a

GAO

United States General Accounting Office

Report to Congressional Requesters

September 2003 EARNED INCOME 

CREDIT

Qualifying Child 

Certification Test 

Appears Justified, but 

Evaluation Plan Is 

Incomplete

GAO-03-794
The Assistant Treasury Secretary and IRS Commissioner convened a task 

force to identify ways of reducing EIC overclaims while minimizing taxpayer 

burden and maintaining the EIC’s relatively high participation rate. In August 

2002, the Secretary approved a recommendation to certify taxpayers’ 

eligibility to claim EIC qualifying children. The proposal is based on analyses 

of the leading sources of EIC errors, thus focusing attention and burden on 

the subset of taxpayers most likely to make those errors. 

Since August 2002, IRS has made key changes to the certification program, 

including concentrating on residency certification and postponing 

relationship certification, delaying program implementation until later this 

year, and reducing the test sample from 45,000 to 25,000. Despite the 

changes, the process for selecting taxpayers, what taxpayers will receive 

from IRS, what taxpayers are required to provide, and the program’s goals 

remain fundamentally the same as originally planned. In addition, IRS has 

emphasized that program expansions, if any, will depend on the results of 

this year’s test. The process would involve three key stages as shown below. 

The EIC Certification Process as Envisioned 

These changes, including the most recent, help achieve a better balance 

between preventing unreasonable taxpayer burden and addressing the EIC’s 

high overclaim rate and support IRS’s plans to test the certification program. 

However, IRS’s plan for evaluating the test is incomplete, presenting only 

some information on how IRS would evaluate whether certification would 

reduce the EIC overclaim rate, minimize burden, and maintain a relatively 

high participation rate. The plan proposes potential options for identifying 

how and when certain critical data will be obtained, but does not provide 

further details on when decisions will be made or on the specific data that 

will be collected. Officials have developed preliminary drafts identifying 

data to be obtained and have begun considering how to use contractors to 

gather the data. Because the data relate to taxpayers’ actions that will occur 

next spring, IRS appears to have some time to finalize its evaluation plan. 

The Earned Income Credit (EIC), a 

tax credit available to the working 

poor, has experienced high rates of 

noncompliance. Unlike many 

benefit programs, EIC recipients 

generally receive payments without 

advance, formal determinations of 

eligibility; the Internal Revenue 

Service (IRS) checks some 

taxpayers’ eligibility later. IRS 

estimated that tax year 1999 EIC 

overclaim rates, the most recent 

data available, to be between 27 

and 32 percent of dollars claimed 

or between $8.5 billion and 

$9.9 billion. To address overclaims, 

IRS plans to test a new certification 

program. 

Because IRS’s plans have garnered 

much attention, you asked us to 

(1) describe the design and basis 

for the EIC qualifying child 

certification program, (2) describe 

the current status of the program, 

including significant changes, and 

(3) assess whether the program is 

adequately developed to prevent 

unreasonable burden on EIC 

taxpayers and improve compliance 

so that the test should proceed. 

GAO recommends that the 

Commissioner of Internal Revenue 

accelerate the development of 

IRS’s plan to evaluate the 

certification test. The plan should 

demonstrate how the program’s 

objectives would be evaluated, 

including milestones for 

conducting the evaluation. The 

Commissioner said that IRS would 

further develop its evaluation plan 

as we recommended. 

www.gao.gov/cgi-bin/getrpt?GAO-03-794.

To view the full report, including the scope 

and methodology, click on the link above. 

For more information, contact Michael 

Brostek at (202) 512-9110 or 

brostekm@gao.gov. 

Highlights of GAO-03-794, a report to 

congressional requesters 

September 2003 

EARNED INCOME CREDIT 

Qualifying Child Certification Test 

Appears Justified, but Evaluation Plan Is 

Incomplete 
Page i GAO-03-794 Earned Income Credit

Contents

Letter 1

Results in Brief 2

Background 5

Task Force Considered Much Information Related to EIC 

Compliance before Recommending Qualifying Child Certification 

Program 9

IRS Has Made Key Changes to Its Initial Qualifying Child 

Certification Program and More May Occur 18

Qualifying Child Certification Program Developed to Improve 

Compliance While Considering Taxpayers’ Burden, but Plan for 

Evaluating Test Is Incomplete 31

Conclusions 38

Recommendations for Executive Action 39

Agency Comments and Our Evaluation 40

Appendixes

Appendix I: Significant Noncompliance Rates Other Than for the EIC 41

Appendix II: Overclaim Rates, Administrative Costs, and Eligibility 

Verification Processes of Benefit Programs 44

Appendix III: Objectives, Scope, and Methodology 50

Objectives 50

Scope and Methodology 51

Appendix IV: Key Milestones for the Qualifying Child Certification 

Program 54

Appendix V: Documents Related to the Precertification Program 55

Appendix VI: Comments from the Internal Revenue Service 65

Appendix VII: GAO Contacts and Staff Acknowledgments 71

GAO Contacts 71

Acknowledgments 71

Tables Table 1: EIC Requirements for Tax Year 2002 6

Table 2: EIC Overclaim Rates for 1997 and 1999 10

Table 3: Recent Statutory Changes 12

Table 4: Overclaim Rates, Administrative Costs, and Eligibility 

Verification Processes for EIC and Other Programs 45

Table 5: How Overclaim Rates Are Calculated for Selected Benefit 

Programs 49
Contents

Page ii GAO-03-794 Earned Income Credit

Table 6: Questions We Were Asked 50

Figures Figure 1: Estimated Percentage of EIC Taxpayers (with Children) 

Who Made Residency Errors and Filed Single or Head of 

Household in Tax Year 1999 17

Figure 2: IRS’s Process to Identify the Population of Taxpayers 

from Which the 25,000 Person Test Sample Was Drawn 22

Figure 3: The EIC Certification Process as Envisioned 24

Figure 4: Key Milestones for the Certification Program 54

Abbreviations

EIC Earned Income Credit

IRS Internal Revenue Service

AGI Adjusted Gross Income

FCR Federal Case Registry

SB/SE Small Business/Self Employed 

NRP National Research Program 

TCMP Taxpayer Compliance Measurement Program

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Page 1 GAO-03-794 Earned Income Credit

United States General Accounting Office

Washington, D.C. 20548

A

September 30, 2003 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

The Earned Income Credit (EIC), a tax credit available to the working poor, 

has generally been considered a successful antipoverty program by 

researchers. In recent years, the Internal Revenue Service (IRS) has paid 

about $30 billion annually to about 20 million EIC recipients. However, the 

EIC program has long experienced high rates of noncompliance. For tax 

year 1999, IRS estimated the EIC overclaim rates1

 ranged between 27 and 

32 percent of dollars claimed or between $8.5 billion and $9.9 billion. 

Unlike many benefit programs, EIC recipients generally receive payments 

without a prior, complete review of their eligibility; IRS checks some 

aspects of taxpayers’ eligibility before and after the credit is granted. 

To help combat the high rates of noncompliance, IRS plans to test a new 

program, beginning in December 2003.2

 Referred to as the qualifying child 

certification program, some taxpayers will be asked to verify EIC 

“residency” requirements3

 for their qualifying children before getting that 

portion of their refund or reduction in tax liability. IRS plans to test the EIC 

program with 25,000 taxpayers whose residency cannot be confirmed 

1

Overclaim rates are calculated based on erroneous claim amounts less any amounts IRS 

recovered or expects to recover, such as through examinations. IRS also has limited 

information on underclaim rates, or instances in which taxpayers claimed less than they 

were entitled to receive. This report primarily focuses on IRS’s efforts to address 

noncompliance related to overclaims using the qualifying child certification program.

2

The program discussed in this report is one part of a strategy to target three major known 

sources of EIC noncompliance. The other two parts involve the improper reporting of filing 

status, such as among married taxpayers who report as single or head of household to avoid 

reporting their spouse’s income, and income misreporting, such as underreporting earned 

income. 

3

Taxpayers must meet multiple criteria in order to claim the EIC, as shown in table 1. 

Residence is one criterion for a taxpayer with a qualifying child.
Page 2 GAO-03-794 Earned Income Credit

through other means. Future plans for the program largely depend upon 

the results of this test.

Because IRS’s plans surrounding the program have garnered much 

attention, you asked us to respond to questions about the qualifying child 

certification program. These questions cover various topics, such as the 

status of the program, understandability of letters and forms going to 

taxpayers, certification requirements and taxpayers’ ability to comply, 

taxpayer burden, impact on compliance rates, impact of recent legislative 

changes, and data from other federal or state benefit programs. We grouped 

these questions into three objectives: (1) describe the design and basis for 

the EIC qualifying child certification program as proposed by the EIC task 

force, (2) describe the current status of the program, including significant 

changes since program approval, and (3) assess whether the program is 

adequately developed to (a) prevent unreasonable burdens on EIC 

taxpayers and (b) improve compliance so that the test should proceed. In 

addition, you asked us to provide readily available information on the 

(1) significant noncompliance rates other than for the EIC and (2) 

overclaim rates and administrative costs of comparable benefit programs 

administered by states or the federal government and any verification 

process used by these programs. This information is presented in 

appendixes I and II, respectively.

This report is based primarily on our previous work and analysis of IRS and 

Department of the Treasury documents and reports, new letters and forms 

that will be sent to taxpayers, and interviews with senior officials at IRS 

and Treasury. We did not verify the accuracy of reports or data obtained. 

Rather, we reviewed the steps IRS officials had taken to implement the 

program and determined, to the extent possible, how they assured 

themselves that the program had been adequately developed to prevent 

unreasonable burden and improve compliance. We did not determine the 

adequacy of various other preparations for the qualifying child test, such as 

staffing and training of staff. Appendix III provides more detail on the 

scope and methodology used in conducting our work.

Results in Brief Due to persistently high EIC noncompliance, among other factors, the 

Assistant Secretary of the Treasury and IRS Commissioner convened a task 

force in February 2002 to find ways of reducing EIC overclaim rates while 

minimizing the burden to taxpayers and maintaining the EIC’s relatively 

high participation rate. The task force considered the likely effect of recent 

legislative changes on EIC compliance in formulating its proposal to 
Page 3 GAO-03-794 Earned Income Credit

combat noncompliance. It also considered various options, such as 

partnering with other federal or state agencies to verify EIC taxpayers’ 

eligibility. The task force analyzed data and reviewed studies to design the 

program to focus on known sources of noncompliance. In August 2002, the 

Treasury Secretary approved the task force recommendation that IRS 

certify the eligibility of taxpayers’ qualifying children. Only taxpayers most 

likely to make errors and whose qualifying child eligibility cannot be 

verified from available information would be asked to certify. 

Since taking its broad charge from the task force, IRS obtained input from 

external and internal stakeholders, and made key changes to the 

certification program, including (1) concentrating on residency 

certification and postponing the relationship certification for an 

undetermined period of time, (2) delaying program implementation until 

later this year, and (3) reducing the test sample from 45,000 to 25,000. 

According to IRS officials, the relationship portion of the program was 

postponed indefinitely for several reasons, including concerns raised about 

the proposed relationship certification form and studies that have shown 

meeting requirements for relationship is less of a compliance issue than 

meeting residency requirements. IRS had previously changed the start date 

of the test, and, as we were finalizing this report, announced in August 

2003, that it was again delaying the program and now plans to send letters 

about the qualifying child certification program to taxpayers in December 

2003. With this change, taxpayers will now have to provide proof that 

qualifying children meet the residency test when they file their 2003 

individual income tax returns; thus, any unresolved issues could result in 

frozen refunds. As part of the August announcement, IRS also reduced the 

number of taxpayers that will be included in the test from 45,000 to 25,000, 

in part, in response to comments received during a 30-day public period. 

However, these changes create additional challenges for IRS and taxpayers. 

For example, the test will no longer be a direct test of the original concept 

of certifying taxpayer eligibility in advance of the filing season. At the same 

time, the process for selecting taxpayers, what taxpayers will receive from 

IRS, and what taxpayers will be asked to provide to prove the residency of 

a qualifying child remains basically the same as originally planned. Further, 

IRS officials have emphasized that program expansions, if any, will depend 

on the results of the test. 

The changes made in the proposed certification program—including the 

ones announced in August—help achieve a better balance between 

preventing unreasonable taxpayer burden and addressing the EIC’s high 

overclaim rate, and support IRS’s plans to move forward with the residency 
Page 4 GAO-03-794 Earned Income Credit

test. The qualifying child program is based on analyses of the leading 

sources of EIC errors, thus focusing attention and burden on the subset of 

taxpayers making those errors as opposed to all EIC recipients. In addition, 

IRS has taken steps to address the burden taxpayers will experience as 

participants in the test this year. However, IRS’s plan for evaluating the 

results of the test is not yet complete. Although an evaluation plan does not 

have to completely identify all issues or how they will be evaluated prior to 

a program’s start, the more completely a plan is developed, the more likely 

that the evaluation will be sufficient to support future decisions. The draft 

evaluation plan presents only some information on how IRS will show 

whether certification’s objectives—reduce the overclaim rate, minimize 

burden, and maintain the EIC’s relatively high participation rate—will be 

achieved. However, the plan proposes potential options for identifying 

how and when some critical data will be obtained and analyzed, but does 

not provide further details on when, how, and by whom decisions will be 

made on the specific data that will be collected. Officials have developed 

preliminary drafts identifying data to be obtained and have begun 

considering how to use contractors to gather the data. Since the data 

relates to taxpayers’ actions that will occur next spring, IRS has some time 

to finalize the evaluation plan. 

We are recommending that the Commissioner of Internal Revenue, to the 

extent possible, accelerate the development of the evaluation plan, and 

have the plan demonstrate how each program objective will be evaluated, 

including milestones for critical steps such as how data will be obtained 

and analyzed in time to support decisions about the future of IRS’s 

certification program.

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

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

appendix VI. In his comments, the Commissioner said that IRS would be 

including the components we suggested in their evaluation plan and said 

that IRS is working to incorporate these components well before the 

certification test begins. We further discuss the Commissioner’s comments 

in the “Agency Comments and Our Evaluation” section of the report. 
Page 5 GAO-03-794 Earned Income Credit

Background Congress enacted the EIC in 19754

 with the goal of offsetting the Social 

Security taxes paid by the working poor and creating a greater work 

incentive for low-income taxpayers. According to data cited in the task 

force report, an estimated 4.3 million individuals were lifted out of poverty 

in 1998 by the EIC, including 2.3 million children.

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

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

during the year. Taxpayers can qualify for the credit in one of two ways: 

with a “qualifying child” or by “income only,” if they do not have a 

qualifying child. For example, for tax year 2002, the amount of EIC that 

could be claimed with a qualifying child or children ranged from $0 to 

$4,140. EIC payments have a phase-in range in which higher incomes yield 

higher EIC amounts, a plateau phase in which EIC amounts remain the 

same even as income rises, and a phase-out range in which higher incomes 

yield lower EIC payments or tax liability.

EIC requirements for tax year 2002 include rules for everyone, additional 

rules for taxpayers with qualifying children, and additional rules for 

taxpayers without qualifying children, as shown in table 1. 

4

26 U.S.C. Sec. 32.
Page 6 GAO-03-794 Earned Income Credit

Table 1: EIC Requirements for Tax Year 2002

Source: IRS. 

IRS has periodically measured EIC compliance for overclaims and 

underclaims. The most current data available, for tax year 1999, show EIC 

overclaim rates estimated to be between 27 and 32 percent of dollars 

claimed or between $8.5 billion and $9.9 billion. IRS has limited data on 

underclaims, which for tax year 1999 were estimated to be between 

$710 million and $765 million.5 IRS has tried to reduce noncompliance 

through various means, including education and outreach to taxpayers and 

tax return preparers. In addition, Congress has enacted legislation aimed at 

resolving some concerns with EIC rules. Because a new analysis of EIC 

compliance using 2001 tax return information is not expected to be 

complete until late in 2004, IRS does not know whether compliance has 

significantly changed since 1999, but officials do not think it has improved

Rules for all taxpayers 

claiming the EIC

Additional rules for 

taxpayers with a qualifying 

child

Additional rules for 

taxpayers without a 

qualifying child

Must have a valid Social 

Security number

Income limitations: If one 

child: $29,201 (or $30,201 if 

married filing jointly). If more 

than one child: $33,178 (or 

$34,178 if married filing 

jointly).

Income limitations: $11,060 

(or $12,060 if married filing 

jointly).

Cannot use married filing 

separately status

Child must meet age, 

relationship, and residency 

tests

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 

Taxpayer cannot be the 

dependent of another 

person

Cannot file form 2555 or 

2555-EZ

Taxpayer cannot be a 

qualifying child of another 

taxpayer

Taxpayer cannot be a 

qualifying child of another 

taxpayer

Investment income must be 

$2,550 or less

Must have lived in U.S. more 

than half of a year

Must have earned income

5

Underclaims refers to the amount in which taxpayers claimed less than what they were 

entitled to receive. 
Page 7 GAO-03-794 Earned Income Credit

substantially. Because of the persistently high rates of noncompliance, we 

have identified the EIC program as a high-risk area for IRS since 1995.6

Currently, taxpayers claim the EIC by filing an individual income tax return 

(e.g., a Form 1040 or 1040A) and including a Schedule EIC—a procedure 

similar for claiming other tax credits. Unlike with other benefit programs 

such as Supplemental Security Income, however, EIC taxpayers are not 

required to be found qualified before claiming the credit or file any other 

documents with their return to establish eligibility. Instead, IRS uses four 

primary means to evaluate EIC eligibility and check for noncompliance 

after the return is filed and checks some aspects of taxpayers’ eligibility 

before and after the credit is granted: (1) the math error program, (2) 

correspondence and face-to-face examinations (also called audits), (3) the 

document matching program, and (4) criminal investigations. Some of 

these means, such as the math error program, check all EIC returns, but 

only for limited aspects of eligibility. Other means, such as examinations, 

only check a small subset of EIC returns, but the review is more expansive. 

In general, IRS subjects all returns to its math error program and takes 

corrective action on errors found. Depending on the resources IRS has 

available, IRS works only a small portion of cases identified as potentially 

meriting follow-up under its examination, document matching, and 

criminal investigations efforts.

While processing all tax returns, IRS uses its automated math error 

program to identify and correct the simpler errors found in claiming the 

EIC. For example, the math error program can identify invalid Social 

Security numbers and taxpayers who fail to follow recertification 

requirements.7

 As a result, some inappropriate EIC claims are stopped 

before refunds are issued. During fiscal year 2001, IRS stopped more than 

371,000 incorrect EIC claims using its math error authority. After 

identifying errors, IRS corrects them so the tax return can be processed 

and sends a computerized notice to the taxpayer identifying the error and 

stating that IRS disallowed or reduced the EIC claim. The notice tells 

6

Prior to 2001, EIC was part of a broader IRS tax filing fraud high-risk area. Beginning in 

2001, the focus of that designation was narrowed to EIC specifically. U.S. General 

Accounting Office, High-Risk Series: An Update, GAO-01-263 (Washington, D.C.: January 

2001).

7

Taxpayers are required to meet recertification requirements when they have been denied 

the EIC in a previous year. Recertification involves taxpayers providing documentation, 

such as a birth certificate, to support their claim of a relationship to a qualifying child. 
Page 8 GAO-03-794 Earned Income Credit

taxpayers that if they can correct the error, the EIC claim will be allowed 

and any refund related to the EIC claim will be issued. 

Two types of examinations—-correspondence and face-to-face—are used 

when EIC noncompliance is suspected, in most cases before refunds are 

issued. IRS uses various systematic means to “score” the likelihood of 

noncompliance on any return and uses experienced staff to manually 

identify the specific items on returns for examination. Most EIC 

examinations occur shortly after a return is filed, largely because of the 

difficulty in recovering refunds. IRS stops refunds on these returns until 

examinations are completed. This contrasts with IRS’s normal examination 

practice of performing examinations many months after tax returns have 

been processed and any refunds paid. The EIC examinations usually rely 

on correspondence with taxpayers rather than face-to-face contacts. IRS 

completed about 368,000 EIC related correspondence exams during fiscal 

year 2002. IRS tends to use face-to-face meetings with taxpayers to 

examine tax returns with EIC claims on a very limited basis and primarily 

when examinations are initiated for other reasons. As part of either type of 

examination, however, IRS would describe the potential noncompliance in 

a computerized notice to taxpayers claiming the EIC. IRS requests 

documentation, such as a school record or birth certificate, to establish 

EIC requirements. Depending on whether IRS officials accept or reject the 

support, they may make changes to the return and refund related to the EIC 

claim. If taxpayers disagree with IRS’s decisions, they have the right to 

appeal administratively and/or through the courts.

IRS also uses its document matching programs to identify potentially 

misreported income on tax returns claiming the EIC. By comparing the tax 

return to wage and income statements provided by third parties such as 

employers and financial institutions, the document-matching program 

identifies whether a taxpayer appears to have misreported income. Given 

the phase-in and phase-out ranges of the EIC, some taxpayers may claim 

too much EIC by overreporting or underreporting their income. This 

program notifies such taxpayers months after returns are filed and refunds 

are issued. Similar to audits, a notice is issued telling a taxpayer that an 

error appears to have been made, that he or she may disagree and provide 

any support for income reported, and that he or she may appeal IRS’s 

decision about additional taxes owed. Unlike audits, the program is highly 

automated and is designed to require less contact with taxpayers by IRS 

staff.
Page 9 GAO-03-794 Earned Income Credit

IRS also uses criminal investigations to stop the payment of false refunds, 

identify refund scams/schemes, and prosecute perpetrators, including 

those with fraudulent EIC claims. For EIC, IRS uses a specific computer 

program that looks for questionable refund claims and for return preparers 

known to have prepared questionable returns. IRS also has teams that scan 

returns and receive referrals from other parts of IRS and informants. IRS 

stops many returns as they are being processed so that criminal 

investigators can review the claims before the refund is paid or after the 

return has been processed.

Task Force Considered 

Much Information 

Related to EIC 

Compliance before 

Recommending 

Qualifying Child 

Certification Program

When IRS’s study of EIC compliance rates for 1999 was released, the 

Assistant Secretary of the Treasury and IRS Commissioner convened a 

task force in February 2002 to find ways of reducing EIC overclaims while 

minimizing the burden to taxpayers and maintaining the EIC’s relatively 

high participation rate. The task force considered whether changes in 

statutes recently enacted by Congress or proposed by Treasury may have 

lessened the need for new EIC compliance initiatives and concluded that, 

while statutory changes addressed some sources of noncompliance, they 

likely would not reduce other leading sources of noncompliance. The task 

force also considered a range of new methods, including partnering with 

other federal or state agencies or programs and developing a new database 

to verify EIC eligibility before issuing tax refunds, but decided that these 

options were not viable. Ultimately, the task force recommended the 

qualifying child certification program. The task force reviewed IRS’s EIC 

compliance study results and other data, as well as other studies, to 

identify the sources and develop new methods of addressing 

noncompliance.

Task Force Convened to 

Address Long-Standing 

Compliance Problem

The joint Treasury and IRS task force addressed a long-standing problem of 

high EIC overclaim rates. Although the release of IRS’s 1999 compliance 

study precipitated the formation of the EIC task force in February 2002, the 

study results were generally consistent with high overclaim rates reported 

in prior IRS studies. While some stakeholders view the 1999 study as having 

some methodological weaknesses, it showed that of the approximately 20 

million taxpayers that claimed the EIC in 1999, 46 to 50 percent of their tax 

returns had errors that led to claiming too much of the credit (IRS often 

refers to this as the error rate). IRS also estimated that the total dollars 

overclaimed on those returns represented between 27 and 32 percent of 

total EIC dollars claimed in 1999, or between $8.5 billion and $9.9 billion. 
Page 10 GAO-03-794 Earned Income Credit

IRS also has some data on underclaims—instances where taxpayers 

claimed less than they were entitled to receive. For tax year 1999, 

underclaims were estimated to be between $710 million and $765 million.

IRS has conducted EIC compliance studies for several years and the 

overclaim rate, which is the percentage of total dollars paid out in error, 

was estimated to be about 24 percent in tax year 1994. According to IRS 

officials, because different methodologies were used in the subsequent 

studies, changes in estimated overclaims found in other studies do not 

support conclusions about trends in the overclaim rate over time. However, 

IRS officials also acknowledged the overclaim rate has not improved 

significantly. Overclaim rates for tax years 1997 and 1999 are shown in table 

2. The information in table 2 does not reflect the current compliance 

situation; for example, it does not reflect the presumably positive impact of 

new legislation that has taken effect since 1999 aimed at improving 

compliance.

Table 2: EIC Overclaim Rates for 1997 and 1999

Source: IRS data.

Note: Because not all individuals responded to audit contacts, IRS uses certain assumptions to 

estimate the overclaim rate range. The lower-bound rate assumes that the overclaim rate for the 

nonrespondents is the same as for the respondents, while the upper-bound assumes that all 

nonrespondents are overclaims. 

Although IRS’s studies have shown high EIC overclaim rates for many 

years, other studies had shown that EIC’s participation rate was fairly high. 

For example, in 2001 we reported that an estimated three of every four 

eligible participants received the EIC in tax year 1999.8

 For taxpayers with 

one or two qualifying children, we estimated that participation rates 

exceeded 90 percent. Individuals with no children, who receive a much 

smaller credit than taxpayers with qualifying children, had a much lower 

participation rate that we estimated to be about 45 percent. Although at the 

time we reported that available data did not enable us to determine the 

Tax year Lower-bound rate Upper-bound rate

1997 23.8% 25.6%

1999 27.0% 31.7%

8

U.S. General Accounting Office, Earned Income Tax Credit Participation, GAO-02-290R

(Washington, D.C.: Dec. 14, 2001). 
Page 11 GAO-03-794 Earned Income Credit

reasons for these differences, IRS officials attributed these differences, in 

part, to the lower EIC amounts allowed for individuals and because the 

program did not include individuals without children when it first began. 

Task Force Reviewed 

Recent Legislative Changes 

Likely to Improve 

Compliance

The EIC task force reviewed whether recent statutory changes have the 

potential to reduce the major sources of EIC noncompliance, either by 

changing the rules or providing IRS new enforcement options. Because the 

study of tax year 1999 compliance was the most recent available, the task 

force lacked data on the effect of the recent changes and relied on other 

analyses that showed whether the changes would affect compliance. Of the 

recent changes, the task force estimated that one change, to the Adjusted

Gross Income (AGI) tiebreaker rule,9 would likely reduce noncompliance. 

The task force judged that the other legislative changes, including those 

proposed by Treasury, while potentially helping reduce noncompliance 

from other sources, would not be enough to reduce noncompliance 

without further IRS efforts.

Three key pieces of legislation, which have been recently enacted or taken 

effect, were at least partially aimed at improving EIC compliance, as shown 

in table 3. They may eventually help reduce noncompliance after taxpayers 

and tax preparers become familiar with the new laws. The statutory 

changes were to serve several purposes, including improving compliance 

and simplifying tax laws associated with the EIC.

9

The new AGI tiebreaker rule applies when two taxpayers can claim the same qualifying 

child. If one of the taxpayers claiming the credit is the child’s parent (or parents who file a 

joint return), then the child is considered the qualifying child of the parent or parents. If 

both parents claim the child and parents do not file a joint return, then the child is 

considered a qualifying child first of the parent with whom the child resided for the longest 

period during the year, and second of the parent with the highest adjusted gross income. If 

none of the taxpayers claiming the child as qualifying is the child’s parent, the child is 

considered a qualifying child with respect to the taxpayer with the highest adjusted gross 

income. 
Page 12 GAO-03-794 Earned Income Credit

Table 3: Recent Statutory Changes 

Source: GAO analysis of legislation.

A Treasury study showed that the change in the AGI tiebreaker rule 

effective for tax years after December 31, 2001, would likely have 

eliminated about $1.4 billion of the nearly $2 billion in tax year 1999 EIC 

overclaims that were due to tiebreaker errors. Accordingly, the task force 

decided that this source of EIC overclaims did not need to be further 

addressed by a new compliance initiative.

Although officials recognized the benefits of these recent legislative 

changes to help improve EIC compliance, they concluded that additional 

initiatives were still needed. For example, officials recognized the value of 

IRS being able to use math error authority to deny EIC claims on and after 

January 1, 2004, when the Department of Health and Human Services’ 

Federal Case Registry (FCR) indicates that the taxpayer is the noncustodial 

parent of the qualifying child. However, officials told us that this authority 

Law Change

Economic Growth and Tax Relief 

Reconciliation Act of 2001(P.L. 

107-16, March 7, 2001) 

This act made several changes, including (a) effective 

for tax years after December 31, 2001, simplifying the 

“Adjusted Gross Income tiebreaker rule,” (b) for tax 

years beginning after December 31, 2001, establishing 

a new definition for earned income by eliminating nontaxable earned income and by having the Earned 

Income Credit (EIC) based on adjusted gross income, 

(c) for tax years beginning after December 31, 2001, 

amending the definition of a foster child by reducing 

the residency requirement to over half a year, and

(d) effective January 1, 2004, allowing the IRS to use 

math error authority to deny EIC claims if the Federal 

Case Registry (FCR) indicates that the taxpayer is the 

noncustodial parent of the qualifying child with whom 

the credit is claimed. 

Ticket to Work and Work 

Incentives Improvement Act of 

1999 (P.L. 106-170, December 

17, 1999)

Effective after December 31, 1999, part of this act 

simplified the definition of a foster child.

Tax Relief Act of 1997 (P.L. 105-

34, August 5, 1997)

After October 1,1998, this act requires that each 

record in the state registry include the Social Security 

number of any child for whom support has been 

ordered. This information is included in the FCR 

database. It also requires an applicant for a Social 

Security number who is under age 18 to provide his or 

her parent’s Social Security numbers, in addition to 

other required evidence, such as age, identity, and 

citizenship. 
Page 13 GAO-03-794 Earned Income Credit

was limited and not applicable to a significant number of taxpayers whose 

compliance may be problematic. IRS has a study in process to determine 

the effectiveness of using FCR data to deny EIC claims using its math 

authority. The study was scheduled for completion by July 30, 2003, but as 

of August 20, 2003, was not yet completed. 

Task Force Considered 

Three Alternatives to 

Improve Qualifying Child 

Compliance

The EIC task force considered three key options to verify taxpayers’ 

qualifying children: (1) partnering with other federal or state agencies or 

government programs to verify EIC taxpayers’ eligibility, (2) creating a 

federal database that would automatically match and detect questionable 

or erroneous EIC claims, and (3) certifying taxpayers’ eligibility for certain 

EIC criteria. Ultimately, in August 2002, the Secretary of the Treasury 

approved the qualifying child certification program, which at the time was 

to include providing proof of eligibility in advance of the filing season 

(July–December), and was referred to as “precertification.” 

The first two options were expected to impose little or no documentation 

requirements on taxpayers. The task force was trying to determine for both 

options whether sufficient information was already available from others, 

or that little additional information would need to be collected by others, to 

verify a taxpayer’s qualifying children. However, the task force found that 

there was little overlap between the EIC population and verification 

criteria used to administer other federal or state programs. In addition, 

although some databases existed, the task force found that they could not 

be used to effectively verify EIC eligibility, largely for the same reason. 

Consequently, the task force judged that these options were not likely to be 

useful in addressing EIC compliance problems. Similarly, the task force 

also found that if a federal database were created to facilitate EIC 

verification, IRS would have to gather the bulk of the information itself, 

thus imposing a burden on taxpayers, which would also be costly and timeconsuming for IRS. The third option, which the task force selected, 

required taxpayers to demonstrate EIC eligibility for certain criteria, 

namely residency and relationship tests for qualifying children, prior to 

receiving the credit. 

The relative cost of the options the task force considered did not drive the 

decision to select the qualifying child program because the other two 

alternatives were not considered viable. The task force did compare IRS’s 

EIC administrative costs to those of other federal benefit programs and 

found them to be much smaller. IRS has had a special appropriation for EIC 

compliance initiatives since 1998—and has received about $875 million 
Page 14 GAO-03-794 Earned Income Credit

total through fiscal year 2003. It requested a total of about $250 million in 

fiscal year 2004, which included $100 million for the EIC compliance 

initiatives, including the qualifying child program, and about $150 million 

for the special appropriation. IRS estimated that this $250 million10 total 

was about 0.8 percent of the total annual EIC benefits distributed, and 

therefore much smaller than the 9 to 13 percent administrative costs the 

task force had found for other benefit programs. See appendix II for more 

information we obtained on administrative costs for other benefit 

programs.

Task Force Reviewed 

Studies and Data to Design 

Initiatives Focused on 

Known Sources of 

Compliance Problems

The EIC task force reviewed IRS studies, other IRS data, and studies by 

other parties to better understand the sources of EIC noncompliance and 

devise new initiatives to address those known sources. In reviewing IRS 

studies and data, the task force found that the three leading sources of EIC 

errors resulting in overclaims in 1999 were (1) claiming nonqualifying 

children incorrectly, accounting for about $3 billion, (2) using the wrong 

filing status, accounting for about $2 billion, and (3) misreporting income, 

also accounting for about $2 billion. Three administrative proposals 

resulted, involving (1) qualifying child certification, (2) improper filing 

status, and (3) income misreporting.11 In 1999, another leading source of 

EIC overclaims involved taxpayers with lower modified adjusted gross 

income claiming a child when another person with a higher income should 

have done so. The task force did not propose an initiative dealing with 

these errors, primarily because the “AGI tiebreaker” legislation was 

specifically enacted to decrease this source of noncompliance, as 

previously discussed.

10In addition to the $250 million that IRS requested in its fiscal year 2004 budget request to 

administer the EIC, IRS incurs some additional costs. For example, IRS incurs costs to 

process the EIC tax returns. Therefore, the full cost of administering the EIC is not known. 

11Improper filing status claims and income misreporting are other common problems 

associated with the EIC. IRS plans to verify the filing status for about 41,650 cases in fiscal 

year 2004, but the criteria for selecting the cases have not yet been finally determined. In 

fiscal year 2004, IRS plans to use document matching to verify the income reported by about 

300,000 EIC filers who have a history of misreporting income for 2 consecutive years in 

order to increase (or receive) the EIC. Depending on how well these efforts work in fiscal 

year 2004, they would be expanded in future years. Also see U.S. General Accounting 

Office, May 20 Oversight Hearing on the Internal Revenue Service – Questions for the 

Record, GAO-03-962R (Washington, D.C.: June 27, 2003). 
Page 15 GAO-03-794 Earned Income Credit

To deal with the error attributable to claiming children who are not EIC 

qualifying children, the task force proposed a qualifying child certification 

program. Based on analyses of past compliance data, IRS found that 

taxpayers who overclaimed the EIC, most frequently claimed children who 

did not meet the residency or relationship criteria.12 As a result, the task 

force proposed the qualifying child program that was to include an annual 

residency certification and a one-time relationship certification.

Under this program, during the period from July through December, 

taxpayers would have been asked to document that the children they 

intend to claim under the EIC, meet the EIC relationship and residency 

criteria. The task force proposed targeting the program to those taxpayers 

with qualifying children for whom IRS could not establish residency or 

relationship through other available means and it proposed that this 

concept be tested on a sample of EIC taxpayers for the tax year 2003. The 

task force envisioned that ultimately all EIC claimants whose eligibility 

could not be verified through available means would be asked to provide 

additional eligibility documentation prior to the filing season. Taxpayers 

who successfully certified qualifying children’s eligibility in advance of the 

filing season would have their claims processed and paid expeditiously 

during the filing season, absent any other problems with their tax return or 

EIC claim. Having taxpayers certify between July and December was also 

intended to allow IRS to process the taxpayers’ documents outside of the 

filing season when IRS processing systems are in highest demand. 

Taxpayers who did not respond and/or were unable to document their 

eligibility during the certification period, but then claimed the EIC when 

they submitted their tax returns, would have the EIC portion of their tax 

refund frozen. Then they would be required to provide the same 

documentation during or after the filing season as they were asked to 

provide during the certification period. When and if they document their 

eligibility, the EIC portion of their refunds would be released.

12For 2002 returns, taxpayers who claim the EIC with a qualifying child must meet certain 

tests, including residency and relationship. To meet the residency test, the qualifying child 

had to live with the taxpayer in the United States for more than half of 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 individual 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. Internal Revenue Service, Earned Income 

Credit (EIC), Publication 596 (Washington, D.C.: 2002).
Page 16 GAO-03-794 Earned Income Credit

Process for Identifying 

Taxpayers When IRS Planned to 

Certify for Relationship

According IRS officials, as the task force neared its end and before the 

Secretary of the Treasury approved the program, IRS developed a means 

for using existing data to determine whether each taxpayer likely would 

meet the relationship or residency test for children they had claimed for 

EIC for tax year 2002. For relationship, IRS developed a plan to match 

taxpayers to several databases that show the parents of children. For 

instance, one database IRS planned to use was the Social Security 

Administration’s database (which IRS refers to as KIDLINK) that ties 

parent’s and children’s Social Security numbers for children born after 1998 

in U.S. hospitals. For tax year 2003, IRS had planned to match 1.6 million, 

or 10 percent of the approximately 16 million EIC taxpayers with a 

qualifying child, to the databases. Under this scenario, any taxpayer who 

was not shown to be the parent of a qualifying child claimed for tax year 

2002 would then be part of the population from which IRS would randomly 

select taxpayers to test for relationship.

Process for Identifying 

Taxpayers to Certify for 

Residency

IRS considered the work of the task force in developing a comparable 

means for using available data to identify those who have met the residency 

criterion. The task force had analyzed data from the 1999 compliance 

study and information in other reports.13 It found that residency errors 

related to qualifying children were often correlated with the taxpayer’s 

relationship to the child and the taxpayer’s filing status and gender. The 

analysis showed that, overall, parents who filed married filing jointly were 

the most compliant when compared to taxpayers filing single or head of 

household in claiming a qualifying child who meets the residency test. 

Married filing jointly parents had the fewest qualifying child residency 

errors—1.5 percent—compared to any other combination of taxpayers by 

relationship to the child, gender, or tax filing status. Among taxpayers who 

file single or head of household, mothers were the most compliant (see 

figure 1). 

13Andrew J. Cherlin and Paula Fomby, “Welfare, Children, and Families: A Three-City Study,” 

A Closer Look at Changes in Children’s Living Arrangements in Low-Income Families, 

Working Paper 02-01(Baltimore, MD.: Johns Hopkins University, Feb. 20, 2002), and Allen 

Dupree and Wendell Primus, Declining Share of Children Lived with Single Mothers in the 

Late 1990s: Substantial Difference by Race and Income (Washington, D.C.: Center on 

Budget and Policy Priorities, June 15, 2001). We did not review these studies in detail. 

Instead, we relied upon IRS’s assessment. 
Page 17 GAO-03-794 Earned Income Credit

Figure 1: Estimated Percentage of EIC Taxpayers (with Children) Who Made 

Residency Errors and Filed Single or Head of Household in Tax Year 1999

Note: This figure reflects residency errors only. Mothers who filed as single or head of household, for 

example, made qualifying child residency errors 3.4 percent of the time, while 96.6 percent of the time, 

they either made no errors or errors other than residency-related errors. 

The task force also found other reports that reinforced the results of its 

analysis. Specifically, an independent study of low-income households in 

three urban areas estimated that children resided with biological mothers 

90 percent of the time. Another study estimated that 89 percent of children 

in low-income households lived with both parents or their mother.

IRS used this information to propose a process for identifying taxpayers to 

include in the population that would be subject to the residency 

certification requirement. IRS proposed that the 1.6 million taxpayers, or 

10 percent of the 16 million taxpayers with a qualifying child, would be 

matched to the FCR database. IRS officials considered the FCR to be the 

most useful database for identifying those meeting the residency 

requirements. This database compiles court and other records that 

indicate who is the custodian for a child (which could be a parent or 

nonparent). IRS assumes that children live with the custodian of record. 

According to IRS, the FCR database contains custodial information for 

about 40 percent of the EIC population. If a taxpayer matched as the 

custodian of the child claimed for the EIC for 2002, the taxpayer would not

80

70

3.4

29.4

33.9

44.1

60

50

40

30

20

mothers male 

nonparent

Source: IRS data.

fathers female 

nonparent

10

0

Percentage
Page 18 GAO-03-794 Earned Income Credit

be among those needing to certify. When the FCR database showed 

someone was the custodian of a child other than the EIC taxpayer who had 

claimed that child for the EIC in 2002, those taxpayers would be among the 

group from which the residency certification sample would be drawn. 

When the FCR contains no information about the child a taxpayer had 

claimed for EIC in 2002, the IRS would attempt to establish the relationship 

of taxpayers to qualifying children by comparing information in several 

databases. Those taxpayers IRS could identify from databases as the child’s 

mother would be excluded from the sample, if they filed married filing 

jointly, single, or as head of household. Mothers would be excluded on the 

basis of the task force analyses showing mothers to be among the most 

compliant on the residency criterion. Also excluded from the sample 

would be fathers who filed as married filing jointly. Otherwise, all males 

who were shown to be a child’s father filing single or head of household 

would be included in the group from which the certification sample would 

be drawn because of the data showing a high level of noncompliance on the 

residency criterion for these taxpayers. Finally, all nonparents who are not 

shown in the FCR to be the custodian would go into the group from which 

taxpayers would be selected for residency certification, also due to 

information showing nonparents to be among the less compliant taxpayers 

on the residency criterion. The selection processes for relationship and 

residency would have, therefore, yielded a group of taxpayers that would 

include some needing to certify for relationship only, some for residency 

only, and some to certify for both.

IRS Has Made Key 

Changes to Its Initial 

Qualifying Child 

Certification Program 

and More May Occur

Since adopting the EIC task force recommendations in August 2002, IRS 

has made key changes to the qualifying child certification program in 

response to input received and additional analyses done. Some of these 

changes include (1) postponing relationship certification for an 

undetermined period of time, (2) delaying program implementation, and 

(3) reducing the test sample from 45,000 to 25,000. However, these changes 

create additional challenges for IRS and taxpayers. Despite these 

challenges, the process for selecting taxpayers, what taxpayers will receive 

from IRS, and what taxpayers will be required to provide remains basically 

the same as originally planned. According to officials, the same factors 

were considered when setting the new sample size, which is still designed 

to allow IRS to achieve the same goals as the original sample size, albeit to 

a lesser extent. 
Page 19 GAO-03-794 Earned Income Credit

In addition, IRS has emphasized that program expansions, if any, will 

depend on the results of this year’s test. Concerns we identified in our 

report on recertification14 were considered and taken into account by IRS 

in designing the new qualifying child certification program. 

IRS Broadly Adopted Task 

Force Recommendations in 

Its Initial Design of the 

Qualifying Child 

Certification Program

IRS took the broad charge from the EIC task force and designed the 

qualifying child certification program. Its focus was to decrease the EIC 

overclaim rate while striving to maintain the high rate of participation and 

minimize taxpayer burden. Initially, IRS decided that the certification 

program would involve

• testing of 45,000 taxpayers for both relationship and residency 

beginning in July 2003, and

• immediately expanding the certification program for relationship to 2 

million taxpayers in 2005 and to both relationship and residency in 

substantial numbers in future years.

However, as IRS obtained input on the program, it modified these plans.

Certification for Residency 

Only Is to Begin in 

December 2003 for 25,000 

Taxpayers

Since initially formulating plans for the qualifying child certification, IRS 

has made multiple changes to the program. First, IRS postponed 

relationship certification for an undetermined period for a number of 

reasons. IRS had developed a draft form for certifying relationships and 

obtained input on the form from external and internal stakeholders. Some 

stakeholders raised concerns about whether taxpayers would be able to 

provide some of the types of documentation IRS planned to request, such 

as marriage certificates, within the time envisioned. IRS officials said that 

testing the relationship certification this year was postponed, in part, 

because these concerns were unresolved. The officials also noted that 

Treasury studies have shown relationship requirements to be a lesser 

compliance issue than residency, and taxpayers that were found to be 

14 The “certification” program is different from the IRS “recertification” program, which is 

required by statute. Recertification was implemented in 1998 and requires taxpayers who 

have been disallowed the EIC through an IRS examination to substantiate their qualification 

for the EIC, i.e., recertify before they receive the credit again. U.S. General Accounting 

Office, Opportunities to Make Recertification Program Less Confusing and More 

Consistent, GAO-02-449 (Washington, D.C.: Apr. 25, 2002).
Page 20 GAO-03-794 Earned Income Credit

noncompliant with relationship requirements were also often 

noncompliant due to residency errors. Since both residency and 

relationship requirements have to be met, if taxpayers fail certification on 

residency there would be no need to test on relationship. Consequently, 

officials gave a higher priority for testing residency certification.

Second, IRS has changed the start date of the test twice. Originally, IRS 

planned to start the test in July 2003, but postponed implementation until 

mid-August. As we were finalizing this report, IRS announced in August 

that it now plans to begin the test in December 2003, in conjunction with 

the 2004 tax filing season. (Appendix IV shows key milestones from 2002 

through 2005.) According to IRS officials and documents, implementation 

was postponed from July to August to allow time to conduct focus group 

testing, request and obtain public comments during a 30-day period, and 

make changes to the program as a result of those efforts. Thereafter, IRS 

postponed implementation a second time from August to December to 

ensure (1) taxpayers have better access to tax practitioners since many 

only operate during the filing season and (2) more time for outreach and 

education.

However, as a result of the delays, taxpayers will be providing proof of 

residency documentation during the filing season and not “precertifying” 

before the filing season as originally envisioned. This change is important 

and creates additional challenges for both IRS and taxpayers, as follows: 

• Taxpayers will no longer have the opportunity to provide proof of 

qualifying child residency, correspond with IRS in advance of the filing 

season, and resolve any potential issues before filing their tax returns. 

Because all correspondence will take place during the filing season, 

selected taxpayers could experience a delay in receiving the EIC portion 

of any refund, if the EIC portion is frozen because of any problems until 

certification is successfully completed. 

• IRS will no longer be able to spread out its workload and processing 

may be slower since certification will occur during the filing season---

IRS’s busiest time of year.

• IRS will not have the opportunity to assess taxpayers’ ease or difficulty 

in obtaining required documentation in advance of the filing season and 

whether taxpayers would do so. This is important because taxpayers 

may be given the opportunity to certify in advance of the filing season in 

future years.
Page 21 GAO-03-794 Earned Income Credit

Third, IRS reduced the number of taxpayers included in the test from 

45,000 to 25,000, in part, in response to comments received during the 30-

day public period. According to IRS officials, despite reducing the number 

of taxpayers included in the test, the sample size should still allow IRS to 

make statistically valid measurements of results in addition to helping IRS 

meet its desired goals of protecting revenue and testing the process for 

conducting the certification program. In addition, the smaller sample 

should help mitigate the challenge related to processing the certification 

forms during the filing season. 

Process for Selecting 

Taxpayers, What They Will 

Receive, and What They Will 

Provide to IRS Remains 

Basically the Same

Despite these changes, how IRS selected taxpayers for the test, what 

taxpayers will receive from IRS, and what taxpayers will be asked to 

provide as proof of residency for qualifying children will remain 

fundamentally the same. IRS’s process for selecting the taxpayers for the 

test is shown in figure 2.15 Using this process, IRS selected 25,000 

taxpayers in August. The 25,000 represents about 0.16 percent of the 

approximately 16 million EIC claimants with a qualifying child in tax year 

2002 and about 0.13 percent of the approximately 20 million EIC recipients 

overall. 

15IRS will exclude from its sample taxpayers who are subject to an examination, 

investigation, or other treatment at the same time. 
Page 22 GAO-03-794 Earned Income Credit

Figure 2: IRS’s Process to Identify the Population of Taxpayers from Which the 

25,000 Person Test Sample Was Drawn
Page 23 GAO-03-794 Earned Income Credit

a

The FCR contains custodial and welfare assistance data. If there is a match showing that the taxpayer 

is the child’s custodian, regardless of the taxpayer’s gender, filing status, or relationship to the child, 

IRS assumes the child resides with the taxpayer.

b

These taxpayers are excluded, based on (1) IRS compliance data that show married filing jointly 

parents are 20 times more compliant on residency than nonparents, and single or head of household 

mothers are 10 times more compliant on residency than single or head of household fathers and (2) 

STOP. 

Taxpayers not subject 

to test, but 

are subject to IRS’s 

regular process

 for determining 

EIC eligibility.

IRS selected 25,000 

taxpayers for test.

No information found in 

Federal Case Registry.

The taxpayer was not 

the child’s custodian.

Was IRS 

able to 

establish

that the taxpayer 

is the child’s 

parent?

no

no

yes

no

IRS attempted to establish 

relationship of taxpayers to their 

qualifying children by 

comparing information from the 

2002 tax year to various 

databases, such as Social 

Security Administration’s 

KIDLINK.

Taxpayer was not the 

child’s parent.

Taxpayer was the child’s 

father and filed single or 

head of household.

This is the population from which the test 

sample was drawn. IRS estimated about 

402,000 taxpayers remained at this point.c

Taxpayer was the 

child’s mother or father 

and filed married filing 

jointly or was the child’s 

mother and filed single 

or head of household.b

yes
Page 24 GAO-03-794 Earned Income Credit

private studies that show about 90 percent of children in low income households live with their mother 

or both parents. 

c

IRS estimates that using the FCR and other databases will exclude almost 75 percent of the 1.6 

million taxpayers. Therefore, about 402,000 taxpayers were included in the population from which IRS 

drew the certification sample. 

According to agency officials, IRS will now send the 25,000 taxpayers forms 

and instructions about the program in December instead of this summer. 

IRS plans to send Notice 84-A, a letter informing them about the new 

program; Form 8836, “Qualifying Children Residency Statement;” 

Publication 3211M, “Earned Income Tax Credit Question and Answers;” 

and Publication 4134, “Free/Nominal Cost Assistance Available for Low 

Income Taxpayers.” However, officials are changing these documents 

based on the public comments received. Appendix V has the most current 

copies of these documents. 

Once taxpayers receive this information from IRS, they would obtain 

documentation to prove the qualifying child’s residency and send it back to 

IRS. IRS examiners would review the documentation and send a letter back 

to the taxpayer either accepting or rejecting the claim, as shown in figure 3.

Figure 3: The EIC Certification Process as Envisioned

IRS currently envisions that the 25,000 taxpayers selected for certification 

will be required to provide proof that the qualifying child meets residency 

requirements before getting the EIC portion of their refund. IRS officials 
Page 25 GAO-03-794 Earned Income Credit

say that taxpayers who are able to establish eligibility when filing their tax 

return should receive their refunds more expeditiously than those who do 

not. Taxpayers selected for certification but who are not able to provide 

the necessary documentation will be treated essentially the same as 

taxpayers undergoing a correspondence audit. The EIC portion of their 

refund—if they are to get one—will be frozen until proof of eligibility is 

established.

Same Factors Considered 

When Setting Smaller 

Sample Size 

According to IRS’s draft evaluation plan for the certification test and our 

discussions with officials, three factors were considered in setting the 

original sample size of 45,000: (1) show that certification would “protect 

revenue,” (2) determine whether the test will succeed, and (3) test its 

processes and systems. According to IRS officials, the smaller sample size 

of 25,000 is designed to allow IRS to achieve the same goals as the original 

sample size, albeit to a lesser extent. 

One factor considered by IRS for the certification test was to stop as large 

an amount of EIC overclaims due to ineligible qualifying children as 

possible during the 2003 tax year. To determine how many taxpayers to 

include in the certification test to achieve this goal, officials said they 

determined the maximum number of staff that could be assigned to and 

adequately supported by the planned central unit in Kansas City that would 

be responsible for the certification program. Based on the maximum 

number of staff that could be assigned and assumptions about how many 

cases staff could handle, IRS calculated that 45,000 taxpayers could be 

included in the test. IRS estimated that $114.5 million in protected revenues 

could be realized from including 45,000 taxpayers in the test. Based on the 

revised sample size of 25,000, IRS now estimates that $63.6 million in 

protected revenues could be realized. 

A second factor considered was to have a large enough sample to support 

analyses of whether the test succeeds. For instance, IRS is interested in 

how many taxpayers provide the information needed for IRS to determine 

qualifying child eligibility, whether taxpayers in the sample population who 

are actually qualified to claim the EIC do not do so with their 2003 tax 

return and why, and whether taxpayers found the certification process 

burdensome. IRS’s draft plan for evaluating the certification test notes that 

the original 45,000 sample size was much larger than needed to obtain 

statistically valid measures of test results. The draft plan indicated that a 

sample size of about 3,600 taxpayers, which would have provided an 

estimate at 95 percent confidence levels plus or minus 5 percent, was the 
Page 26 GAO-03-794 Earned Income Credit

number of taxpayers needed for IRS to determine qualifying child 

eligibility. According to the draft plan, the 45,000 sample size would allow 

very precise estimates for the population as a whole and should provide 

statistically valid information about sub-sets of claimants. Despite the 

reduction to 25,000, IRS officials still believe that this sample size will allow 

for precise estimates for the universe as a whole and smaller subsets as 

well. 

Finally, a third factor in selecting both the 45,000 and 25,000 sample sizes 

was to have a large enough sample to test the processes and systems that 

would be required if IRS were to expand certification in the coming year. 

IRS had been preparing to work on approximately 25,000 certification 

cases during the filing season under its original plan for 45,000 taxpayers. 

It based the 25,000 on worst case assumptions about how many of the 

45,000 would not opt to submit proof of eligibility in advance of the filing 

season and, instead, would have submitted their documentation during the 

filing season. In addition, for this goal, the draft plan preceded IRS’s 

current thinking that the certification program likely will not be expanded 

as rapidly next year, if expanded at all. However, according to IRS officials, 

based on the number of cases IRS estimates can be worked on and what it 

plans to achieve under this goal, the 25,000 sample size is appropriate to 

help test the systems and processes.

Future Expansion of 

Certification Program 

Depends on Test Results

Although IRS has consistently referred to the certification effort as a test, 

officials recently have stressed this point. For example, officials have 

recently referred to the efforts for this year as a “pilot or proof of concept.” 

Furthermore, as a result of the most recent changes, the program will no 

longer take place in advance of the filing season, but instead, during the 

filing season. IRS officials told us that it is unlikely that the certification 

program will be expanded to cover 2 million claimants in the summer of 

2004, as originally anticipated. Instead, IRS officials plan to assess the 

program’s overall effectiveness and make any necessary modifications 

before expanding it to additional EIC claimants in the future. Thus, 

particularly in light of IRS’s most recent announcement and according to 

IRS officials, the program may be expanded more slowly, if at all, 

depending upon the evaluation results. Officials also said that test results 

will contribute to a future decision about whether certification, if 

continued, will precede the filing season or be part of the filing season as it 

will be this year. 
Page 27 GAO-03-794 Earned Income Credit

Input from Focus Groups 

and Others Has Resulted in 

Changes and May Result in 

More

On the basis of stakeholder input, focus groups, and other input, IRS has 

made several changes to the planned certification test in addition to those 

discussed previously. IRS held informal meetings with external and internal 

stakeholders, focus group meetings with taxpayers and paid preparers, and 

one-on-one interviews with third parties to share the certification letters, 

forms, and/or instructions and obtain views on aspects of the new process. 

In response, IRS took several actions, including revising the forms. As of 

August 2003, IRS was evaluating comments received during the 30-day 

public comment period, which IRS officials said may result in additional 

changes.

IRS held several informal meetings with external and internal parties with 

an interest in the qualifying child certification program. In March 2003, the 

Stakeholder Partnership, Education, and Communication Organization16

and the National Taxpayer Advocate held four informal meetings with 

various external stakeholders, such as representatives of the National 

League of Cities, the Boston EIC Coalition, and the American Institute of 

Certified Public Accountants. Similarly, IRS officials coordinated the 

certification initiative with internal stakeholders, such as representatives 

from the Compliance unit, Wage and Investment operating division, Small 

Business/Self Employed (SB/SE) operating division, and Forms and 

Publications unit. The purpose of these meetings was to discuss the EIC 

certification proposal and share the drafts of the two new certification tax 

forms—Form 8836, “Qualifying Children Residency Statement,” and Form 

8856, “Qualifying Child Relationship Statement.” Officials told us they 

received comments from these groups of stakeholders and revised and 

improved the forms based on the feedback received. For example, for the 

residency form IRS added a list of community-based organizations and a 

list of acceptable third parties from which IRS would accept affidavits.

After incorporating the recommendations from these informal meetings, 

officials said they felt comfortable with testing the Form 8836, its 

instructions, and the accompanying letter in other ways, including focus 

groups, one-on-one interviews, and a 30-day public comment period.17

16 The Stakeholder Partnership, Education, and Communication Organization is a unit with 

IRS’s Wage and Investment operating division. Its role is to educate and assist taxpayers 

before their returns are filed. 

17Before the focus groups commenced, IRS had decided to move forward only with the 

residency certification.
Page 28 GAO-03-794 Earned Income Credit

In June 2003, a contractor conducted nine focus groups, five with taxpayers 

who claimed EIC in tax year 2002, and four with tax preparers who had 

prepared returns for taxpayers claiming EIC. In addition to the focus 

groups, the contractor also conducted nine one-on-one interviews with a 

cross section of the third parties listed on Part IV of the Form 8836 (the 

participants were landlords, employers, and child care providers). The goal 

of the testing was to determine whether individuals understood the 

documents and thought they could obtain the requested supporting 

documents and whether the suggested third parties would be willing to sign 

the affidavit.

The focus groups and interviews were held in Philadelphia, Chicago, 

Dallas, and Los Angeles. These cities were selected because of their high 

EIC population. The participants were selected using screening guidelines 

developed by IRS in conjunction with the contractor. Taxpayers were 

selected on the basis that they claimed the EIC for tax year 2002 with a 

qualifying child. Similarly, preparers were selected on the basis that they 

worked as a tax preparer on federal tax returns for 2002 and prepared tax 

returns for clients claiming EIC with a qualifying child. Those selected for 

one-on-one interviews represented a cross section of the types of 

individuals IRS deemed credible to provide affidavit information about the 

EIC claimant. In total, 816 people were contacted and 109 agreed to 

participate in the focus group testing. Of the 109, 88 persons arrived for the 

testing and 81 actually participated in the focus groups. For the one-on-one 

interviews, 12 individuals were qualified to participate and 9 actually 

participated in the interviews.18

Key IRS officials were on site during the focus groups and one-on-one 

interviews to observe the participants’ comments. A variety of comments 

were received and some changes were made. For example, IRS highlighted 

where taxpayers and third parties were to sign the forms. Although the 

contractor’s report of these meetings was not available before the public 

comment period, IRS officials who attended the meetings concluded that 

they had not received any feedback that would preclude moving forward 

with getting comments from the public. 

18According to IRS officials, approval from the Office of Management and Budget is required 

in situations where the agency conducts interviews with more than nine private sector 

participants. However, because conducting such interviews was suggested later in the 

process and because OMB had been briefed on the development of the certification test, IRS 

did not seek that approval. 
Page 29 GAO-03-794 Earned Income Credit

During the comment period, anyone could write or go to IRS’s Web site and 

provide any comments or opinions about the qualifying child certification 

program, including the form IRS expected to use and the data it planned to 

request to prove eligibility. According to IRS, during the 30-day public 

comment period, IRS received about 200 communications containing 

comments. Any other comments about the certification program are due by 

December 31, 2003. In addition, individuals can comment on the 

certification process during the filing season until April 15, 2004. As of 

August 2003, IRS officials were reviewing the comments received and 

anticipated making additional changes to the forms and publications 

shown in appendix V. 

Our Concerns with IRS’s 

Recertification Were 

Considered as IRS Designed 

the Qualifying Child 

Certification Program

IRS officials told us they considered the recommendations in our 

recertification report19 when planning their certification program. We agree 

that our applicable recommendations have been considered. Whether the 

strategies IRS adopted to deal with the concerns that led to our 

recertification report recommendations are successful will not be known 

until IRS evaluates the certification test.

Our recertification report described three aspects of the recertification 

process that caused problems for taxpayers. Specifically,

• one form used for recertification was of questionable value to IRS and 

another form was potentially confusing to taxpayers;

• taxpayers were asked to submit information that was difficult for them 

to obtain or inconsistent with what many IRS examiners considered 

acceptable; and

• IRS examiners’ inconsistent assessment of documentation submitted by 

taxpayers could result in different recertification decisions for 

taxpayers in similar circumstances.

IRS has taken steps to deal with all of these concerns in designing the 

certification process. Regarding the problems with recertification forms, 

the form that was of questionable value to IRS, which was essentially a 

means for taxpayers to tell IRS that they wished to be considered for 

19GAO-02-449.
Page 30 GAO-03-794 Earned Income Credit

recertification, is not applicable to the certification program. The other 

recertification form told taxpayers what they had to submit to establish 

their eligibility for the EIC. We found that this form could confuse 

taxpayers into believing they had to show that a qualifying child was also 

their dependent, a criterion not applicable to EIC eligibility. We also found 

that the form provided insufficient guidance to taxpayers on what 

information they needed to provide to prove that qualifying children met 

the EIC eligibility requirements. We made several recommendations, 

including that IRS should clarify taxpayers do not need to demonstrate that 

qualifying children are also dependents, help taxpayers better understand 

what documentation they need to provide to establish their relationship 

with any qualifying children, eliminate a requirement that statements from 

child care providers be notarized, and encourage taxpayers to submit more 

than one type of documentation.

Regarding our concerns about taxpayers who were recertifying being 

asked to submit documentation that was difficult for them to obtain and 

that tax examiners did not all accept, we found, for example, that EIC 

taxpayers’ living arrangements could make providing various documents 

difficult. We also found taxpayers did not always understand that school 

records were for a calendar year and therefore needed to cover the spring 

and fall of separate school years. We also found situations in which IRS 

examiners would not accept a document even though the recertification 

form listed the document as being acceptable. This concern overlapped 

with our finding that IRS examiners’ were inconsistent in their assessment 

of whether documentation provided by the taxpayers was sufficient to 

establish their qualifications for the EIC.

Regarding our concerns about inconsistent documentation, IRS again took 

actions intended to deal with our concerns in developing the certification 

program. By introducing a new option—obtaining an affidavit affirming 

that a qualifying child resided with the taxpayer for more than half the 

year—IRS intended to give taxpayers another means of showing that the 

residency requirement is met, which would prevent the taxpayer having to 

obtain the other types of documents that the draft certification form lists. 

Although IRS did not, as we recommended, create a new form to be used by 

taxpayers when seeking school records, it did follow our alternative 

recommendation that IRS clearly remind taxpayers that they need records 

for part of 2 school years. The information is included in the certification 

form’s instructions, which contain an example where a taxpayer must 

provide records from 2 school years. Finally, by centralizing the EIC 

certification processing in one location—Kansas City—and providing 
Page 31 GAO-03-794 Earned Income Credit

training to those who will be involved, IRS is seeking to ensure a higher 

level of consistency in how tax examiners judge whether taxpayers 

adequately establish that qualifying children meet the residency criterion 

for EIC.

Whether the manner in which IRS took our recertification 

recommendations into account when designing the certification program 

will be successful will not be known until IRS evaluates the certification 

test.

Qualifying Child 

Certification Program 

Developed to Improve 

Compliance While 

Considering Taxpayers’ 

Burden, but Plan for 

Evaluating Test Is 

Incomplete

The certification program appears to be adequately developed to 

potentially improve EIC compliance with consideration for minimizing 

taxpayer burden so that testing should proceed, particularly in light of IRS’s 

recent announcement further delaying the program’s start and reducing the 

sample size. For example, the EIC task force and IRS have taken steps that 

directly minimized the number of taxpayers who will be burdened by the 

certification program. That is, the certification proposal is based on 

analyses of the leading sources of EIC errors detected in earlier studies, 

thus focusing attention and burden on the subset of taxpayers making 

those errors, as opposed to all EIC recipients. In addition, IRS has taken 

steps to address the burden taxpayers will experience as participants in the 

certification test this year. 

Although IRS has made and is continuing to make progress in defining its 

plan to evaluate the certification test, the plan is incomplete. For example, 

the draft plan does not indicate how and when some information that will 

be needed to evaluate whether certification achieves its objectives will be 

obtained and analyzed. However, officials recognize the draft plan needs to 

be further developed and the importance of doing so quickly. 

Initial Design and 

Subsequent Changes May 

Improve EIC Compliance 

and Have Helped to 

Minimize Burden 

In initially designing and subsequently modifying the EIC certification 

program, officials took into account the burden that taxpayers may 

experience while attempting to improve compliance. Officials designed the 

program to include, and thus burden, only the taxpayers most likely to 

make the errors that contribute most to the EIC’s overclaim rate. By 

focusing on these noncompliant taxpayers, IRS expects to improve EIC 

compliance. In addition, officials took a number of steps, such as obtaining 

input from external and internal stakeholders that resulted in changes and 

delaying the program while considering comments received during the 
Page 32 GAO-03-794 Earned Income Credit

comment period, which should reduce the burden on those taxpayers who 

are identified to certify.

To help improve compliance, the task force focused on known sources of 

noncompliance including claiming nonqualifying children, filing status, and 

misreporting income. To deal with errors attributable to claiming 

nonqualifying children, the task force proposed a program for certifying the 

eligibility for qualifying children and envisioned targeting taxpayers most 

likely to make those errors. In contrast, other benefit programs that we 

reviewed generally require all applicants to provide documentation before 

receiving assistance. For example, to receive Supplemental Security 

Income, an individual must visit a Social Security office, meet with a 

representative, and provide documentation including birth certificates and 

payroll information. The Social Security Administration then matches this 

information to determine eligibility in advance of benefits being received. 

IRS’s certification effort, even if fully implemented, would require only a 

subset of all EIC taxpayers to provide documentation to support their 

eligibility and only when IRS is unable to verify eligibility from other 

sources of information.

After the proposal was formally adopted, IRS took a number of steps in 

developing plans for implementation that have been intended at least in 

part to minimize the burden that taxpayers actually asked to certify would 

experience, including the following.

• IRS has undertaken more activities than usual to ensure the residency 

form and other explanatory documents related to the certification 

program have been reviewed by those who would use them. 20 IRS 

sought feedback from focus groups and stakeholders on various aspects 

of the certification test and the draft letter, form, and instruction 

proposed for the residency test, such as whether taxpayers will be able 

to obtain and provide documents within the time available, and made 

some changes to the proposed form due to that feedback. As previously 

described, IRS held focus groups with taxpayers, paid tax preparers, and 

other parties to obtain feedback on certification. Officials also 

interviewed a small number of third parties who would be called upon 

20 IRS generally tests few forms and instructions with taxpayers before using them. See U.S. 

General Accounting Office, Tax Administration: IRS Should Reassess the Level of 

Resources for Testing Forms and Instructions, GAO-03-486 (Washington, D.C.: Apr. 11, 

2003). 
Page 33 GAO-03-794 Earned Income Credit

to provide requested documents. IRS also held a 30-day open period to 

receive comments from any interested party and expects to revise 

certification materials due to comments received. Finally, IRS officials 

say they will again revisit, among other things, the appropriateness of 

the forms and explanations going to taxpayers after evaluating the 

results of this year’s test of certification.

• IRS considered the issues we raised in our report about the 

recertification program21 when planning for certification. For example, 

as discussed previously in this report, IRS developed a standard form 

that includes an affidavit, which taxpayers can provide to third parties, 

such as an employer, as an alternative to obtaining other documents to 

prove residency. We also noted in our report that examiners 

inconsistently accepted or declined supporting documentation for 

recertification purposes. To address this concern, IRS officials 

conducted special training and have all certification examiners in one 

location, Kansas City, where EIC claims will be processed.

• IRS provided taxpayers with a variety of documentation choices in 

order to prove eligibility for their qualifying children. To certify for 

residency, taxpayers will need to provide Form 8836, “Qualifying 

Children Residency Statement,” with one or more of the following 

supporting documents:

• school records, medical records, day care provider records, leases, or 

social service agency records that show the parent’s name and the 

child’s name and address, and the dates that the child lived with the 

parent; or

• a letter on official letterhead for a qualifying child from the child’s 

school, health care provider, landlord, or member of the clergy that 

shows the parent’s name and the child’s name and address, and dates 

that the child lived with the parent; or

• a third party affidavit from a clergy member, community-based 

organization official, health care provider, landlord or property 

manager, school official, or day-care provider.

21 GAO-02-449.
Page 34 GAO-03-794 Earned Income Credit

• IRS dropped for an undetermined period of time, its plan to ask 

taxpayers to certify their relationship to qualifying children. IRS officials 

do not know whether or if they will test certification of relationships in 

the future. Various external stakeholders had expressed concerns about 

whether taxpayers would be able to provide the type of documents, 

such as marriage and birth certificates, which IRS had planned to 

request to document relationships to qualifying children on time. Also, 

IRS officials said that the relationship portion of the program was 

dropped for other reasons, including that (1) studies that have shown 

relationship requirements to be less of a compliance issue than 

residency and (2) taxpayers found to be noncompliant because of 

relationship requirements often were also noncompliant due to 

residency errors. As a result, certification will only include residency 

this year.

As part of its effort to balance burden with ensuring compliance, IRS 

made the changes listed above. As we drafted this report, it had not yet 

determined what additional changes it would make to the forms on the 

basis of comments received during the 30-day public comment period, 

but officials said more changes will likely result. As previously 

discussed, the initial design of the residency form was responsive to 

concerns we raised in our earlier report on IRS’s recertification 

program. Additional changes, especially dropping relationship 

recertification, were responsive to the concerns that stakeholders 

raised before the public comment period. Accordingly, the current draft 

residency certification form addresses many burden concerns. 

IRS’s Plan for Evaluating the 

Test Is Incomplete

Although IRS has made and is continuing to make progress in defining its 

plan to evaluate the certification test, the plan is not yet complete. From its 

inception, the certification program was intended to: (1) reduce the EIC’s 

overclaim rate, (2) minimize burden on taxpayers and (3) maintain the 

EIC’s relatively high participation rate. Although there are many ways to 

organize an evaluation, determining whether the major objectives of a 

program are accomplished should help policymakers determine whether 

and how to proceed with the program. The draft plan is not explicitly 

organized to show whether certification’s objectives are achieved, but does 

present some information on how IRS would evaluate these objectives. 

However, the plan proposed potential options for identifying how and 

when some critical data will be obtained and analyzed, but does not 

provide further details on when decisions will be made on specific data that 

will be collected, how, and by whom. Officials recognize that the draft plan 
Page 35 GAO-03-794 Earned Income Credit

needs to be further developed and the importance of doing so quickly. 

They have, for instance, developed preliminary drafts identifying additional 

data needed and have begun considering how to use contractors to gather 

the data. Because evaluating these objectives will depend in part on actions 

of EIC certification participants that will now occur as part of next year’s 

filing season, IRS appears to have some time before it must make final 

decisions on how it will determine whether the objectives were met.

Although an evaluation plan may not have to completely identify all issues 

that need to be evaluated and precisely how they will be evaluated before a 

program begins, the more completely such a plan is developed before a 

program is implemented, the more likely that the evaluation will be 

sufficient to support future decisions. For example, identifying key 

questions that need to be answered before a project’s implementation 

increases the chances that necessary data will be collected to answer those 

questions. IRS’s Internal Revenue Manual22 recognizes the desirability of 

having evaluation plans in place before a project is implemented. For 

instance, it requires such plans before reorganizations.

IRS has been preparing an evaluation plan for the certification test and has 

a draft plan, dated April 22, 2003. That draft describes how IRS expects to 

evaluate the program and the process IRS used to select taxpayers for the 

test. 

The draft plan identifies one “threshold” question for evaluating the 

certification program: whether the claimant selected for the test provided 

the required information to allow IRS to determine the eligibility of 

qualifying children regardless of whether the claimant was determined to 

be eligible or not. The plan lists data that are to be gathered throughout the 

certification program to answer this question. 

The threshold question is part of what must be included in determining 

whether certification for residency helps lower EIC overclaims, but 

additional information is needed. Although not tying methodologies or 

planned data collection specifically to whether certification lowers the EIC 

overclaim rate, the draft plan has a combination of approaches that should 

contribute to answering this question. For example, the draft plan 

identified data that IRS would gather throughout the test on how many 

taxpayers in the test sample certify or fail to do so in advance of the filing 

22See Internal Revenue Manual 1.1.4 and 1.2.1. 
Page 36 GAO-03-794 Earned Income Credit

season as well as how many prove that children meet the EIC residency 

test during the filing season.23

The extent to which certification may reduce overclaims due to qualifying 

children not meeting the residency requirement, however, will depend 

significantly on why some taxpayers will not attempt to certify and why 

some will fail to claim the EIC, or as much EIC, for tax year 2003 as they 

did for 2002. The draft plan takes into account that some taxpayers may 

receive the certification materials, determine that a child does not meet the 

residency test, and therefore not attempt to certify and not claim the EIC 

with their 2003 tax return or claim EIC on another basis. IRS expects to use 

available data to help assess whether the taxpayer had a filing requirement 

and whether the taxpayer may have been eligible to claim the EIC (e.g., did 

the taxpayer’s income fall within the appropriate range?). In addition, the 

draft plan proposes that IRS use a contractor or another third party to 

gather information from taxpayers about why they did not claim the EIC. A 

subsequent document cites ideas for the types of questions that could be 

asked. 

Regarding the burden certification imposes on taxpayers who participate, 

the plan is not organized to show how this will be evaluated, but it 

recognizes that participants’ burden should be evaluated. For example, the 

data IRS plans to collect throughout the process will have some utility in 

answering this question. IRS will keep track of the number of 

communications back and forth between IRS and the taxpayer before a tax 

examiner makes a final certification decision. IRS’s plan also recognizes 

that some information on burden will need to be collected directly from 

taxpayers. The plan includes a general description of a potential opinion 

survey that would gather burden-related information from certification 

participants. Little or no detail is provided on how taxpayers would be 

selected for such a survey, what types of questions would be asked, and 

when the survey would be done; however, some of this information is 

shown in a subsequent draft document. Because taxpayers will not have 

completed their certification experience until sometime next filing season, 

IRS has some time to decide whether to do such a survey and how to define 

its parameters. 

23IRS’s draft evaluation plan preceded its decision to test certification during the 2004 filing 

season. These data will now need to be collected during the filing season. 
Page 37 GAO-03-794 Earned Income Credit

Regarding the objective of maintaining the EIC’s relatively high 

participation rate, the draft plan proposes to obtain information from those 

taxpayers who are asked to certify, do not, and then fail to claim the EIC. 

The plan proposes to use a contractor or other third party to gather 

information from these taxpayers about why they did not claim the EIC. 

The plan does not amply describe how and when final decisions would be 

made about selecting contractors or another third party to do this, when 

the contractor would contact taxpayers, or what data they would attempt 

to obtain from the taxpayers. Because the population IRS will need to 

contact for these surveys will not be known until during and after the 

spring of 2004, IRS has a number of months to further develop and 

implement an approach.

Recognizing that its plans need to be further developed, IRS officials have 

continued to explore how the evaluation will be done. For example, 

officials have drafted ideas for the type of survey questions a contractor or 

other party would ask of EIC taxpayers to help IRS assess why taxpayers 

take, or do not take, various actions (such as why they may stop claiming 

the EIC after being asked to certify eligibility) and to assess taxpayers’ 

experiences under the certification program, including the burdens they 

experience. In addition, officials have begun identifying potential 

contractors who would perform the surveys and considering contracting 

options. According to IRS officials and documents, some discussions have 

been held with potential contractors to gain a better understanding of ways 

to test the survey instruments, techniques available to ensure the best 

possible response rate, and the number of taxpayers needing to be 

contacted to have useful results.

Finally, because IRS would like to undertake some version of the qualifying 

child program next year, possibly including certification during the latter 

part of 2004, the timely production of evaluative data for this year’s test will 

be critical for supporting decisions about what form future efforts will 

take. IRS is aware of the tight schedule. Officials note that while they will 

not have complete information on which to base some decisions about 

whether and how to continue with implementation in 2004 before those 

decisions must be made, they expect to have preliminary data in a timely 

fashion. For example, IRS will not be able to completely answer whether, 

and if so, why, taxpayers who are legitimately qualified to receive the EIC 

do not claim it when they file their 2003 tax return until the end of the 2003 

tax filing season, or later if taxpayers request a filing extension. IRS does 

expect that its contractor will have contacted many, if not most, of the 

taxpayers who file returns before the end of the filing season and do not 
Page 38 GAO-03-794 Earned Income Credit

claim EIC. Thus, IRS expects to know during the fall of 2004 why many 

taxpayers in the certification test stop claiming the EIC. 

Some Implementation 

Issues Not Reviewed

We did not evaluate some implementation issues because they were 

outside the scope of our review, still under development, or the Treasury 

Inspector General for Tax Administration had audits planned in these 

areas. Nonetheless, implementation issues could affect whether IRS is able 

to fully implement the certification test and ultimately improve 

compliance. We did not assess (1) whether IRS assigned an appropriate 

number of staff to assist taxpayers with questions and process the forms 

and documents relating to certification, (2) the adequacy of training 

materials for staff or the procedures put in place to help examiners 

consistently accept or decline taxpayers’ supporting documentation,

(3) the design or reliability of the databases that will be used to capture and 

evaluate program information, and (4) supporting tools, which examiners 

will use to do their job.

IRS has developed broad plans for processing the certification workload. 

Officials identified about 30 different offices that will be affected by the 

new certification program. As a key part of its processing strategy, IRS 

plans to dedicate employees at its Kansas City campus to process cases, 

answer a special toll-free number, and make updates to a certification 

database based on responses from the test of the 25,000 taxpayers. The 

Kansas City site will have about 180 staff, the bulk of whom will come onboard between September and December 2003. Approximately 40 staff 

took initial training between April and June 2003.

Conclusions Given the persistently high EIC overclaim rates, that the certification 

program is a test, and that IRS has taken key steps to address burden issues 

and focus the test on individuals least likely to meet the qualifying child 

residency requirements, we believe IRS has struck a reasonable balance 

between preventing unreasonable burden on EIC taxpayers and balancing 

the need to obtain information on whether certification can be a useful 

approach to improving EIC compliance. In addition, with the recent 

program changes announced in August, it appears that IRS is taking even 

more steps to be mindful of these concerns. Although certification during 

the 2004 filing season gives IRS somewhat more time to modify the forms 

and take other actions to potentially further reduce the burden on 

taxpayers subject to the test, it also creates new challenges for IRS. The 
Page 39 GAO-03-794 Earned Income Credit

test will no longer be a direct test of the original concept of certifying 

taxpayer eligibility in advance of the filing season. Instead, testing will 

occur during the filing season—IRS’s busiest time of year—and gives IRS 

only indirect evidence on how well certification may work before the filing 

season as originally envisioned. Further, because IRS currently plans for 

taxpayers to have to successfully provide proof of eligibility when they file 

their individual income tax return or have a refund frozen until they do, a 

greater portion of the taxpayers chosen for the test may have their refunds 

delayed than if certification had been done before the filing season. Finally, 

like virtually all aspects of the qualifying child certification program, IRS’s 

future plans have yet to be determined and are largely dependent of the 

results and subsequent evaluations of this test. 

For various reasons, we did not review in detail some implementation 

issues, such as staffing and procedures for handling taxpayer responses, 

which could affect whether IRS is able to successfully implement the 

certification test. Thus, our opinion on whether IRS is ready to proceed is 

based only on whether it has adequately developed the test to prevent 

unreasonable burden and to improve compliance.

Although the balance IRS has struck supports proceeding with the test, 

IRS’s plan for evaluating the certification program test is incomplete. IRS 

recognizes the need to evaluate the test and is developing its plan to do so. 

For some key test objectives, IRS has preliminarily identified some data 

that it believes must be collected to determine whether certification’s 

objectives are achieved and has broadly identified when and how that 

information will be collected. Because the data are related to taxpayers’ 

actions that will occur later this year or next spring, IRS appears to have 

some time to finalize its evaluation plan. 

Recommendations for 

Executive Action

Given that the qualifying child certification program is a key part of IRS’s 

plans for reducing EIC overclaims and that certification is intended to help 

reduce overclaims while minimizing the burden on taxpayers and 

maintaining the EIC’s participation rate, the Commissioner of Internal 

Revenue should, to the extent possible, accelerate development of the 

evaluation plan for the test. The plan should demonstrate how each of the 

certification’s objectives will be evaluated, including milestones for such 

critical steps as defining the specific data that will be collected, who will 

collect the data, and how the data will be analyzed in time to support 

decisions about the future of the program. 
Page 40 GAO-03-794 Earned Income Credit

Agency Comments and 

Our Evaluation

While not explicitly agreeing with our recommendation, in his September 

22, 2003, letter, the Commissioner of Internal Revenue said that IRS would 

be including the components we suggested in their evaluation plan and said 

that IRS is working to incorporate these components well before the 

certification test begins. The Commissioner said that our discussion of the 

evaluation plan is essentially accurate, but provided an enclosure to his 

letter that noted supplemental information on the plan. We are aware of the 

information described in the enclosure to the Commissioner’s letter, and 

considered it when drafting our report. 

The Commissioner also raised concerns about the comparability of EIC 

error rates to the error rates in taxpayers’ reporting of certain types of 

income. We concurred that, by-and-large, the compliance data on reporting 

of these types of income are not comparable to the EIC error rate. As a 

result, we no longer show those comparisons in our final report.

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 

appendix VII. If you have any questions about this report, contact Ms. 

Stamatiades at (404) 679-1900 or me on (202) 512-9110.

Michael Brostek

Director, Tax Issues
Page 41 GAO-03-794 Earned Income Credit

Appendix I

Significant Noncompliance Rates Other Than Apendxies

for the EIC ApendxiI

The IRS has compliance data on some taxpayer groups such as individuals 

and small businesses and some tax items such as income and credits. Byand-large, the compliance data IRS currently has are not comparable to the 

EIC. IRS is implementing its National Research Program (NRP), which will 

provide new compliance data in 2004. In the meantime, IRS is using its 

Strategic Planning and Performance Management process to prioritize 

compliance issues. 

The compliance data that IRS has available for some taxpayer groups and 

tax items are largely based on the Taxpayer Compliance Measurement 

Program (TCMP),1

 which was last conducted in 1988. However, these data 

cannot be compared to the EIC overclaim or error rates, in part because 

these data are 15 or more years old and reliable inferences cannot be drawn 

because much of the tax system and the economy have changed during that 

time. In addition, the methods used to calculate compliance rates for TCMP 

are different than those used to calculate EIC. 

In late 2002, IRS began implementing its new NRP, a detailed study of 

individual taxpayers’ compliance.2

 As part of NRP, IRS has identified a 

random sample of approximately 47,000 returns from tax year 2001 and is 

in the process of verifying the information on the returns through reviews 

of IRS and third-party data. Where necessary to confirm the accuracy of 

taxpayer-reported information, IRS is conducting either correspondence or 

face-to-face examinations. IRS intends to conduct additional NRP reviews 

of additional types of taxpayers, such as small corporations, and use the 

NRP periodically to measure compliance of individual taxpayers.

The NRP sample of 47,000 returns includes about 7,300 EIC returns. These 

EIC returns are subject to the same processes as the other returns in the 

sample, and will include a review of the taxpayers’ eligibility for the EIC. In 

order to determine whether the NRP review of these returns will yield 

results methodologically similar to those of the 1999 EIC compliance study, 

IRS is also comparing the results of the 1999 compliance study with NRP by 

putting a sample of returns from the 1999 study through NRP processes 

1

For almost 30 years, the Taxpayer Compliance Measurement Program was IRS’s method for 

statistically estimating the voluntary compliance of taxpayers in reporting their tax 

obligations. 

2

Among other things, IRS plans to use NRP data to update the formulas used to select tax 

returns for examination and allow it to design programs that will help taxpayers comply 

with tax laws.
Appendix I

Significant Noncompliance Rates Other Than 

for the EIC

Page 42 GAO-03-794 Earned Income Credit

(not including examinations). According to IRS officials, this should allow 

them to see the impact of the methodological differences between the 

compliance study and NRP review. IRS expects the results of the 

comparison study by September 2003. IRS plans to have preliminary NRP 

results in May 2004 and final results in November 2004.

Until better compliance measurement data are available, IRS’s 

organizational divisions use the Strategic Planning Budgeting and 

Performance Management process to prioritize the compliance problems 

IRS faces. Through this process, IRS says that it (1) identifies and explores 

critical trends, issues, and problems, (2) develops operational priorities 

and improvement projects to address existing or emerging problems, 

(3) explores drivers of program resources in order to develop resource 

allocation targets for carrying out the proposed strategies, and (4) enables 

division commissioners and the senior leadership teams to prioritize the 

strategies and projects and determine the resource requirements to apply 

to each strategy, operational priority, and improvement project.

Based on managers’ judgments made during this process, the Small 

Business/Self Employed (SB/SE) operating division, for example, identified 

its top six compliance priorities for fiscal year 2003 and 2004:

• high income nonfilers (income greater than $100,000),

• abusive offshore financial transactions,

• promoter investigations (those selling tax schemes to others),

• abusive tax avoidance transactions,

• high income taxpayers (income greater than $1 million), and

• returns with a high probability of unreported income.

SB/SE, which conducts few examinations of EIC claims, did not consider 

EIC in this prioritization exercise since EIC has its own dedicated 

appropriation.3

 Because IRS used different means to identify and prioritize 

these potentially noncompliant taxpayer groups, their identification as 

3

Personnel in IRS’s Wage and Investment operating division conduct the majority of EIC 

examinations. 
Appendix I

Significant Noncompliance Rates Other Than 

for the EIC

Page 43 GAO-03-794 Earned Income Credit

SB/SE priorities does not mean their noncompliance rate is comparable to 

noncompliance rates established for EIC or rates, which will be determined 

through the current or future NRPs or other EIC compliance studies.
Page 44 GAO-03-794 Earned Income Credit

Appendix II

Overclaim Rates, Administrative Costs, and 

Eligibility Verification Processes of Benefit 

Programs ApendxiI

In addition to the data we complied on IRS’s EIC and qualifying child 

certification program, we also compiled overclaim rate and administrative 

cost data, as well as information on the eligibility verification processes, for 

nine other federal or state benefit programs. We selected the nine benefit 

programs because each requires some type of certification for benefits, 

similar to the EIC, and because the EIC task force reviewed the same 

programs. We did not do a comprehensive analysis to determine which 

programs, if any, are most comparable to the EIC, nor did we determine 

whether the information reported is comparable across programs.

The overclaim rates, administrative costs, and the eligibility verification 

processes for the EIC and the other nine benefit programs—-

Unemployment Insurance, Supplemental Security Income, Social Security 

Disability Insurance, the National School Lunch program, the Food Stamp 

program, Housing and Urban Development rental assistance, Medicaid, 

Medicare, and Temporary Assistance for Needy Families—-are shown in 

table 4.

Overclaim rates for programs other than the EIC for which data were 

available ranged from 0.2 to 10.7 percent. These overclaim rates reflect the 

percentage of total dollars paid out in error, not, for example, the 

percentage of claimants who made errors.1

 To calculate the overclaim 

rates, most of the nine agencies selected a sample of program participants 

and conducted a detailed analysis of the cases. This can involve collection 

of additional supporting documentation, personal contacts with employers 

and other third parties, or home visits to program recipients. A description 

of how the overclaim rates were calculated is in table 5.

Administrative costs range from $123 million to $11.9 billion for the nine 

programs. Administrative costs reported by federal agencies are likely not 

comparable across programs and may not include all of the costs involved 

in administering the programs. For example, various agencies and entities 

at the federal, state, and local levels have administrative responsibilities 

under the National School Lunch program. However, while the federal 

budget provides funds separate from program dollars to pay for 

administrative processes at the federal and state level, officials at the local

1

We use the term overclaim rate to be the total excess payments made in error. This is 

generally referred to as the error or overpayment rate in the other programs we reviewed. 
Appendix II

Overclaim Rates, Administrative Costs, and 

Eligibility Verification Processes of Benefit 

Programs

Page 45 GAO-03-794 Earned Income Credit

level pay for administrative costs from program dollars that include federal 

and state funding and student meal payments.2

The process used to determine and validate eligibility varies significantly. 

Some programs, such as the school lunch program, rely primarily on selfreported information and verification is limited. Other programs, such as 

the Food Stamp program, require program staff to conduct extensive 

verification.

Table 4: Overclaim Rates, Administrative Costs, and Eligibility Verification Processes for EIC and Other Programs 

2

See, for example, U.S. General Accounting Office, School Meal Programs: Estimated Costs 

for Three Administrative Processes at Selected Locations, GAO-02-944 (Washington, D.C.: 

Sept. 25, 2002).

Program Overclaim ratea Administrative cost Eligibility verification process

Earned Income Credit 27–32 percent

(tax year 1999)

$145 millionb

(tax year 1999)

Currently, no certification requirement exists. An EIC claimant’s 

return is selected for examination when it meets certain 

selection criteria that points to potential overclaim. When this 

occurs, documentation is generally requested to establish 

requirements for EIC and related issues using document 

request forms including for qualifying child, filing status, and 

dependency issues. 

Unemployment 

Insurance 

8 percentc

(fiscal year 2001)

$2.3 billiond

(fiscal year 2001)

Eligibility for unemployment insurance benefits is determined 

under state law, so the information applicants are required to 

provide varies by state. States rely heavily on self-reported 

information; in some states applicants can apply over the 

telephone or on-line. Only a limited number of states 

independently verify claimants’ identity by using the Social 

Security Administration’s State Online Query system, which can 

match a claimant’s name, date of birth, and Social Security 

number. States may use independent automated data sources 

to verify other eligibility factors such as wages and employment 

status. 
Appendix II

Overclaim Rates, Administrative Costs, and 

Eligibility Verification Processes of Benefit 

Programs

Page 46 GAO-03-794 Earned Income Credit

Supplemental 

Security Income 

7.2 percente

(fiscal year 2001)

$2.8 billione

(fiscal year 2002)

Supplemental Security Income is available to individuals who 

are blind or disabled and poor. The amount of Supplemental 

Security Income an individual receives depends on several 

factors including, but not limited to, other sources of income and 

living arrangements. To apply for Supplemental Security 

Income, applicants must visit a Social Security office and meet 

with a Social Security representative. Examples of 

documentation required under the program include: (1) social 

security card; (2) birth certificate or other proof of age; 

(3) mortgage or lease; (4) payroll slips, bank books, insurance 

policies, and other records about income and assets; (5) names 

and addresses of doctors (if disabled); and (6) proof of United 

States citizenship or noncitizen status. To verify this information, 

the Social Security Administration uses computer matches to 

compare Supplemental Security Income records against 

recipient information contained in records of third parties, such 

as other federal and state government agencies. The Social 

Security Administration periodically conducts “redetermination” 

reviews to verify eligibility factors such as income, resources, 

and living arrangements. Recipients’ eligibility is to be reviewed 

at least every 6 years.

Social Security 

Disability Insurance 

0.2 percente

(fiscal year 2001)

$2.0 billione

(fiscal year 2001)

Social Security Disability Income provides income support 

benefits to former workers who have suffered a long-term 

disability. Applicants can start their application online, but before 

they are approved for benefits, applicants must provide the 

following documentation to a social security office: (1) a Social 

Security number; (2) birth certificate or other proof of age;

(3) medical information, such as names and addresses of 

doctors and medical records; (4) work history for the prior 15 

years; and (5) a W-2 or tax return.

School Lunch Not known $123 millionf

(fiscal year 2002)

Households submit applications with self-reported information, 

including the names of household members and all sources of 

income for each household member, and the Social Security 

number of the adult that signs the application. Alternatively, 

children with Temporary Assistance for Needy Families or Food 

Stamp case number can be certified directly. Generally, no 

documentation or additional support is requested at the time of 

application. Local authorities verify eligibility for free and 

reduced price meals for a sample of applications using either 

random or focused sampling techniques.

(Continued From Previous Page)

Program Overclaim ratea Administrative cost Eligibility verification process
Appendix II

Overclaim Rates, Administrative Costs, and 

Eligibility Verification Processes of Benefit 

Programs

Page 47 GAO-03-794 Earned Income Credit

Food Stamps 8.66 percentg

(fiscal year 2001)

$2.4 billionh

(fiscal year 2002)

Food Stamp applicants are asked to provide documentary 

evidence of household assets, income, and allowable 

deductions, as well as proof of noncitizen status. Allowable 

deductions may include housing and utility expenses, medical 

expenses, and child support payments. If documentary 

evidence is not available, state agencies may use other means 

of verifying information provided by applicants, including 

contacting third parties. State agencies are required to verify 

certain information on income and deductions and states may 

opt to require verification of additional information. State 

agencies may establish their own standards for the use of 

verification subject to the parameters specified in federal 

regulations. 

Housing and Urban 

Development rental 

assistance programs

10.7 percenti

(fiscal year 2001)

$945 millionj 

(fiscal year 2001)

Applicants must provide third party verification of the following 

factors: (1) family annual income, (2) value of assets, (3) 

expenses related to deductions from annual income, and 

(4) other factors that affect the determination of adjusted 

income. Housing agencies may require documentation or they 

may verify self-reported information by telephone. Individual 

housing agencies determine their own verification procedures. 

Medicaid Not known 11.9 billionk

(fiscal year 2001)

Medicaid provides health insurance coverage to certain low 

income adults and children in a program jointly administered 

and funded by the federal government and the states. While the 

Social Security Administration sets the income threshold for 

Supplemental Security Income-related Medicaid eligibility 

annually, most Medicaid eligibility requirements and verification 

procedures are determined at the state level and vary by state. 

For example, some states require applicants to provide 

documentation of both income and allowable deductions, such 

as child care expenses and child support payments. Other 

states require applicants to provide information on income and 

deductions but do not require further documentation. Federal 

law requires that Medicaid applicants provide a Social Security 

number, unless the applicant refuses to obtain a number 

because of well established religious objections. While states 

are required to establish procedures for the periodic 

redetermination of a recipient’s Medicaid eligibility at least 

annually, the procedures may vary by state. 

Medicare 6.3 percentl

(fiscal year 2002)

4.4 billionm

(fiscal year 2001)

The Centers for Medicare and Medicaid Services administers 

the Medicare program; however, the Social Security 

Administration determines entitlement to Medicare benefits. 

Retired recipients who are receiving retirement benefits from 

Social Security or the Railroad Retirement Board are 

automatically enrolled in Medicare the month they turn 65. 

Individuals who are under age 65 and disabled are also 

automatically enrolled in Medicare after they have been 

receiving Social Security or Railroad Retirement disability 

payments for 24 months. All other individuals (e.g., retired 

individuals who are not eligible for Social Security and 

individuals who have end stage renal disease) are required to 

file a Medicare application at a Social Security office.

(Continued From Previous Page)

Program Overclaim ratea Administrative cost Eligibility verification process
Appendix II

Overclaim Rates, Administrative Costs, and 

Eligibility Verification Processes of Benefit 

Programs

Page 48 GAO-03-794 Earned Income Credit

Source: GAO analysis of multiple agency data.

a

See table 6 for information on how overclaim rates were calculated for each program.

b

IRS does not know the full cost of administering the EIC; for example, the $145 million does not 

include the cost of processing EIC returns.

c

United States Department of Labor Benefit Accuracy Measurement data.

d

United States Department of Labor.

e

Social Security Administration, Performance and Accountability Report, fiscal year 2002.

f

United States Department of Agriculture Food and Nutrition Service. Includes state expenses for 

administering the School Breakfast Program, the Child and Adult Care Food Program, and the Special 

Milk Program.

g

United States Department of Agriculture Food and Nutrition Service, Quality Control Division.

h

United States Department of Agriculture Food and Nutrition Service.

i

Housing and Urban Development’s Audit of Financial Statements Fiscal Year 2002 and 2001, 2003-

Fiscal Year 2004 (January 31, 2001), Note 17, p. 104ff.

j

Departments of Veterans Affairs and Housing and Urban Development, and Independent Agencies 

Appropriations for 2003, Hearings. 552-070-28357-9, p.106.

k

Health and Human Services’ Financial Management Report, fiscal year 2001.

l

Health and Human Services’ Office of Inspector General, Improper Fiscal Year 2002 Medicare FeeFor-Service Payments A-17-02-0220, (January 2003).

mThe Boards of Trustees, Federal Hospital Insurance and Federal Supplementary Medical Insurance 

Trust Funds, 2003 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and 

Federal Supplementary Medical Insurance Trust Funds. Administrative cost figure includes 

administrative costs for both Federal Hospital Insurance and Federal Supplementary Medical 

Insurance Trust Funds. Administrative costs for Hospital Insurance include the costs of experiments 

and demonstration projects as well as fraud and abuse control expenses.

n

Health and Human Services’ Administration for Children and Families, Temporary Assistance for 

Needy Families Program Fifth Annual Report to Congress. (February 2003).

To the extent known, how the overclaim rates are calculated, for the nine 

benefits program we reviewed, including EIC, is shown in table 5.

Temporary 

Assistance for Needy 

Families

Not yet Available $2.3 billionn Eligibility requirements are determined at the state or local level, 

and therefore vary by state and locality. 

(Continued From Previous Page)

Program Overclaim ratea Administrative cost Eligibility verification process
Appendix II

Overclaim Rates, Administrative Costs, and 

Eligibility Verification Processes of Benefit 

Programs

Page 49 GAO-03-794 Earned Income Credit

Table 5: How Overclaim Rates Are Calculated for Selected Benefit Programs

Source: GAO analysis of multiple agency data.

a

U.S. General Accounting Office State, Efforts to Control Improper Payments Vary, GAO-01-662

(Washington, DC: June 7, 2001).

Program How overclaim rates are calculated

Earned Income Credit Compliance study based on audits of a statistically representative sample of taxpayers and 

adjustments made to their tax returns. 

Unemployment Insurance The quality assurance system is used to estimate overpayments based on a statistically 

valid sample of Unemployment Insurance claims from each state. Investigators conduct 

detailed, comprehensive analyses of each case by personally contacting employers, 

claimants, and third parties. Investigators typically spend 5 to 8 hours examining each case.

Supplemental Security Income The payment accuracy rate is based on a detailed analysis of a sample of Supplemental 

Security Income cases. However, the Social Security Administration’s Office of Inspector 

General reported that not all types of overpayments are counted as errors so payment 

accuracy rates do not correspond to overpayments reported in the Social Security 

Administration’s financial statements.

Social Security Disability Insurance The overpayment overclaim rate is based on a monthly sample selection from the payment 

rolls consisting of beneficiaries in current payment status. For each sampled case, the 

recipient or representative payee is interviewed, collateral contacts are made as needed, 

and all factors of eligibility are redeveloped as of the current sample month.

School Lunch The United States Department of Agriculture does not routinely collect data on the 

percentage of ineligible children receiving free or reduced price school lunches. 

Food Stamps Under the food stamp quality control system, states draw a statistical sample, review case 

information, and make home visits to determine whether households were eligible for 

benefits and received the correct benefit payment. Regional offices validate the results by 

reviewing a subset of each state’s overpayment and underpayment errors as necessary. 

Housing and Urban Development rental 

assistance programs

The overclaim rate is based on an in-depth analysis of a statistical sample of cases. The 

overclaim rate showed an increase in 2001 over previous years largely because Housing 

and Urban Development expanded its methodology for measuring error to cover three types 

of program errors – incorrect reporting of income by tenants; mistakes by public housing 

agencies, owners, and renting agents in calculating income and rent amounts; and mistakes 

made by public housing agencies, owners, and renting agents in completing appropriate 

paperwork and billing Housing and Urban Development for rental assistance.

Medicaid GAO has found that few states measure the overall accuracy of their payments.a

Medicare This overclaim rate for Medicare fee-for-service claims is based on a review of claims 

conducted by the Housing and Human Service’s Inspector General’s office. The Inspector 

General used a multistage stratified sample design. For each claim, the provider was 

contacted and asked to provide copies of all medical records supporting services billed. 

These records were assessed to determine whether the services billed were reasonable, 

adequately documented, medically necessary, and coded in accordance with Medicare 

reimbursement rules and regulations. Billing practices were also reviewed. Starting in fiscal 

year 2003, the Centers for Medicare and Medicaid Services will publish a national overclaim 

rate developed through the Comprehensive Error Rate Testing Program and the Hospital 

Payment Monitoring Program. These programs build on the Inspector General’s 

methodology.

Temporary Assistance for Needy Families Payment accuracy overclaim rates have not yet been calculated for the Temporary 

Assistance for Needy Families’ program.
Page 50 GAO-03-794 Earned Income Credit

Appendix III

Objectives, Scope, and Methodology ApendxiI

Objectives We were asked to respond to 12 questions about IRS’s certification 

program, as shown in table 6.

Table 6: Questions We Were Asked 

Source: Subcommittee on Oversight, House Committe on Ways and Means.

In consultation with our requesters’ offices, we grouped these questions 

into three objectives, as follows: (1) describe the design and basis for the 

EIC qualifying child certification program as proposed by the EIC task 

force, (2) describe the current status of the program, including significant 

changes since program approval, and (3) assess whether the program is 

1. What is the status of the EIC certification program, including the timing and 

number/types of taxpayers to be contacted?

2. Has IRS “tested” or conducted a “focus-group” of any related letters, forms, or 

documents for understandability and other issues; and, if so, what have been the 

results of such efforts?

3. (a) What is the appropriateness of the draft certification forms and explanations? 

(b) What are IRS’s plans for processing them? (c) What types of documents will EIC 

taxpayers need to provide the IRS? (d) Will taxpayers generally be able to obtain the 

required documentation to otherwise establish eligibility within the required time 

frame, such as for marriage certificates, school transcripts, and rental agreements?

4. What is the range of alternatives considered by IRS for obtaining similarly reliable 

documentation, including the cost of alternatives, and taking into account the cost of 

EIC noncompliance?

5. What is the percentage of EIC claimants that would be required to precertify prior to 

the 2004 filing season?

6. What information does IRS have regarding differences in the EIC overclaim rate 

among EIC claimants that are positively correlated with filing status, relationship to 

the qualifying child, or other factors?

7. To what extent are the issues of concern in GAO’s report on the current 

recertification program of similar concern in the new certification program, including 

probable solutions to problem areas?

8. Does GAO believe the certification program has been adequately developed to 

prevent unreasonable burdens on EIC taxpayers and to improve compliance? 

9. What is the current process for evaluating EIC eligibility?

10. (a) What is the current EIC error rate? (b) Have recent statutory changes had an 

impact on the error rate or on the rate of overpayments? (c) Were these statutory 

changes for the purpose of deterring noncompliance?

11. What are the error rates of non-EIC taxpayer groups having significant compliance 

issues?

12. What are the error rates of comparable benefit programs administered by states or 

the federal government and do these programs use any verification process?
Appendix III

Objectives, Scope, and Methodology

Page 51 GAO-03-794 Earned Income Credit

adequately developed to (a) prevent unreasonable burdens on EIC 

taxpayers and (b) improve compliance so that the test should proceed. In 

addition, we were asked to provide readily available information on 

(1) significant noncompliance rates other than for the EIC and (2) the 

overclaim rates and administrative costs of comparable benefit programs 

administered by states or the federal government and any verification 

process used by these programs.

Scope and 

Methodology

To respond to all of the questions, we reviewed and analyzed relevant IRS 

and other documentation, such as compliance reports, EIC task force 

reports, draft letters and forms, testing and focus group records, 

implementation plans, evaluation plans, and our prior products, and 

interviewed Department of the Treasury and IRS officials involved in the 

EIC certification program, including the Assistant to the Commissioner; the 

National Taxpayer Advocate; Research, Analysis, and Statistics officials; 

and members of the qualifying child certification implementation team. We 

did not verify the accuracy of the data shown in the various reports that we 

reviewed. Rather, we reviewed the steps IRS had taken to implement the 

certification program and determined, to the extent possible, how IRS 

ensured that the program had been adequately developed to prevent 

unreasonable burden and improve compliance. We did not evaluate 

whether IRS’s preparations for implementing the certification test, such as 

staffing and training, were sufficiently developed to support proceeding 

with the test, because they were outside the scope of our review, still under 

development, or the Treasury Inspector General for Tax Administration 

had audits planned. 

The first objective includes, in order, our response to questions 10, 4, and 6. 

To determine the current EIC error rates and whether any studies had been 

done on the impact of recent statutory changes on error rates, we reviewed 

IRS’s most recent compliance study, the Treasury Inspector General for Tax 

Administration reports and our previous reports, and interviewed IRS 

officials. In addition, we reviewed the legislative history of recent statutory 

changes—effective since 1999—that pertained to EIC. We analyzed these 

data and IRS and Treasury reports to determine whether an analysis on the 

impact of the legislative changes on EIC error or overclaim rates had been 

conducted. To determine the range of alternatives considered by the task 

force, we reviewed documents and interviewed members of the EIC task 

force. To determine the correlation between overall EIC error rates, filing 

status, and gender, we interviewed officials from Research, Analysis, and 
Appendix III

Objectives, Scope, and Methodology

Page 52 GAO-03-794 Earned Income Credit

Statistics and analyzed their data, and reviewed the EIC task force reports 

and Treasury’s past compliance studies.

The second objective included, in order, our response to questions one, 

five, two, and seven. To determine the status of the EIC certification 

program, including the number and types of taxpayers to be contacted, we 

interviewed IRS and Treasury officials and reviewed documents showing 

timelines and key milestones. We reviewed plans for the certification 

program, such as IRS’s Concept of Operations and the 2004 Increment 

Evaluation Plan, in conjunction with IRS’s current process for evaluating 

EIC eligibility. To calculate the percentage of EIC claimants subject to 

certification in 2004, we divided the planned sample size by the number of 

EIC claimants with qualifying children. To obtain information on IRS’s 

testing of letters, forms, and documents for understandability, we observed 

the focus group testing that IRS conducted in Dallas, Tex., with EIC 

taxpayers, tax preparers, and other parties to understand how IRS assured 

itself that such persons understood the forms and thought they could 

obtain the required documentation. For whether items of concern we 

found within the recertification program could have similar concerns in the 

new initiative, we analyzed our prior reports on IRS’s recertification 

program and IRS’s progress in implementing our recommendations, then 

we compared our analysis to the certification plans.

The third objective includes, in order, our responses to questions eight and 

three. To make our determination as to whether the program had been 

adequately developed to improve compliance with minimal burden to 

taxpayers, we asked IRS officials to describe and provide documentation to 

support the steps they took to assure that the program was adequately 

developed. This included interviews and a high-level review of key steps 

and decisions found in various documents, such as the EIC task force 

reports, the Concept of Operations, staffing plans, training materials, and 

the evaluation plan. To determine the potential extent of the burden on 

taxpayers, we reviewed reports from outside groups that analyze programs 

and policies for low-income groups. We obtained the opinions of IRS 

officials and discussed those of outside stakeholders, such as 

representatives from the Annie E. Casey Foundation, low income taxpayer 

clinics, and large tax preparation organizations, that IRS had met with 

about any problems taxpayers might have in complying with the 

documentation requirements to establish EIC eligibility. We also 

interviewed IRS officials and reviewed EIC task force documents to learn 

about the range of alternatives taxpayers have available to obtain similarly 
Appendix III

Objectives, Scope, and Methodology

Page 53 GAO-03-794 Earned Income Credit

reliable documentation, if they were unable to comply with the 

certification documentation requirements.

Our responses to questions 11 and 12 are in appendixes I and II, 

respectively. To determine the error rates of non-EIC taxpayer groups 

having significant compliance issues, we reviewed compliance research 

reports, interviewed officials about IRS’s National Research Program, and 

reviewed information contained in the Strategy and Program Plan. We 

discussed our analysis with key IRS officials, including representatives of 

the Assistant to the Commissioner. To determine the overclaim rates, 

administrative costs, and verification process of comparable benefit 

programs administered by states or the federal government, we researched 

our prior reports and contacted our staff knowledgeable about the selected 

programs. We selected nine programs to review: Unemployment Insurance, 

Supplemental Security Income, Social Security Disability Insurance, school 

lunch, food stamps, Housing and Urban Development rental assistance, 

Medicaid and Medicare, and Temporary Assistance for Needy Families. We 

chose these programs largely because they were the same programs the 

EIC task force reviewed and because each of them had some sort of 

precertification program. We did not do a comprehensive analysis to 

determine which programs, if any, were most comparable to the EIC, nor 

did we determine whether the information reported for each program was 

consistent and could be compared across programs. We did not do 

additional analyses to determine how administrative costs compared to 

program outlays.

Our response to question nine is in the background section of this report. 

To determine the current process for determining EIC eligibility, we 

reviewed relevant IRS documents and our prior reports. We verified the 

accuracy of this information in interviews with IRS officials.

We conducted our work in Atlanta, Ga., Dallas, Tex., and Washington, D.C., 

from May 2003 through September 2003 in accordance with generally 

accepted government auditing standards.
Page 54 GAO-03-794 Earned Income Credit

Appendix IV

Key Milestones for the Qualifying Child 

Certification Program ApendxiIV

Key milestones for the certification program for fiscal years 2002 through 

2005, are shown in figure 4. 

Figure 4: Key Milestones for the Certification Program

2002

Source: GAO analysis of IRS data.

2003

2004

2005

February

● EIC task force formed.

July

● EIC task force 

 recommendations approved.

August

● Qualifying child certification 

 concept and detailed plans 

 developed (through February 

 2003).

March

● Informal meetings with internal 

 and external stakeholders held.

June

● Focus group testing and 

 one-on-one interviews held.

July

● A 30-day public 

 comment period ends.

December

● Letters notifying taxpayers of 

 residency certification 

 requirements begin to be mailed. 

January

● Final evaluation report for 

 qualifying child certification test 

 to be completed.

● Eligibility determinations to be 

 made (through October 2004 with 

 extensions).

July

● Possible pilot for certification in 

 advance of the 2005 filing season 

 initiated–letters to taxpayers 

 to be mailed.

September

● Preliminary evaluation report for 

 qualifying child certification test to 

 be completed.

January
Page 55 GAO-03-794 Earned Income Credit

Appendix V

Documents Related to the Precertification 

Program ApendxiV

According to agency officials, IRS will send each of the 25,000 taxpayers 

subject to precertification four documents, including (1) Notice 84-A, a 

letter informing taxpayers about the new program; (2) Form 8836, 

“Qualifying Children Residency Statement;” (3) Publication 3211M, “Earned 

Income Tax Credit Question and Answers;” and (4) Publication 4134, 

“Free/Nominal Cost Assistance Available for Low Income Taxpayers.” 

Copies of these documents, current as of September 2003, follow.
Appendix V

Documents Related to the Precertification 

Program

Page 56 GAO-03-794 Earned Income Credit
Appendix V

Documents Related to the Precertification 

Program

Page 57 GAO-03-794 Earned Income Credit
Appendix V

Documents Related to the Precertification 

Program

Page 58 GAO-03-794 Earned Income Credit
Appendix V

Documents Related to the Precertification 

Program

Page 59 GAO-03-794 Earned Income Credit
Appendix V

Documents Related to the Precertification 

Program

Page 60 GAO-03-794 Earned Income Credit
Appendix V

Documents Related to the Precertification 

Program

Page 61 GAO-03-794 Earned Income Credit
Appendix V

Documents Related to the Precertification 

Program

Page 62 GAO-03-794 Earned Income Credit
Appendix V

Documents Related to the Precertification 

Program

Page 63 GAO-03-794 Earned Income Credit
Appendix V

Documents Related to the Precertification 

Program

Page 64 GAO-03-794 Earned Income Credit
Page 65 GAO-03-794 Earned Income Credit

Appendix VI

Comments from the Internal Revenue Service ApendxiVI
Appendix VI

Comments from the Internal Revenue Service

Page 66 GAO-03-794 Earned Income Credit
Appendix VI

Comments from the Internal Revenue Service

Page 67 GAO-03-794 Earned Income Credit
Appendix VI

Comments from the Internal Revenue Service

Page 68 GAO-03-794 Earned Income Credit
Appendix VI

Comments from the Internal Revenue Service

Page 69 GAO-03-794 Earned Income Credit
Appendix VI

Comments from the Internal Revenue Service

Page 70 GAO-03-794 Earned Income Credit
Page 71 GAO-03-794 Earned Income Credit

Appendix VII

GAO Contacts and Staff Acknowledgments ApendxiVI

GAO Contacts Michael Brostek (202) 512-9110

Joanna Stamatiades (404) 679-1984

Acknowledgments In addition to those named above, Tiffany Brown, Evan Gilman, Veronica 

Mayhand, Kathryn Larin, David Lewis, Donna Miller, Libby Mixon, Cheryl 

Peterson, and Tom Short made key contributions to this report.

(450216)
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441 G Street NW, Room LM

Washington, D.C. 20548

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Public Affairs Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Service Requested

Presorted Standard

Postage & Fees Paid

GAO

Permit No. GI00