC in 1975 to achieve two long-term

objectives: (1) to offset the impact of Social Security taxes on low-income

workers with families and (2) to encourage low-income individuals with

families to seek employment rather than welfare.

EIC eligibility and credit amounts generally are determined according to

the taxpayers’ earned income and whether they have qualifying children

who meet age, relationship, and residency tests. The credit gradually

phases in, plateaus at a maximum amount, and then phases out until it

reaches zero. If the taxpayers’ earned income or adjusted gross income

(AGI) exceeds the maximum qualifying income level, they are not eligible

for the credit. When the taxpayers’ AGI falls in the credit’s phase-out range,

they receive the lesser amount resulting from using their earned income or

AGI in calculating the credit.

As the figure illustrates, when changes made in the 1993 Omnibus Budget

Reconciliation Act (OBRA) are fully in effect in tax year 1996, taxpayers

with two children and whose earned income ranges from $1 to $8,424 will

receive $.40 for each dollar earned. For taxpayers with incomes between

$8,425 to $10,999, the amount of EIC received will remain stable at $3,370.

Taxpayers whose income falls between $11,000 and $27,000 will receive a

declining amount of EIC, with the credit falling $.21 for each additional

dollar of income.

Page 11 GAO/GGD-95-122BR Earned Income Credit
Briefing Section I 

Background

GAO Growth in EIC Program Costs 

(1988 - 2000)

0

5,000

10,000

15,000

20,000

25,000

30,000

Millions of dollars (1994)

1988 1990 1992 1994 1996 1998 2000

4,433

6,856

11,127

15,010

24,550

27,241 28,048

Projected

Source: Fiscal year estimates from the Presidents’ 1990, 1992, 1994, 1996 budgets.

Page 12 GAO/GGD-95-122BR Earned Income Credit
Briefing Section I 

Background

Broader Coverage and

Larger Credit Amounts

Increase EIC Program

Costs

Total program costs5 for the EIC have increased dramatically as Congress

has broadened its coverage and increased the amount of credit available.

The figure shows that between 1988 and 1996 total EIC program costs are

estimated to increase over five fold in real terms, from $4.4 billion in 1988

to an estimated $24.6 billion in 1996. Congress has increased the coverage

and amount of the credit for reasons such as to (1) ensure that EIC

amounts would not fall in terms of purchasing power, (2) increase or

maintain the progressivity of the tax system, and (3) better ensure that

working individuals will have incomes above the poverty line.

The most recent change to the EIC, in the OBRA of 1993, increased the

maximum credit available and the income level at which individuals can

qualify for the credit, and made certain low-income taxpayers without

children eligible. The maximum credit amount for a family with two

children is rising from $1,511 for tax year 1993 to $3,370 in tax year 1996.

The maximum income qualifying for the EIC is rising from $23,050 in tax

year 1993 to $27,000 in tax year 1996. Finally, beginning in tax year 1994,

individuals without a qualifying child are eligible for the credit if they

(1) are at least 25 but less than 65 years old, (2) are not a dependent of

another taxpayer, and (3) have earned income and AGI of $9,000 or less.

These taxpayers will be eligible for a maximum credit of $306, adjusted for

inflation.

5

The EIC is a refundable tax credit. As such, the portion of the credit that offsets taxes owed by EIC

recipients is considered a tax expenditure, i.e., a reduction in taxes due to a preferential provision in

the federal tax law. The refundable portion of the EIC is considered a federal outlay. We totaled the

tax expenditure estimate and the outlay estimate from appropriate versions of the President’s Budget

to arrive at “total EIC program costs.”

Page 13 GAO/GGD-95-122BR Earned Income Credit
Briefing Section II 

Noncompliance

GAO IRS Studies

No comprehensive, reliable EIC data 

since 1988

IRS' 1994 2-week study

Electronic returns only

29 percent received too much EIC 

($358 million)

13 percent were judged to have 

"intentional" errors ($183 million)

IRS' ongoing study

Source: IRS data.

IRS Is Studying EIC

Noncompliance

Currently, no reliable data exist on the extent of noncompliance among all

EIC claimants. The most recent Taxpayer Compliance Measurement

Program, from 1988, showed that about 42 percent of EIC recipients

received too large a credit and about 32 percent were not able to show

they were entitled to any credit. About $1.9 billion (34 percent of the total

EIC paid out) was awarded erroneously. However, the impact of the

significant changes to the EIC since 1988 suggest that a new compliance

Page 14 GAO/GGD-95-122BR Earned Income Credit
Briefing Section II 

Noncompliance

measurement is needed. For instance, in the intervening years, Congress

has broadened the EIC coverage, increased the credit amount, and revised

filing status and qualifying children criteria.

In response to concerns about EIC-related fraud, IRS studied a sample of

those returns filed during a 2-week period in January 1994. Study results

are only generalizable to electronic returns filed during this period. IRS’

preliminary analysis of these returns showed that an estimated 29 percent

of the 1.3 million EIC returns filed electronically during the period had

claimed too large a refund and about 13 percent of the returns filed were

estimated by IRS as having intentionally claimed too much EIC. Of the $1.5

billion of EIC claimed in this period, an estimated $358 million was

erroneously claimed—about $183 million, or 12 percent, was classified as

intentional error. This intentional error category comes closest of any IRS

category in the study to measuring EIC fraud.6 About 3 percent of taxpayers

claimed a total of about $7 million less EIC than they were entitled to

receive.

In the fall of 1994, IRS began reanalyzing the electronic returns using

additional income data that were not available earlier. The results of the

additional analyses are not yet available. IRS officials expect the analyses

to lead to a higher estimated error rate.

IRS is doing a 1995 study that will yield a noncompliance estimate for the

entire EIC program. The study will include a random sample of EIC returns

filed electronically and on paper throughout the 1995 filing season.

Preliminary results may be available in June 1995.

6

Determining whether a refund is fraudulent requires determining the taxpayer’s intent, which is

difficult to prove.

Page 15 GAO/GGD-95-122BR Earned Income Credit
Briefing Section II 

Noncompliance

GAO

Paper returns: Extent of EIC 

noncompliance unknown

400,000 returns stopped in 1994 

because they lacked SSN for child

$500 million in refunds delayed, most 

indefinitely

Paper and electronic returns

77,781 fraudulent returns in 1994

$43 million in refunds incorrectly paid 

out; $117 million in refunds stopped

91 percent involved the EIC

1994 Filing Season Enforcement 

Results

Source: IRS data.

IRS’ 1994 Enforcement

Efforts Address

Noncompliance

In addition to the 2-week electronic EIC return study, IRS detected

noncompliance in its normal efforts to detect inaccurate or improper

returns as they are processed. These data document noncompliance that

IRS discovers while processing EIC returns but do not measure the universe

of noncompliance.

Page 16 GAO/GGD-95-122BR Earned Income Credit
Briefing Section II 

Noncompliance

In 1994, during initial manual reviews of tax year 1993 EIC paper returns,

IRS personnel identified about 150,000 taxpayers who claimed the EIC

although the return information indicated they were not entitled to it. Most

problems resulting in disqualification related to qualifying children, such

as a child exceeding the age limit. IRS’ initial computerized reviews of

about 6 million electronically filed EIC returns resulted in about 610,000

rejection notices being sent out. The rejections occurred when the

qualifying child’s Social Security number (SSN) did not match the Social

Security Administration’s (SSA) records.

Beginning in January 1994, IRS personnel also stopped the processing of

returns that lacked an SSN for the qualifying child and had a tax refund

exceeding a threshold. Following statutorily required notice procedures,

IRS suspended the EIC refund and asked the taxpayer to submit proof of

their EIC qualification. If proof was provided, the refund was released. If

the taxpayer submitted insufficient proof or failed to respond, IRS’ policy

was to permanently deny the refund. As of September 30, 1994, IRS had

delayed about $500 million in potentially erroneous EIC refunds claimed on

about 400,000 of about 8.7 million paper returns. IRS officials expected

most of these refunds to be permanently denied because many taxpayers

did not respond to requests for information or could not support their

claims.

After electronic returns pass initial computer checks and paper returns

pass manual checks, data is entered into IRS computers, which then

identify returns that are potentially fraudulent. These potentially

fraudulent returns are reviewed by fraud detection teams. The number of

fraudulent returns detected has grown steadily over recent years. As of

December 31, 1994, of the total number of returns reviewed, IRS had

identified 77,781 as fraudulent—44,137 on paper and 33,644 electronic

returns. About $43 million in fraudulent refunds was not detected soon

enough to stop the refund to taxpayers, but IRS stopped about $117 million

in refunds from being released. About 91 percent of the fraudulent returns

claimed the EIC.

Page 17 GAO/GGD-95-122BR Earned Income Credit
Briefing Section II 

Noncompliance

GAO 1995 Interim Enforcement Results

Delayed and rejected returns 

About 355,000 paper returns 

delayed

About 3.7 million electronic returns 

rejected

2.9 million EIC returns delayed up to 

8 weeks to check for duplicate SSN 

use 

About 1 percent of new electronic 

return originator applicants rejected

Source: IRS data.

IRS’ 1995

Countermeasures for

Addressing

Noncompliance

Verifying SSN accuracy is key to IRS’ 1995 EIC enforcement efforts. For

paper returns, IRS enters into computers the taxpayer’s SSN and, starting

this year, dependent and EIC qualifying childrens’ SSNs. When returns have

missing or invalid SSNs (i.e., do not match SSA records), IRS delays the

return and contacts taxpayers to resolve the problem. As of March 17,

1995, IRS had delayed the refunds for about 355,000 paper returns that

lacked a valid dependent or qualifying child’s SSN.

Page 18 GAO/GGD-95-122BR Earned Income Credit
Briefing Section II 

Noncompliance

IRS has added controls to prevent returns with missing or invalid SSNs, or

SSNs already used by another taxpayer, from being filed electronically. All

returns with these problems are to be rejected and returned for correction.

As of March 17, IRS had sent out 3.7 million rejection notices7

 principally

for electronic returns with SSN problems related to a questionable refund.

About 1.1 million notices were primarily due to the EIC qualifying child’s

SSN or year of birth not matching SSA records. The remaining 2.6 million

notices were primarily due to dependent SSN problems.

In addition, IRS is working to identify uses of the same SSN on more than

one tax return. Through a new tracking system, IRS intends to identify

potentially problematic returns and trigger enforcement. Because of past

EIC fraud problems, IRS is concentrating on EIC returns. IRS delays refunds

up to 8 weeks from the time a notice is sent to taxpayers to allow staff

time to identify duplicate SSN uses and fraud schemes—about 7 million EIC

returns could be delayed. As of March 17, about 2.9 million EIC refunds had

been delayed. As of March 17, IRS national office officials told us that initial

problems with the duplicate SSN system were overcome early in the year.

However, compliance personnel we spoke with said that problems with

duplicate SSN data continued to impede their effective use of the system in

mid-March.

IRS has begun checking criminal and credit histories of new return

originator applicants who wish to file taxpayers’ returns electronically.

Due to these checks, IRS had rejected about 1 percent of applicants.

As of mid-March, statistics were not available on fraudulent returns

detected this year.

7

Because a return can be rejected for more than one reason, the number of notices may be exceed the

number of returns.

Page 19 GAO/GGD-95-122BR Earned Income Credit
Briefing Section III 

Better Measuring EIC Filers’ Resources

GAO

Comprehensive wealth test may be 

impractical

A narrower test, measuring income that 

is derived from taxpayers' assets, may 

be more practical

Imperfect measurement

Fairness concerns

Wealth

Options for Measuring

Wealth

Congress requires income and wealth tests for certain welfare programs

like Aid to Families With Dependent Children (AFDC). States use

questionnaires to determine the welfare applicant’s degree of need. A

similar wealth test for the EIC likely would require additional IRS resources,

or a diversion of current resources, to obtain and verify the data. Although

states might administer a wealth test for IRS, such an arrangement likely

would take time to perfect.

Page 20 GAO/GGD-95-122BR Earned Income Credit
Briefing Section III 

Better Measuring EIC Filers’ Resources

Alternatively, a test that uses income earned from assets as an indirect

indicator of wealth is perhaps more immediately practical.8

 Such a test

could measure income reported on tax returns that is derived from

taxpayers’ assets and compare that income to an income threshold. This is

the general approach proposed by the administration and incorporated in

House and Senate versions of H.R. 831, a bill to permanently extend the

health care deduction for self-employed individuals.

In evaluating an indirect wealth test, Congress might wish to consider

several options. Asset-derived income is in several income categories.

These include taxable interest and dividends, tax-exempt interest, estate

and trust income, rental income, and capital gains. A wealth test that

includes a broad array of asset-derived income might better measure

taxpayers’ wealth than a less inclusive test.

However, no wealth test relying on tax-return information can completely

measure a taxpayer’s wealth. For example, the value of a home,9

 valuable

collections, and stocks that appreciate but pay few, if any, dividends is not

reflected on tax forms except when the assets are sold. Within the

constraints of using data reported to IRS, broader income measures might

come closest to measuring a taxpayer’s overall wealth, but the measures

nevertheless could incorrectly represent some taxpayers’ wealth while

more accurately measuring others’ wealth. These limitations raise fairness

concerns since taxpayers with similar wealth could be treated differently

for purposes of the EIC.

8

Taxpayers’ wealth is somewhat taken into account through the present AGI rule since AGI includes

some asset-derived income. The wealth test we discuss takes this approach an additional step by

disqualifying taxpayers’ whose asset-derived income, when summed, exceeds a threshold.

9

The value of a recipient’s home may not be included in wealth tests for welfare programs; for

example, it is not considered for AFDC.

Page 21 GAO/GGD-95-122BR Earned Income Credit
Briefing Section III 

Better Measuring EIC Filers’ Resources

GAO Wealth Thresholds

Income realized

from assets

Presumed value of

underlying assetsa

$1,000 $16,700

1,500 25,000

2,500 41,700

aThe relationship between income and wealth is based on the assumption of a simple 6-percent

annual realized return on the value of the underlying assets.

Wealth Thresholds for

Qualifying for the EIC

Congress will need to set a threshold amount above which taxpayers

would be disqualified from receiving the EIC if it wishes to adopt an

indirect wealth test for the credit. The House version of H.R. 831 proposes

a $2,500 threshold, indexed for inflation. The credit would phase out as

asset-based income rose above $2,500 and disappear when such income

was at least $3,150. The Senate version of the bill proposes a $2,450

Page 22 GAO/GGD-95-122BR Earned Income Credit
Briefing Section III 

Better Measuring EIC Filers’ Resources

unindexed threshold with different income items and provides no phase

out. One consideration in selecting a threshold amount could be the level

of assets, or wealth, that a given level of income may represent. Possible

thresholds could include, for example, amounts of $1,000, $1,500, and

$2,500. Assuming a 6-percent annual realized rate of return, about $16,700

of assets would generate $1,000 of income. About $25,000 and $41,700 of

assets would generate $1,500 and $2,500 of income, respectively.

However, the relationship between asset-derived income and the

underlying asset value may vary widely. For example, if a taxpayer reports

$1,000 of bank account interest, the average annual account balance likely

would have been between $10,000 (at a 10-percent interest rate) and

$30,000 (a 3.3-percent rate). If $1,000 of interest was earned on a tradeable

bond, the value of the underlying bond could lie outside those bounds

because a bond’s value rises or falls as interest rates change.

Associating income reported on tax forms with an underlying asset value

is most problematic for capital gains income. For example, $1,000 of

reported gain could come from a successful $1,000 investment in stocks

that doubled in value. But, a $1,000 capital gain also could come from a

$100,000 investment in stock that performed very poorly. The association

between reported capital gains and underlying asset values also is

complicated because the return on the assets could have been

accumulated over many years.

It is difficult to say whether a goal of treating taxpayers of similar means

similarly is better served by implementing a broad wealth test that

combines income from assets with widely varying rates of return, or

implementing a narrower test that ignores some assets completely. In

considering a threshold amount for an indirect wealth test, lower

thresholds may be more appropriate if the relationship between income

and the value of underlying assets is less likely to vary widely among

taxpayers.

Page 23 GAO/GGD-95-122BR Earned Income Credit
Briefing Section III 

Better Measuring EIC Filers’ Resources

GAO Wealth Test Results

Income derived from 

taxpayers' assets (wealth) Option 1 Option 2 Option 3

Taxable interest

Taxable dividends

Tax-exempt interest 

Net estate and trust income

Net rental income

Net capital gains

Income threshold Estimated revenue in FY'97 from reductions in EIC

$1,000

1,500

2,500

Dollars in millions

$685

505

318

$833

637

405

$971

766

524

a

a

a

b

c

aLess investment interest paid.

bNet rental real estate income, net income from Real Estate Mortgage Investment Conduits, net

farm rental income, and royalty income.

cNet capital gains (Schedule D) and other gains (Schedule 4797).

Source: JCT estimates for Senator William V. Roth, Jr.

Page 24 GAO/GGD-95-122BR Earned Income Credit
Briefing Section III 

Better Measuring EIC Filers’ Resources

Lower Wealth Thresholds

and Broader Measures

Reduce EIC Program Costs

As more sources of income derived from taxpayers’ assets are included in

an EIC wealth test and as the test threshold is lowered, EIC program costs

would be reduced further. Joint Committee on Taxation (JCT) revenue

estimates illustrate this point.10 For example, option 3, including the

broadest base of income derived from taxpayers’ assets, coupled with a

$1,000 threshold, is estimated by JCT to raise $971 million in revenue in

fiscal year 1997. In contrast, option 1, including only taxable interest and

dividends and tax-exempt interest, coupled with the higher $2,500

threshold, is estimated to yield $318 million in revenue in fiscal year 1997.

JCT’s latest published estimate for the EIC program’s total cost in fiscal year

1997 is $25.8 billion. Thus, $971 million would represent about a 3.8

percent reduction in the total EIC program costs, and $318 million would

represent about a 1.2 percent reduction.

10Although figures provided by JCT are revenue estimates, these estimates can be thought of as

“program cost” reductions. The EIC is a refundable tax credit. As such, the portion of the credit that

offsets taxes owed by EIC recipients is considered a tax expenditure, i.e., a reduction in taxes due to a

preferential provision in the federal tax law. The refundable portion of the EIC is considered a federal

outlay. Since most EIC recipients owe no taxes, most of total EIC “costs” come from the refundable, or

outlay, portion of the credit.

Page 25 GAO/GGD-95-122BR Earned Income Credit
Briefing Section III 

Better Measuring EIC Filers’ Resources

GAO

Income not included in AGI test

Nontaxed social security income

Tax-exempt interest

Nontaxed pension distributions

Income

Page 26 GAO/GGD-95-122BR Earned Income Credit
Briefing Section III 

Better Measuring EIC Filers’ Resources

AGI Criteria Could Be

Expanded

Although the amount of EIC a taxpayer receives is based largely on earned

income, the amount, if any, also depends in part on other sources of

income. Taxpayers’ AGI can limit their EIC payments. In addition to earned

income, AGI includes income from other sources, such as investments,

alimony received, and unemployment compensation. When taxpayers’ AGIs

fall within the EIC phase-out range, EIC payments are the lower of those

resulting from using taxpayers’ AGI or earned income. When AGIs exceed

the top of the EIC phase-out range, taxpayers are ineligible for the credit

regardless of their earned income level. Adding income elements to

calculations of the AGI for the EIC, thus, would be an incremental change

that would enable Congress, if it so desired, to take into account a fuller

range of taxpayers’ incomes in determining the amount of credit taxpayers

would receive.11

One alternative for expanding AGI could be to include nontaxed Social

Security income, tax-exempt interest income, and nontaxed pension

income. These income sources are excluded from AGI for purposes of

calculating income tax liabilities but are sources of support available to

individuals.12 Of the three income items, Social Security is the largest

income source to EIC recipients. Although most taxpayers eligible for the

EIC do not receive Social Security income, several hundred thousand do.

11AGI would be expanded to include those other income items only for purposes of the EIC and not for

income tax liability.

12The taxable portions of Social Security income and pensions are included in taxpayers’ AGIs.

Page 27 GAO/GGD-95-122BR Earned Income Credit
Briefing Section III 

Better Measuring EIC Filers’ Resources

GAO

Expanding AGI would yield $1.449 billion 

in FY'97.

Combining an expanded AGI and a 

wealth test would yield somewhat less 

revenue than the sum of the two.

Expanded AGI Results

Source: JCT estimates for Senator William V. Roth, Jr.

Page 28 GAO/GGD-95-122BR Earned Income Credit
Briefing Section III 

Better Measuring EIC Filers’ Resources

Results of Expanding AGI

to Include Nontaxed Social

Security Income,

Tax-Exempt Interest, and

Nontaxed Pension

Distributions

As requested by Senator Roth, JCT estimated the revenues that would

result from including nontaxed Social Security income, tax-exempt

interest income, and nontaxed pension income in taxpayers’ AGI for

purposes of EIC eligibility. It estimated that $1.449 billion in revenue would

be realized in fiscal year 1997 from this change. This would represent

about a 5.6 percent reduction in the estimated $25.8 billion cost of the EIC

program for fiscal year 1997.

If both a wealth test and an expanded definition of taxpayers’ AGIs were

adopted simultaneously for the EIC, the net result in revenues would be

somewhat less than the sum of savings from each test independently. This

would occur because some of the taxpayers disqualified by one test would

also be disqualified by the other; but these reductions resulting from the

disqualified taxpayers should not be counted twice when estimating net

revenue savings achieved by implementing both proposed changes.

Page 29 GAO/GGD-95-122BR Earned Income Credit
Briefing Section III 

Better Measuring EIC Filers’ Resources

GAO Additional Considerations

Wealth and income tests

Increase complexity and burden

May discourage EIC claimants

Wealth test-Broader measures may

Capture more wealth

Reduce incentives to shift investments

Include some unverifiable income 

Income test

Most social security income is not 

reported on Form 1040

Complexity Increases With

Wealth and Income Tests

A wealth test and an expanded AGI definition for credit determination

purposes would have additional consequences besides reducing EIC

program costs. Both changes would increase the complexity of the EIC and

impose burdens on taxpayers in determining their eligibility and on IRS in

ensuring compliance. Complexity has long been a concern of the IRS.

Complexity contributes to taxpayer errors and the EIC’s high

noncompliance rate. IRS officials also expressed concern to us that a

wealth test might discourage some legitimately qualified taxpayers from

applying for the EIC—a longstanding concern. Some research suggests that

Page 30 GAO/GGD-95-122BR Earned Income Credit
Briefing Section III 

Better Measuring EIC Filers’ Resources

between 14 percent and 25 percent of eligible taxpayers do not claim the

EIC.

13

Complexity concerns might be alleviated, in part, because a small portion

of EIC recipients have income that would be taken into account in either

the wealth test or the expanded AGI. For example, in 1992 about 82 percent

of EIC recipients had no income from any of the sources included in a

broad indicator of wealth. Furthermore, about 50 percent of EIC recipients

use paid preparers.

Specifically for a wealth test, broader measures may capture more sources

of wealth and might reduce taxpayers’ incentives to shift investments to

maintain their EIC eligibility. However,IRS would be unable to verify

tax-exempt interest income because it receives no third-party information

reports to use in checking the accuracy of taxpayers’ returns. Short of an

audit, IRS also may be unable to verify the cost basis used in determining

certain capital gains that could be included in a wealth test.

For the expanded AGI definition, tax-exempt income would, of course, be

unverifiable. In addition, only taxpayers whose Social Security income is

taxed report their Social Security income to IRS. IRS would have to collect

Social Security income data for an expanded AGI test. The SSA provides all

Social Security recipients with an annual Form 1099 that records their

Social Security income and a computer tape containing this information is

provided to IRS. However, under existing systems, according to the IRS,

more than a year likely would elapse before IRS would be able to match

taxpayers’ claimed Social Security income to the SSA tape.

13Yin et al., Improving the Delivery of Benefits to the Working Poor: Proposals to Reform the Earned

Income Tax Credit Program, American Tax Policy Institute, Feb. 1994.

Page 31 GAO/GGD-95-122BR Earned Income Credit
Briefing Section III 

Better Measuring EIC Filers’ Resources

GAO Child Support Data Not Reported

Including child support in the 

expanded AGI may yield $686 million 

in FY'97.

Administration would be difficult.

Data on child support not reported to 

IRS

Verification of child support 

payments, if reported, may be 

difficult

Source: JCT estimates for Senator William V. Roth, Jr.

Including Child Support

Payments in AGI Reduces

Costs but Imposes Greater

Administrative Difficulty

The AGI definition for EIC purposes could be expanded to include child

support payments. Including child support payments would recognize that

such payments are part of a family’s support. As estimated by JCT, adding

child support to AGI along with the other items discussed earlier would

result in a savings of $2.135 billion in fiscal year 1997 (about a 8.3 percent

reduction in total EIC program costs for that year). This is $686 million

more than if the AGI definition did not include child support payments.

Page 32 GAO/GGD-95-122BR Earned Income Credit
Briefing Section III 

Better Measuring EIC Filers’ Resources

However, the administrative issues associated with incorporating child

support payments in EIC eligibility criteria appear to be more formidable

than for the other income items, such as Social Security payments, that

could be added to AGI for determining the EIC. Although child support

payments may be a factor in determining whether a divorced or separated

parent may claim a child as a dependent for income tax purposes, child

support income itself is not required on any IRS forms. Therefore, if child

support were to be considered in determining EIC eligibility, IRS would

need to begin collecting this information.

IRS’ ability to ensure compliance is impeded when it cannot verify the

accuracy of information reported on tax returns. Independent verification

of child support payments could be difficult. In cases where child support

agreements are overseen by a court or a state or local social services

agency, the overseeing agency may be able to report to the IRS the amounts

of child support paid. IRS could use such a report to verify the accuracy of

child support data used by taxpayers claiming the EIC. However, systems

would need to be developed to routinely report this data to IRS.

When courts or social service agencies do not oversee child support

payments, third party verification of payments may be unavailable.

Furthermore, the parents could have incentives to misreport the amounts

paid. That is, a custodial parent might claim that payments were not made

because such payments could affect their ability to claim the child as a

dependent for tax purposes. Noncustodial parents who had not properly

paid child support would have an incentive to claim they had paid it if for

no other reason than to avoid child support enforcement procedures.

Page 33 GAO/GGD-95-122BR Earned Income Credit
Briefing Section IV 

EIC Eligibility

GAO Illegal Alien Recipients

No reliable data on number of illegal 

aliens who received EIC

IRS suspects that more than 

160,000 received EIC in 1994

Many more may have received it

Duplicate uses of SSNs

Temporary identification numbers

Some Illegal Aliens

Receive EIC

The Internal Revenue Code does not prohibit illegal aliens from receiving

the EIC if they meet the prescribed eligibility requirements. IRS forms do not

require illegal aliens to identify themselves as such; therefore, IRS does not

know how many illegal aliens may be claiming and receiving the EIC.

IRS needs an identification number, generally the taxpayer’s SSN, to process

a tax return. IRS assigns a temporary Taxpayer Identification Number (TIN)

when any taxpayer files a return with an invalid SSN, a blank space, or the

Page 34 GAO/GGD-95-122BR Earned Income Credit
Briefing Section IV 

EIC Eligibility

code “205(c).”14 The designation 205(c) is often used by taxpayers to

indicate they are not eligible to receive an SSN. Thus, IRS officials said

taxpayers who enter this code are likely to be illegal aliens.

Limited data from manual reviews under the 1994 EIC Compliance

Initiative show that a minimum of 160,000 taxpayers,15 out of about

8.7 million who filed paper returns claiming the EIC, entered 205(c) instead

of an SSN for a qualifying child.16 Given use of the 205(c) code for qualifying

children and their enforcement experience, IRS officials believe these

returns likely were filed by illegal aliens. IRS expects most of these refunds

to be denied because taxpayers will not be able to support their claims by

verifying that the dependent met the age, relationship, and residency

requirement.

Some unknown portion of returns filed with SSNs may also be filed by

illegal aliens. For example, if illegal aliens use SSNs of other individuals

when filing a return and IRS does not detect the SSN duplication, they may

receive an EIC refund. IRS’ new efforts to detect duplicate uses of SSNs, if

successfully implemented, should reduce the number of illegal aliens as

well as U.S. citizens incorrectly receiving tax refunds.

14The designation 205(c) refers to section 205(c) of the Social Security Act as amended which specifies

the rules for issuing SSNs. Most legal aliens can obtain an SSN if they meet the applicable

requirements. Section 205(c) does not refer specifically to illegal aliens.

15In addition to the 160,000, an unknown number of illegal aliens would have received the EIC because

the amount they claimed was below the Compliance Initiative’s dollar threshold.

16EIC claimants are required to provide a TIN for qualifying children.

Page 35 GAO/GGD-95-122BR Earned Income Credit
Briefing Section IV 

EIC Eligibility

GAO

Administration's compliance proposal

Exclude illegal aliens from EIC 

eligibility

Require recipient to have an SSN

Allow IRS to use streamlined 

enforcement procedures

Administration estimates $400 million 

in reduced EICs in fiscal year 1997

Excluding Illegal Aliens

Proposals to Exclude

Illegal Aliens From EIC

Eligibility

A Senate bill introduced in 1994 by Senator Roth and the administration’s

Tax Compliance Act of 1995 (H.R. 981 and S. 453) introduced in 1995

would deny the EIC to illegal aliens. Illegal aliens cannot be employed

lawfully in the United States. On the other hand, the EIC, which is intended

in part to encourage employment, under current law, can be paid to illegal

aliens. Thus, the EIC works at cross purposes with the prohibition on

employment of illegal aliens.

Page 36 GAO/GGD-95-122BR Earned Income Credit
Briefing Section IV 

EIC Eligibility

The administration’s proposal would require that all EIC recipients provide

SSNs that are valid for employment in the United States for themselves, for

their spouses, if applicable, and for qualifying children. Because illegal

aliens cannot qualify for SSNs that are valid for employment in the United

States, they would not be able to receive the EIC.

The SSA provides the IRS with a computer tape with names and SSNs of

those individuals having SSNs. The data include codes indicating whether

the SSN is for employment purposes or other purposes, such as qualifying

for Social Security benefits. This data provides a tool for IRS to use in

enforcing the administration’s proposal. We have not assessed the

adequacy of the information in the tape for enforcement purposes or the

potential for illegal aliens to fraudulently receive work-related SSNs from

the SSA.

Finally, the administration’s proposal would permit IRS to use streamlined

procedures to enforce the requirement that EIC claimants have valid

work-related SSNs. The administration proposes that IRS be permitted to

notify taxpayers who do not provide valid SSNs that they are not eligible for

the EIC. Within 60 days, taxpayers would either have to provide valid SSNs

or request that IRS follow deficiency procedures. Deficiency procedures

protect taxpayers’ rights through notices to the taxpayer and opportunities

for rebuttal of IRS’ concerns and petition to the Tax Court. Taxpayers who

fail to respond within 60 days to IRS’ proposed notice regarding lack of

valid SSNs would be required to refile an amended return with correct SSNs

to obtain the EIC.

The administration estimates that requiring all EIC recipients to provide

valid work-related SSNs and using streamlined procedures to enforce this

requirement would yield about $400 million in additional revenue in fiscal

year 1997.

Page 37 GAO/GGD-95-122BR Earned Income Credit
Appendix I 

Objectives, Scope, and Methodology

As requested, our objectives were to (1) present information about EIC

noncompliance and what steps IRS is taking to control noncompliance and

(2) review the impact on the amount of EIC paid that might result from

potential changes to the EIC eligibility criteria that would reflect taxpayer

wealth and additional sources of income and administrative issues that

could arise due to these changes. In addition, we were asked to provide

information about illegal aliens receiving the EIC and to describe the

administration’s proposal, which is similar to Senator Roth’s 1994

proposal, to exclude illegal aliens from eligibility.

In responding to all of these objectives, we met with and obtained reports

and data from officials with the Department of the Treasury and IRS’

national office. Primarily in response to the objectives concerning

noncompliance and illegal aliens receiving the EIC, we also met with

officials and reviewed relevant procedures and data in IRS’ Cincinnati, OH,

and Fresno, CA, Service Centers.

Specifically for our objective of assessing the effects of certain revisions to

the criteria used in determining the amount, if any, of EIC that is awarded,

we

• reviewed relevant literature on the EIC to understand its requirements and

to determine the results of others’ analyses of EIC eligibility modifications;

• met with staff from the JCT to discuss advantages and disadvantages of

using possible proxy measures of wealth to determine EIC eligibility;

• interviewed Congressional Budget Office analysts regarding their

consideration of modifications to EIC eligibility requirements;

• met with Department of the Treasury Office of Tax Analysis staff to

discuss policy and administrative issues associated with EIC eligibility

modifications; and

• met with IRS national office officials, including the National Director of

Submissions Planning; the Chief of Service Center Compliance; the

Director of the Service’s Tax Forms and Publications Division; and the

National Director, Applications Design and Development Management, to

discuss administrative issues associated with EIC eligibility modifications.

In addition, we performed statistical analyses to make preliminary

estimates of the potential effects on the overall amount of EIC program

costs and the number of EIC recipients of using measures of taxpayers’

wealth and additional sources of their income when determining how

much, if any, EIC would be awarded. After we determined the general

magnitude of change that might result, we discussed our preliminary

Page 38 GAO/GGD-95-122BR Earned Income Credit
Appendix I 

Objectives, Scope, and Methodology

results with Senator Roth and he requested revenue estimates, shown in

our study, from the JCT.

17

To do our analysis, we first determined how much EIC would have been

awarded and to how many recipients had the EIC rules that will be in effect

in 1996 actually been in effect in tax year 1992. Applying the 1996 rules,

which increase the credit amount and the number of individuals who are

eligible for the EIC, provided us with a more realistic indicator of the

potential effects of changing the EIC eligibility rules.

Using this as a base measure, we computed the amount of EIC that would

have been awarded and the number of recipients if (1) wealth measures of

varying breadth coupled with varying cutoff thresholds had been used in

determining EIC eligibility and (2) nontaxed Social Security income,

nontaxed pension distributions, and tax-exempt income had been included

in taxpayers’ AGIs in determining how much, if any, EIC they would have

received.

To assess the likely effects of changing the EIC eligibility criteria, we

obtained and analyzed data from the Internal Revenue Service’s (IRS)

Statistics of Income Division (SOI) and from the Bureau of the Census’

Current Population Survey (CPS).18 The CPS data was needed because SOI

only has data that can be obtained from tax returns. Critically absent from

SOI was data related to nontaxable Social Security income. (Social Security

income is reported on Forms 1040 and 1040A, but only to the extent that

some portion of the income is subject to tax.) We used tax year 1992 SOI

data and March 1993 CPS data, which incorporates economic data for the

calendar year 1992, because it conformed to the same period as the most

recent SOI data available.

Using these data, we simulated the effect of broadening the definition of

AGI to include nontaxed Social Security income as well as nontaxed private

pensions and tax-exempt interest income. (The latter two items are

reported on tax forms.) We used Census’ simulation of EIC recipients on its

CPS data set to estimate the Social Security income received by the actual

SOI population. Overall, we believe that this simulation procedure yielded a

17Our methodology produces an estimate given the taxpayer income characteristics that existed in

1992 but assuming that the 1996 EIC rules had then applied. The result differs from a revenue estimate,

which provides an indication of future changes in revenues due to changes in the EIC statute and also

takes into account forecasted changes in interest rates and other economic factors.

18The Omnibus Budget Reconciliation Act of 1993 revised the EIC criteria, in part making certain

taxpayers without children eligible for the credit. Our analyses did not include taxpayers without

children.

Page 39 GAO/GGD-95-122BR Earned Income Credit
Appendix I 

Objectives, Scope, and Methodology

conservative estimate of the reductions in EIC program costs and the

number of affected EIC recipients.

Page 40 GAO/GGD-95-122BR Earned Income Credit
Appendix II 

Major Contributors to This Report

General Government

Division, Washington,

D.C.

Michael Brostek, Assistant Director, Tax Policy and

 Administration Issues

James A. Wozny, Chief Tax Economist, Tax Policy and

 Administration Issues

Mary Phillips, Assignment Manager

Clifford Tuck, Economist-in-Charge

Cincinnati Regional

Office

William Bricking, Evaluator-in-Charge

Ellen Soltow, Evaluator

Page 41 GAO/GGD-95-122BR Earned Income Credit
Glossary

Income

Taxable Earned Income For the EIC taxable earned income includes (1) wages, salaries, and tips,

(2) union strike benefits, (3) long-term disability benefits received prior to

minimum retirement age, and (4) net earnings from self-employment.

Nontaxable Earned Income Among the earned income items that are nontaxable are (1) voluntary

salary deferrals, such as 401(k) plans or the federal thrift savings plan,

(2) pay earned in a combat zone, (3) basic quarter and subsistence

allowances from the U.S. military, (4) housing allowance or rental value of

a parsonage for the clergy, and (5) excludable dependent care benefits.

Unearned Income Items that are not earned income include (1) interest and dividends,

(2) Social Security and railroad retirement benefits, (3) welfare benefits

(including AFDC payments), (4) pensions or annuities, (5) veterans’

benefits, (6) workers’ compensation benefits, (7) alimony, (8) child

support, (9) unemployment compensation (insurance), (10) taxable

scholarship or fellowship grants (not reported on Form W-2), and

(11) variable housing allowance for the military.

Adjusted Gross Income In addition to taxpayers’ earned income, AGI includes their income from

other sources, such as investments, alimony received, and unemployment

compensation.

Qualifying Child A qualifying child (1) is an EIC claimant’s son, daughter, adopted child,

grandchild, stepchild, or foster child, (2) is under age 19 or under age 24

and a full-time student or any age and permanently and totally disabled,

and (3) lives in the claimant’s home in the United States for more than half

of the year (or all of the year if a foster child).

Working Poor The term “working poor,” while used in reference to the intended

beneficiaries of the EIC, is not defined in statute. Generally, for purposes of

this report, we use the term to refer to those individuals who meet the

current EIC income criteria, or the revised criteria that we analyze. The

revised criteria do not alter the basic EIC income criteria, but rather

Page 42 GAO/GGD-95-122BR Earned Income Credit
Glossary

include a fuller range of potential EIC recipients’ resources in determining

whether basic eligibility criteria are met.

(268643) Page 43 GAO/GGD-95-122BR Earned Income Credit
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