Report to Congress on 

Strengthening Earned Income Tax Credit Compliance 

through Data Driven Analysis

U.S. Department of the Treasury

July 5, 2016

House Report 114-194 directed Treasury and IRS to conduct a data-driven analysis to improve Earned 

Income Tax Credit compliance with an emphasis on enhancing taxpayer understanding of the credit, and 

further directed Treasury and IRS to submit a report on their progress toward meeting this goal to the 

Committees on Appropriations in the House and Senate. This report fulfills the latter request by the 

Committee.
D EPARTM ENT O F T H E TREASURY 

WASHINGT ON, D.C. 20220 

August 1, 2016 

The Honorable Hal Rogers 

Chairman, House Committee on Appropriations 

U.S. House ofRepresentatives 

Washington, DC 20515 

Dear Chairman Rogers, 

In House Report 114-194, the House of Representatives' Committee on Appropriations 

expressed supp01t for efforts by the Department of the Treasury and the Internal Revenue 

Service to increase compliance with the Earned Income Tax Credit (EITC) program. The 

Committee directed Treasury's Office of Tax Policy and the IRS Office of Research, Analysis 

and Statistics to collaborate in conducting data-driven analysis to improve EITC compliance in 

collaboration with the tax preparation community with an emphasis on enhancing taxpayer 

understanding of the credit. The House Report further directed Treasury and IRS to submit a 

report on their progress toward meeting this goal to the Committees on Appropriations in the 

House and Senate. 

Enclosed is our rep01t on the data-driven analysis that Treasury and IRS are currently 

undertaking to improve EITC compliance. 

Treasury and IRS appreciate the support of the Committee for our ongoing efforts to improve 

EITC compliance. Should you have any additional questions, please contact me or have your 

staff contact Lisa Pena, Office of Legislative Affairs, at (202) 622-1900. 

Enclosure 

Identical letter sent to: 

The Honorable Thad Cocluan 

The Honorable Barbara Mikulski 

The Honorable Nita Lowey 

Sincerely, 

Thomas Patrick Maloney 

Senior Advisor, Office of Legislative Affairs 
DEPARTME NT OF TH E TREAS URY 

WAS HINGTON, D .C. 2 0 220 

August 1, 2016 

The Honorable Barbara Mikulski 

Vice Chairwoman, Senate Committee on Appropriations 

United States Senate 

Washington, DC 20510 

Dear Vice Chairwoman Mikulski, 

In House Report 114-194, the House of Representatives' Committee on Appropriations 

expressed supp01t for eff01ts by the Department of the Treasury and the Internal Revenue 

Service to increase compliance with the Earned Income Tax Credit (EITC) program. The 

Committee directed Treasury's Office ofTax Policy and the IRS Office of Research, Analysis 

and Statistics to collaborate in conducting data-driven analysis to improve EITC compliance in 

collaboration with the tax preparation community with an emphasis on enhancing taxpayer 

understanding of the credit. The House Report further directed Treasury and IRS to submit a 

report on their progress toward meeting this goal to the Committees on Appropriations in the 

House and Senate. 

Enclosed is our rep01t on the data-driven analysis that Treasury and IRS are currently 

undettaking to improve EITC compliance. 

Treasury and IRS appreciate the support of the Committee for our ongoing efforts to improve 

EITC compliance. Should you have any additional questions, please contact me or have your 

staff contact Lisa Pena, Office of Legislative Affairs, at (202) 622-1900. 

Enclosure 

Identical letter sent to: 

The Honorable Thad Cocluan 

The Honorable Hal Rogers 

The Honorable Nita Lowey 

Sincerely, 

Thomas Patrick Maloney 

Senior Advisor, Office of Legislative Affairs 
DEPARTM E N T OF T H E TREAS U RY 

WASH INGTON, D .C. 2 0 220 

August I, 2016 

The Honorable Nita Lowey 

Ranking Member, House Committee on Appropriations 

U.S. House of Representatives 

Washington, DC 20515 

Dear Congresswoman Lowey, 

In House Report 114-194, the House of Representatives' Committee on Appropriations 

expressed support for efforts by the Department of the Treasury and the Internal Revenue 

Service to increase compliance with the Earned Income Tax Credit (EITC) program. The 

Committee directed Treasury's Office of Tax Policy and the IRS Office of Research, Analysis 

and Statistics to collaborate in conducting data-driven analysis to improve EITC compliance in 

collaboration with the tax preparation conununity with an emphasis on enhancing taxpayer 

understanding of the credit. The House Report further directed Treasury and IRS to submit a 

rep011 on their progress toward meeting this goal to the Committees on Appropriations in the 

House and Senate. 

Enclosed is our report on the data-driven analysis that Treasury and IRS are currently 

undertaking to improve EITC compliance. 

Treasury and IRS appreciate the supp011 of the Conunittee for our ongoing effmis to improve 

EITC compliance. Should you have any additional questions, please contact me or have your 

staff contact Lisa Pena, Office of Legislative Affairs, at (202) 622-1900. 

Enclosure 

Identical letter sent to: 

The Honorable Thad Cochran 

The Honorable Hal Rogers 

The Honorable Barbara Mikulski 

Sincerely, 

Thomas Patrick Maloney 

Senior Advisor, Office of Legislative Affairs 
DEPA RTM EN T O F T H E TREA SU RY 

WAS HINGTO N , D.C . 2 0 220 

August 1, 2016 

The Honorable Thad Cochran 

Chairman, Senate Committee on Appropriations, 

United States Senate 

Washington, DC 20510 

Dear Chairman Cochran, 

In House Report 114-194, the House of Representatives' Committee on Appropriations 

expressed support for efforts by the Department of the Treasury and the Internal Revenue 

Service to increase compliance with the Earned Income Tax Credit (EITC) program. The 

Committee directed Treasury's Office ofTax Policy and the IRS Office of Research, Analysis 

and Statistics to collaborate in conducting data-driven analysis to improve EITC compliance in 

collaboration with the tax preparation community with an emphasis on enhancing taxpayer 

understanding of the credit. The House Report further directed Treasury and IRS to submit a 

repmt on their progress toward meeting this goal to the Committees on Appropriations in the 

House and Senate. 

Enclosed is our repott on the data-driven analysis that Treasury and IRS are currently 

undertaking to improve EITC compliance. 

Treasury and IRS appreciate the supp01t of the Committee for our ongoing efforts to improve 

EITC compliance. Should you have any additional questions, please contact me or have your 

staff contact Lisa Pena, Office of Legislative Affairs, at (202) 622-1900. 

Enclosure 

Identical letter sent to: 

The Honorable Hal Rogers 

The Honorable Barbara Mikulski 

The Honorable Nita Lowey 

Sincerely, 

Thomas Patrick Maloney 

Senior Advisor, Office of Legislative Affairs 
1

I. Introduction

House Report 114-194 expressed support for efforts by the Department of the Treasury and the 

IRS to increase compliance with the Earned Income Tax Credit (EITC) program. The 

Committee directed Treasury and IRS to conduct data-driven analysis to improve EITC 

compliance with an emphasis on enhancing taxpayer understanding of the credit, and further 

directed Treasury and IRS to submit a report on their progress toward meeting this goal to the 

Committees on Appropriations in the House and Senate.1 This report fulfills the latter request by 

the Committee.

Treasury and IRS appreciate the support of the Committee for our efforts to improve compliance

with respect to the EITC. Consistent with the Committee’s direction, we have undertaken and 

continue to undertake a number of studies designed to strengthen compliance as well as improve 

our understanding of effective methods to do so. This report provides detail regarding four 

studies currently underway to improve EITC compliance across different methods of tax 

preparation. These efforts all take the form of tests with a randomized controlled design that 

tailor treatments to specific areas of concern regarding compliance behavior. They include 

efforts to promote compliant participation as well as to detect and deter noncompliance. These 

studies have provided and will continue to provide Treasury and IRS with evidence regarding the 

effectiveness of various methods for strengthening EITC compliance. This will allow our future 

compliance strategy to be data driven, as directed by the Committee. Moreover, all of the studies 

described have an educational component to them, so that taxpayers and preparers alike who are 

 

1 The specific report language is: Strengthening EITC Compliance.—The Committee supports the Department and 

IRS’ [effort] to increase compliance with and the accuracy of the Earned Income Tax Credit (EITC) program. The 

complexity of the EITC law makes it inherently difficult for families and individuals to avoid errors and inherently 

easy for criminals to make false claims. The Committee directs the Office of Tax Policy (OTP) and the IRS Office 

Research, Analysis and Statistics to conduct data-driven analysis to improve EITC compliance in collaboration with 

the tax preparation community. Successful analysis will identify solutions effective for both paid preparers and selfpreparers, [and] ensure ease of taxpayer understanding. The Committee directs OTP and IRS to submit a report to 

the Committees on Appropriations in the House and Senate not later than six months after enactment of this Act on 

meeting this goal.
2

involved in these studies should, as directed by the Committee, gain improved understanding of 

the eligibility criteria for EITC and of their responsibilities for correctly claiming the credit. 

The four studies are discussed in turn. The EITC Return Preparer Study is a multiple-year

iterative study of the effectiveness of feedback or other treatments provided to paid return

preparers as part of IRS’ compliance strategy for paid preparers of EITC returns. The ongoing

outreach and enforcement strategy is estimated to have resulted in a total of almost $1.7 billion

dollars in revenue protected over the past four years, and data-driven analysis results in improved

treatments for preparers in each successive year. The collaborative IRS-Treasury Tax Software

Field Experiment is a study underway in partnership with tax preparation software providers that

tests ways to improve self-preparers’ abilities to assess their own eligibility for the EITC by

embedding additional questions in the tax preparation software. This study is in its second year.

Two other studies, the Dependent Database (DDb) Soft Notice Pilot Effectiveness Study and the

Field Experiment to Reduce Misreporting of EITC Net Self-Employment Income, explore ways

to influence taxpayer behavior by sending mailings to relevant groups of taxpayers based on

information submitted as part of their prior year EITC claims. The former of these studies

focuses on taxpayers whose returns raised a compliance concern, though they were not selected

for audit. Taxpayers selected for this study receive a mailing that describes the specific

compliance concern on the return; their subsequent tax returns are evaluated for changes in

behavior. The latter study focuses on taxpayers who report self-employment income. For this

study, the mailing is more educational in nature, and explains certain rules for reporting selfemployment income when claiming the EITC, without referring to any specific concerns about

the return filed by the taxpayer. Taken together, these four studies cover three important

channels for helping taxpayers improve EITC compliance: through tax preparers, through tax

software, and through direct communication with the taxpayer. They reflect Treasury and IRS’

commitment to continually explore methods for improving EITC compliance, with particular

emphasis on research that leads to data driven conclusions, and informs future treatments.

II. EITC Return Preparer Study
3

Background:

Return preparers are instrumental partners in tax return preparation for many taxpayers,

including 54 percent of EITC claimants. The EITC Return Preparer Study is a multi-year 

research project that is an integral component of the IRS’ larger compliance strategy for EITC 

return preparers. This overall compliance strategy seeks to improve the accuracy of EITC 

returns by educating preparers about their due diligence requirements in a variety of ways. The 

strategy also incorporates an array of enforcement techniques for preparers who fail to meet their 

due diligence requirements and/or who file a large or disproportionate number of tax returns with 

potentially erroneous EITC claims.2 The EITC Return Preparer Study uses randomized 

controlled sample design to quantify the annual revenue protected by various enforcement 

techniques in order to identify effective treatments and operational improvements.3

The EITC Return Preparer Study has been in operation since Fiscal Year (FY) 2012, and each 

year the precise strategies are changed to reflect lessons learned in prior years as well as newly 

arising compliance concerns. The discussion that follows will focus on providing details for the 

current FY 2016 research in progress, but information about prior year sample sizes and major 

findings is also presented. 

Sample of Selected Preparers:

The sample selected for the FY 2016 treatments consists of 25,500 preparers, 22,000 of whom 

are in the treatment group and 3,500 of whom are in the control group. The preparers selected 

for the program all prepared at least 25 tax returns, and either had a large number of their 

 

2

Internal Revenue Code §6695 and related regulations set out the EITC Due Diligence requirements and the 

penalties for failure to comply with them.

3 Certain aspects of the EITC return preparer strategy are implemented without regard to measuring potential 

revenue effects – namely, efforts to provide education and outreach on paid preparer due diligence through 

numerous public venues. For example, the IRS has developed a Tax Preparer Toolkit and made it available on the 

EITC Central website at https://www.eitc.irs.gov/Tax-Preparer-Toolkit/main; here, preparers can access many 

resources including an interactive Due Diligence Training Module, a webinar in English and Spanish, Schedule C 

training material, and Hot Topics. IRS also presents due diligence seminars annually at the Nationwide Tax 

Forums.
4

prepared EITC returns trigger filters in IRS’ Dependent Database (DDb) related to qualifying 

children or Schedule C, or their prepared returns displayed a disproportionate share where the 

maximum EITC amount was claimed.4 The type or types of treatment applied to each preparer 

in the test group further depend on additional criteria or preparer characteristics; these are 

described along with each treatment in the section below.

The number of preparers selected each year has varied but the criteria for selection has remained 

similar over time. The table below shows the size of the sample in each of the five years since 

the inception of the study. With the exception of FY 2012, several test and control groups are 

present in each fiscal year; the combined numbers of preparers are reported in the table.

Total number 

of preparers

Preparers in 

test group(s)

Preparers in 

control 

group(s)

FY2012 2,000 1,500 500

FY2013 17,500 14,500 3,000 

FY2014 21,000 18,100 2,900

FY2015 31,100 20,900 10,200

FY2016 25,500 22,000 3,500

As noted above, the treatments in the EITC Return Preparer Study consist of a variety of 

enforcement techniques. The FY 2016 study includes the following treatments, which differ in 

their intensity and timing.

Pre-Filing Season Treatments:

 

4 The IRS’ Dependent Database refers to an IRS process that combines data from IRS and third-party sources such as the Social 

Security Administration and the Federal Case Registry. When returns are filed, they are compared against these data and scored 

for the probability of noncompliance. This process incorporates filters for characteristics that are strong indicators of 

noncompliance.
5

The following treatments are conducted during the pre-filing season (September to early 

January). The treatments are listed in order from most to least intense.

5

Due Diligence Visits (DDVs): These are visits to return preparers conducted by revenue agents 

to review preparers’ compliance with due diligence requirements under Internal Revenue Code 

(IRC) § 6695(g). Preparers are penalized $500 for each return where due diligence was not met.6 

Knock and Talk Visits (KTVs): KTVs are visits to return preparers conducted by revenue agents 

along with a Criminal Investigation (CI) agent. The purpose of the visit is to educate the 

preparer about EITC due diligence requirements. Although preparers are selected for visits 

based on the characteristics of the EITC returns they filed, penalties are not issued as a result of 

the visit. However, preparers that do not improve during the following filing season receive a 

DDV, which could result in penalties.

Post-Refund Client Audits: Preparers with high volumes of highly suspect EITC returns receive 

additional client audits in a post-refund environment. This effort provides information to 

preparers about whether their work is accurate and reinforces the need to prepare correct returns.

Letters: Selected preparers are sent letters indicating that they might have prepared incorrect 

returns and reminding them about preparer due diligence requirements. There are a number of 

different letters that may be sent, depending on the characteristics of the preparers and the returns

they file. In FY 2016, preparers with a number of expected errors in excess of a threshold are 

mailed one of three versions of Letter 5025, which specifies the type of potential error(s) present 

on the tax return (qualifying child errors, Schedule C errors, or both). Letters are initially sent by 

certified mail and if the preparer does not pick up the letter, another letter is sent as a first class 

letter. Preparers with a lower number of expected errors are mailed Letter 4833-A, which does 

 

5 The most intense treatment employed by the return preparer strategy is an EITC Due Diligence Injunction (EDDI), but because 

this treatment is not randomized it does not provide information from a research standpoint. EDDI investigations are initiated 

when a preparer was previously penalized yet continues to prepare questionable returns and continues to be noncompliant in 

meeting due diligence requirements. An injunction prohibits a return preparer from preparing tax returns for others. Fewer than 

10 cases are referred annually for EDDIs.

6 The penalty is increased for inflation.
6

not specify the type of potential error.

7

 Letters are mailed first class. Some pre-filing season 

letters are returned to the IRS as undeliverable because of an incorrect address. Although 

preparers are expected to update their address and phone number annually during renewal of 

their Preparer Tax Identification Numbers (PTIN), this does not always happen. When letters are 

returned undelivered, the associated preparer is called to deliver the same message that is 

contained in the letter. The phone calls are completed in early January, just prior to the start of 

filing season.

Filing Season Treatments:

Preparers are selected for filing season treatments as tax returns are processed and the treatments 

are conducted rapidly (late January to February). The goal of the quick identification and 

treatment is to reduce additional erroneous returns from being filed by correcting behavior right 

away. Treatments below are ordered by intensity. Preparers may receive multiple treatments 

during the same filing season if less intense treatments, which are usually attempted first, are not 

successful.

Real Time DDVs: Real Time DDVs are selected daily from returns filed early in the filing 

season. Within two days of their selection for audit, the preparer is notified face to face, and the 

audit begins within 10 working days. The goal is to visit the preparer as early in the filing season 

as possible in order to reduce the volume of erroneous returns prepared by this preparer through 

better understanding or better adherence to the rules.

Phone Calls: These calls inform the preparer that they are filing potentially erroneous EITC 

returns. 

Letters: Letter 4858 is similar to Letter 5025 and is mailed first class which requires less 

preparation for mailing than a certified mail letter and results in quicker delivery.8

 

7 Current versions of all letters may be viewed at the following website: https://www.eitc.irs.gov/Tax-PreparerToolkit/compliance/reachingout. For FY 2017, L4833-A will not be used, and all letters will refer to specific suspected errors 

made by the preparer.

8 The letter may be viewed at https://www.eitc.irs.gov/Tax-Preparer-Toolkit/compliance/reachingout.
7

Outcome measures:

The EITC Return Preparer Study generates estimates of annual revenue protected to demonstrate 

the effectiveness of the treatments conducted each year. The estimates are derived from 

analyzing the subsequent behavior of the treated preparers, as well as the characteristics of their 

clients’ tax returns, and comparing this with the preparers in the control group and their clients’ 

tax returns. More specifically, revenue protected is the difference between the estimated amount 

of erroneous credit claims on returns prepared by paid preparers in the treatment group and on 

returns prepared by paid preparers in the control group. The amount of erroneous credit claims 

is estimated using tax return characteristics, including DDb scores and other criteria that IRS has 

found to be associated with errors in claiming tax credits.

The FY 2016 study is also evaluating the following questions in an effort to make further

operational improvements.

Preparers Filing Large Number of Tax Returns: The study will evaluate the impact of mailing a 

pre-filing season letter to preparers filing more than 1,500 total returns under a single PTIN, 

compared to the impact for smaller preparers. It is likely that preparers with extreme volumes 

are offices where many preparers are preparing returns and one preparer is signing the returns. 

Mailing letters to preparers with these apparent volumes may not yield results, as they are not 

actually performing all of the preparation work. Other more costly treatments could be 

necessary to address noncompliance in this group. 

DDVs: Penalties Needed to Influence Preparer Behavior: The study will analyze the number of 

penalties from DDVs that are required to change a preparer’s behavior. For the FY 2016 effort, 

preparers receiving a pre-filing season DDV were randomly split into two groups. Revenue 

agents will review up to 75 returns for half of the preparers and up to 150 returns for the other 
8

half of preparers.9 If preparer improvement is the same for both groups and if comparison of 

return on investment (ROI) supports it, future pre-filing season DDVs for individual preparers 

will be limited to a maximum of 75 EITC returns. The reduction in returns reviewed would 

shorten the amount of time needed to complete a DDV and allow scarce resources to be used 

elsewhere.

Network DDVs: The FY 2016 study will evaluate the impact on preparer networks when one 

preparer, who is part of a larger network of preparers, receives a DDV.

10

 This will address the 

question of whether it might be operationally feasible to conduct one visit for multiple preparers 

in the same network, instead of conducting multiple visits. Prior to FY 2016, the compliance 

program did not consider network associations when assigning treatments. Going forward, the 

program will attempt to learn how network dynamics influence preparers and how best to treat 

networks. Depending on the results, this test may allow the IRS to allocate its scarce compliance 

resources in a more effective manner.

Correspondence DDVs: Currently, due diligence visits are conducted in person. In 2016, up to 

ten correspondence “visits” are being conducted in a qualitative test to determine if the approach 

is workable and could be expanded in future years.11 Correspondence DDVs would allow the 

IRS to perform DDVs in areas where no revenue agents are available, or where there are more 

preparers than revenue agents can visit. Also, correspondence DDVs would likely cost less than 

an in-person visit. However, current resource constraints may prevent the IRS from 

implementing this treatment as it is time-intensive, and although no travel is involved, examiners 

are still needed to conduct the audits.

 

9 Returns are reviewed in groups of 25. If there is no evidence of noncompliance with the due diligence 

requirements in the first group of returns, the examiner will end the audit. If noncompliance is found, another 25 

returns are reviewed.

10 A network is a set of preparers that uses a common identifier on the returns they prepare that indicates they work 

closely with each other in the same office or same preparer community. For example, the common identifier might 

be an Electronic Filing Identification Number (EFIN), Employer Identification Number (EIN), or preparer phone 

number. 

11 This treatment will provide qualitative information rather than data-driven analysis, but it will be useful to 

understand the logistical challenges that arise from attempting to complete DDVs by correspondence rather than in 

person. DDVs are both effective and costly; reducing the time and cost it takes to do the DDV would add value to 

the EITC return preparer program.
9

Filing Season Treatment Expansion to Preparers Not Treated in Pre-Filing Season: This aspect 

of the FY 2016 study will measure the impact of treating preparers during the filing season that 

were not selected for treatment during the pre-filing season. Prior to the FY 2016 compliance 

effort, filing season treatments were limited to preparers where a pre-filing season treatment was 

attempted. Preparers not identified as part of the pre-filing season effort, but who filed

potentially erroneous returns during the current filing season, were not identified until after filing 

season was completed and not treated until the following fall. In FY 2016, many of these 

preparers were identified as returns were being filed and were sent Letter 4858. Treating 

preparers sooner should yield additional savings.

Knock & Talk Visits (KTVs) and Presence of CI Agents: Currently all KTVs are conducted by a 

revenue agent who is accompanied by a Criminal Investigation (CI) agent. The study will 

examine whether KTVs conducted without the presence of a CI agent are as effective as a KTV 

with a CI agent present. If they are as effective, then CI resources could be used elsewhere. The 

KTV program also could be expanded to locations where CI agents are not available.

Timing of Analysis:

Results from the 2016 filing season will be available in the summer of 2016. These will be used

to modify treatments for the 2017 and later filing seasons. 

Conclusion:

The EITC Return Preparer Study continues to demonstrate the effectiveness of IRS’ return 

preparer compliance strategy. Below is a brief summary of major findings from prior years of 

the study, including annual estimates of the revenue protected by the treatments.

FY 2012

 Many new treatments were piloted for the first time and deemed effective. Following are

three examples of treatments employed for the first time:

o Calls to preparers were made during the filing season.
10

o Preparer-focused, post-refund client audits were conducted prior to filing season. 

o Real Time (RT) Due Diligence Visits (DDVs) were completed during the filing

season.

 Pre-filing season and real-time monitoring and intervention resulted in reducing the flow

of improper filing season EITC claims. Estimated revenue protected from the FY 2012

program was $230M: $180M for EITC and $50M for Child Tax Credit (CTC) &

Additional Child Tax Credit (ACTC). The total cost of the FY 2012 program was $2.7M

FY 2013

 All treatment types (letters, calls, and visits) were determined to be effective in reducing

erroneous EITC returns.

 In-person visits and client audits were determined to have larger impacts on preparer

behavior; however, letters had the highest ROI due to their relative low cost when

compared to in-person visits and audits. 

 Pre-filing season treatments are more effective than filing season treatments due to the

timing of the treatment. As a result, pre-filing season treatments have a higher ROI.

 The general reduction of erroneous EITC returns for preparers that respond to treatments

persists into the next filing season.

 No evidence was found that treatments caused taxpayer migration to other preparers.

 The acceleration of preparer risk scoring from a weekly basis to a daily basis allowed for

faster interdiction of preparers and improved the value of the program. It also

significantly improved the ability to do data-driven analysis that impacts compliance.

 Estimated revenue protected by the FY 2013 program was $557M: $453M for EITC and

$104M for CTC/ACTC. The total cost of the FY 2013 program was $12.6M.

FY 2014 

 Approximately 200 preparers were delivered a pre-filing season letter electronically, via a

secure IRS system, which was determined to be feasible and effective.

12

 The cost of

 

12 Electronic delivery of compliance letters has not been attempted since FY 2014 as the IRS does not have the 

infrastructure in place to administer this approach for more than a few hundred preparers. The current infrastructure 

used by IRS to communicate with preparers may not be used for compliance purposes due to its funding source. 
11

providing letters electronically will be minimal once the needed infrastructure is

completed.

 Pre-filing season outbound calls to preparers that did not receive the pre-filing season

certified letter were piloted for the first time and deemed to be successful.

 Estimated revenue protected by the FY 2014 program was $428M: $351M for EITC and

$77M for CTC/ACTC. The total cost of the FY 2014 program was $12.6M.

FY 2015 

 An iterative pre-filing season treatment delivery process was piloted to increase preparer

contact rates prior to the beginning of filing season (first a certified letter, then a first

class letter and finally a phone call). This approach increased the contact rate from

approximately 70% before FY 2015 to over 90% in FY 2015 (for preparers in the pilot).

 Preparers that received 15 additional post-refund client-audits improved, on average, the

same as preparers that received 25 additional client audits. Increasing the number of

preparer focused, post-refund, client audits past a certain threshold did not appear to

produce better results in this instance. 

 Pre-refund client audits were limited in success due to work plan constraints and were

removed from consideration as a future treatment.

 Letter 5025 series was determined to be more effective, on average, than Letter 4833. As

a result, Letter 4833 was not used in FY 2016. Both letters inform preparers of the

possibility of errors on the EITC returns they have filed, and remind them of the EITC

due diligence requirements and the consequences they face for not following those

requirements. The letters also inform them of the consequences their clients may face for

filing erroneous returns. However, the Letter 5025 series are issue-specific and therefore

provide the preparers with more information about the type of errors they are potentially

making. 

 To expand coverage to lower-volume preparers who had not been previously treated,

Letter 4833-A, a letter similar to Letter 4833, was piloted and determined to be effective. 

 

The IRS is working with its IT division to develop a system that could be used outside of a pilot environment. Long 

term postage savings would be substantial if electronic delivery was ever available in a production environment.
12

However, because issue-specific letters are likely to be more effective, this letter will not

be used after FY 2016.

 Estimated revenue protected by the FY 2015 program was $465M: $386M for EITC and

$79M for CTC/ACTC. The total cost of the FY 2015 program was $13.4M.

The ongoing, multi-year EITC Return Preparer Study contributes crucially to the IRS’

compliance strategy for paid return preparers. Its overall goal is to reduce noncompliance

associated with EITC and other tax credits. The study has advanced EITC enforcement with its

ability to use near real-time information and the randomized controlled study design produces

results that can be used to refine and improve treatments. This has yielded evidence of

treatments that improve compliance by paid tax return preparers with respect to claims for EITC

and the CTC/ACTC. 

III. IRS-Treasury Tax Software Field Experiment

Background: 

Taxpayers who self-prepare their tax returns must determine their own eligibility for the EITC. 

This is often facilitated by tax preparation software, used by the vast majority of self-preparers.

13

 

Tax preparation software typically helps the taxpayer establish eligibility for the EITC (as well 

as other tax return line items) by requiring the taxpayer to respond to a series of factual questions

about their income and family circumstances. 

This project is a randomized controlled test that explores whether expanding the set of questions 

related to EITC eligibility can reduce noncompliance with respect to the EITC, without reducing 

participation among compliant taxpayers. The additional questions may have several benefits: 

first, they clarify aspects of the eligibility rules that otherwise may have been confusing to 

taxpayers; second, they make the eligibility requirements more salient and force taxpayers to 

 

13 Less than 2 percent of all EITC claimants file on paper without the use of software.
13

actively affirm certain information is truthful, which the behavioral economics literature has 

suggested might improve compliance; and finally, to the extent these questions are ultimately 

incorporated as a form change, the responses to the questions themselves may provide IRS with 

additional information that could be used to improve IRS enforcement activities in the future. 

The test currently underway in 2016 focuses on questions that relate to the qualifying child 

residency requirement, primarily because the failure to meet this test constitutes the largest 

(dollar value-wise) EITC error.14,15 

Sample: 

IRS and Treasury worked with several online tax preparation companies in the Do-It-Yourself 

market in the 2016 filing season to incorporate several additional EITC-related questions into 

their software for a randomly selected set of taxpayers that numbers in the hundreds of 

thousands. A control group was also selected from taxpayers using the same software products, 

but the taxpayers in the control group were not exposed to the “treatment” of additional EITC 

eligibility questions. 

Treatment:

Taxpayers in the treatment group used a version of the tax preparation software that includes 

additional questions related to the residency test: taxpayers were asked to confirm they lived with 

each child claimed for the EITC for more than half the year and to provide the address at which 

they lived with these children the longest. The software also provided clear language explaining 

that the IRS might ask for documentation to substantiate residency, and forced taxpayers to 

actively certify that the information they provided was correct.

 

14 In order for a child to be eligible to be claimed for EITC, the child must reside with the taxpayer in the United 

States for more than half the year.

15 A similar experiment was run with one software provider in the 2015 filing season. There was generally almost 

no difference in the returns filed by taxpayers in the treatment and control groups, suggesting that the questions 

tested would have at most modest effects. In the current experiment, we have refined the questions, expanded the 

number of participating software providers, and substantially increased the sample size and resulting statistical 

power of the analysis.
14

Outcome Measures: 

Key outcome measures for this analysis include the dollar amount, if any, of EITC claimed with 

qualifying children and the scores generated by IRS DDb filtering algorithms that predict how 

compliant the return is with respect to the EITC. Whether the taxpayer started the process but 

failed to finish the return will also be tracked. Comparison of these measures between the 

treatment and control groups will indicate whether the additional EITC-related questions yield 

statistically significant differences in terms of the amount of EITC claimed, the likelihood of 

noncompliance on the return, and rates of tax return completion. If the questions prove to be a 

success, we would expect to find that the treatment group claimed less EITC, but the subset that 

did claim the EITC would look more compliant than the subset in the control group who claimed 

the EITC, such that only non-compliant taxpayers were dissuaded from claiming the EITC. 

Timing of Analysis:

Results are expected to be available in the summer of 2016. 

IV. DDb Soft Notice Pilot Effectiveness Study

Background: 

As noted above, the IRS’ Dependent Database refers to an IRS process that combines data from 

IRS and third-party sources such as the Social Security Administration and the Federal Case 

Registry. When returns are filed, they are compared against these data and scored for the 

probability of noncompliance. This process incorporates filters for characteristics that are strong 

indicators of noncompliance. The DDb has proven to be a highly effective tool used by IRS to 

score and select EITC cases for audit. However, some segments of the population identified by 

DDb as making potentially erroneous EITC claims are unable to be examined by IRS due to 

limited audit resources.
15

One treatment option that has been employed by the IRS to reach taxpayer populations that fall 

outside existing audit parameters is the “soft notice.” A soft notice is a letter mailed to specific 

taxpayers, identifying a potential compliance issue and providing instructions for self-correction. 

Specifically, taxpayers are instructed to file an amended return if they determine an error was 

made on their filed return and they are reminded how to be compliant in subsequent years. The 

soft notice differs from a standard notice in that there is no subsequent IRS follow-up to the 

recipients of the soft notice, such as a correspondence audit or additional notice communication. 

The soft notice attempts to change behavior through the taxpayer’s own self-correction and 

through voluntary compliance in future tax years.

The DDb Soft Notice Pilot Effectiveness Study is being undertaken by the IRS in order to 

address whether a soft notice treatment can effectively improve the compliance behavior of 

certain self-preparers whose returns have indicators of noncompliance but, due to resource 

constraints, would not be among the returns selected for other enforcement programs.

Sample: 

The population of interest for this study consists of tax year (TY) 2014 taxpayers who selfprepared their return and were identified by the DDb process as making a potentially erroneous 

EITC claim, but their return was not selected for audit. The population is further defined by the 

amount of EITC claimed and by not having been selected for audit or a soft notice in recent 

years. During calendar year 2015, there were approximately 1.9 million returns that met the 

criteria for this population. The population is then further limited to two groups: 1) taxpayers 

who did not receive the EITC in the previous three years and 2) taxpayers who received the 

EITC in the past and for whom the DDb indicated that they made a similar type of error 

(qualifying child or Schedule C income) for the previous two tax years. A sample of 25,600 

taxpayers was selected from these two groups, along with a control group of the same size. 
16

Treatment: 

Taxpayers in the treatment group were sent soft notice letters in December 2015 based on their 

TY 2014 filing. The treatment sought to encourage taxpayers to file amended TY 2014 returns 

and to change the behavior observable on TY 2015 returns. The content of the letter was tailored 

to the taxpayer based on what DDb identified as the potential compliance problem. For example, 

Letter 5621 asks the taxpayer to review their prior year return to determine if each of the children 

claimed met all of the qualifying child rules for the credit. Letter 5621-A asks the taxpayer to 

determine if all the income and expenses reported from self-employment on Schedule C or 

Schedule C-EZ were complete and correct.

Outcome Measures: 

The study will attempt to measure the effectiveness of these soft notices in encouraging selfcorrection on amended TY 2014 returns and voluntarily compliant EITC behavior on the soft 

notice recipient’s TY 2015 tax returns. The analysis will consider the extent to which taxpayers 

in the test and control groups continue to be identified by DDb as filing potentially erroneous 

EITC claims, as well as other aspects of filing and EITC-claiming behavior. Outcomes will be 

evaluated separately by whether the taxpayer was a first time EITC claimant or a repeat EITC 

claimant. The study will also quantify the amount of potential revenue that is protected for TY 

2014 and TY 2015 as a result of the soft notice mailings. 

Timing of Analysis:

The analysis is expected to be completed by October 2016.
17

V. Field Experiment to Reduce Misreporting of EITC Net Self-Employment Income

Background: 

Prior research indicates that there is more misreporting of self-employment income compared to 

misreporting of income from sources for which there is more comprehensive third-party 

information reporting (and withholding) (Slemrod, 2007; Internal Revenue Service, 2016). 

Furthermore, prior research from IRS audits and analyses of administrative income tax records 

has indicated that some taxpayers with self-employment income misreport their net selfemployment income in order to maximize Earned Income Tax Credit (EITC) benefits while 

minimizing the self-employment tax that must be paid (Saez, 2010; Chetty, Friedman, Ganong, 

Leibel, Plumley and Saez, 2012; and Chetty, Friedman and Saez, 2013).16 Behavioral economic 

research in tax applications also indicates that reminders of obligations to truthfully report 

income can prevent errors from occurring (Slemrod, Blumenthal, and Christian, 2001; Kleven, 

Knudsen, Kreiner, Pedersen and Saez, 2011). Motivated by this prior research, the IRS 

developed a study using a randomized controlled design to test whether a soft-touch postcard 

from the IRS could reduce income misreporting and improve EITC compliance for this 

population. 

Sample:

The population for the pilot project consists of taxpayers who filed tax returns for Tax Year 

2014, reported self-employment income, and reported total earned income within $1,000 of the 

lowest income level for which the maximum EITC is allowed. The sample of 200,000 taxpayers 

subjected to the treatment includes both self-prepared and third-party prepared returns. A 

similarly defined control group of over 565,000 taxpayers was selected for comparison. 

 

16 The EITC increases with earned income (including wages and self-employment) up to a threshold, then remains 

constant as earned income continues to increase, and then is phased out as income continues to rise above a second 

threshold. Self-employment income in excess of $400 is taxed at a flat 15.3 percent rate. Thus, by reporting selfemployment income exactly equal to the first threshold, a taxpayer can receive the maximum amount of EITC for 

the least amount of self-employment tax.
18

Treatment: 

The treatment in this study is the mailing of a postcard that informs readers of rules for reporting 

self-employment income when claiming the EITC. In particular, the postcard mentions that all 

business income must be reported and only allowable business expenses can be deducted. The 

postcard also reminds taxpayers that it is not permissible to maximize EITC benefits by claiming 

less than the full amount of eligible business expenses. The text also informs readers of penalties 

for both taxpayers and tax preparers for intentional errors in claiming EITC benefits. Thus, the 

content of the postcard is educational and generic; it does not involve any taxpayer identifying 

information. In this sense, the soft-touch postcard differs from most IRS soft notices, which 

explicitly highlight a compliance concern that is specific to the taxpayer. These experimental 

mailings were sent to taxpayers at the start of the 2016 filling season (January 20, 2016) and 

again on March 1, 2016, before the end of the filing season. This treatment is similar to soft 

notice treatment in that no further enforcement is planned as part of the study, although taxpayers 

who were sent these postcards may be selected for audit or document matching by other standard 

enforcement processes.

Outcome Measures: 

The analysis will examine the impacts of the experimental mailings on treated taxpayers’ filing 

and income reporting behaviors, as well as differential impacts between taxpayers using paid tax 

preparers and those using self-prepared returns. The analysis will also examine network effects 

through geographic neighbors and taxpayers using the same tax preparers. 

Timing of Analysis: 

Preliminary results for the pilot project are expected to be available by August 2016 and final 

results by the end of December 2016.
19

VI. Conclusion 

This report fulfills the request by the House Committee on Appropriations to describe IRS and 

Treasury progress toward the goal of improving EITC compliance. The studies described in this 

report have been carefully designed to evaluate how specific changes to aspects of IRS 

operations can improve taxpayer compliance with respect to claiming the EITC. They reflect 

just a few of the efforts that Treasury and IRS undertake as part of the broad set of 

responsibilities and activities necessary for administering the EITC and other refundable credits. 

While it is harder to evaluate many of these other efforts, we expect they also have direct and 

indirect effects on EITC compliance. 

For example, each year the IRS conducts a multi-lingual outreach campaign that seeks to reach 

EITC underserved populations and newly eligible taxpayers. The campaign includes messaging 

about participation and compliance that helps taxpayers correctly claim the credit. The IRS 

leverages external partnerships to help provide taxpayers with information on qualifications, how 

to claim the credit, and how to get free help on filing. An example is the coordinated effort of 

EITC Awareness Day. Partners hold over 200 local media events. Both partners and the IRS 

use traditional and social media communication channels to lead taxpayers back to irs.gov where 

the IRS provides important information about the EITC including the EITC Assistant, a tool that 

allows taxpayers to determine if they qualify for EITC. 

The IRS continues to partner with members of key tax software organizations. The goals of this 

partnership are to identify software improvements that can help individuals file more accurate 

EITC returns and preparers in meeting their EITC due diligence requirements.

Another activity designed to foster voluntary compliance is the use of soft notices beyond those 

described in the DDb Soft Notice Pilot Effectiveness Study in this report. As stated earlier, soft 

notices are sent just prior to each filing season as a reminder to taxpayers to correct possible 

errors made on their prior year returns related to the claiming of EITC and dependents. These 

soft notices promote self-correction and voluntary compliance in subsequent filing periods and 

are a low-cost alternative to conducting audits. About 90,000 soft notices were sent during fiscal 
20

year (FY) 2015 to alert taxpayers that a qualifying child for the EITC claimed on their returns 

had also been claimed by another person.

IRS also prevents or recovers erroneous EITC claims through examinations (including 

examinations selected due to questionable EITC claims), the Automated Underreporter (AUR) 

information return matching program, and correction of errors using math error authority (MEA). 

The direct revenue effect of these enforcement programs was $4.6 billion for FY 2015. In 

addition, nearly $1.6 billion in EITC payments were prevented from being processed or paid as 

part of IRS’s identity theft and fraud detection filters. It is likely that there are also indirect 

effects on compliance not captured in these amounts. The first three of these enforcement 

programs (examination, AUR, and MEA) each serve to educate taxpayers about how to correctly 

claim the credit in the future. Moreover, some taxpayers may be deterred from making 

erroneous EITC claims by the expectation or risk of being detected by IRS and subject to these 

types of enforcement.

As encouraged by the Committee in House Report 114-194, the IRS held an EITC Summit in 

June 2016 to seek fresh perspectives and ideas on EITC from companies, organizations, 

associations, and agencies with an interest in the credit. The Committee, Treasury and IRS 

recognized the powerful impact that partnerships with the tax community can have as a result of 

last year's Security Summit. That gathering of tax industry professionals and state agencies 

resulted in new ideas and cooperative efforts to fight identity theft and refund fraud. During the 

EITC Summit, the IRS captured ideas during discussions on EITC compliance, participation and 

administration. The IRS will obtain additional ideas through a specially created mailbox and 

from preparers during its Nationwide Tax Forums this summer. Before the end of the year, the 

IRS plans to summarize the suggestions received.

The Administration's Fiscal Year 2017 Budget includes a number of proposed legislative 

changes aimed at improving EITC compliance. Most importantly, the Budget requests adequate 

funding to enable the IRS to provide service that will help taxpayers correctly meet their filing 

obligations and conduct enforcement activities to prevent and recover erroneous EITC claims. In 

addition, the Budget proposes to explicitly provide authority to regulate tax return preparers, 
21

which will help reduce erroneous EITC claims and other tax return errors. The Budget would 

also provide for more flexible correctable error authority to allow the IRS to correct certain 

taxpayer errors, including erroneous EITC claims, before refunds are paid. The Budget also calls 

for increasing civil and criminal penalties for tax-related identity theft, including theft related to 

the EITC. Finally, the Budget provides for simplifying the rules for claiming the EITC for 

taxpayers who reside with a child that they do not claim as a dependent, which would reduce 

taxpayer burden as well as improve EITC compliance.

These activities are a non-exhaustive list of the broad set of ongoing efforts led by Treasury and 

IRS to improve EITC compliance. The four studies described in detail in the body of this report 

should directly improve EITC compliance and will provide data-driven insights about how to 

make changes within the larger set of IRS operations to improve EITC compliance in the future. 
22

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