Congress created the EIC to offset the impact of Social Security taxes and to encourage low-income workers to seek employment rather than welfare. Taxpayers earning income below a certain level may claim the credit. The amount of the EIC increases with increasing income, plateaus at a certain level of earnings, and then decreases until it reaches zero when earned income exceeds the maximum earning level allowed for the credit. Taxpayers with children can claim the EIC if they (1) have at least one EIC qualifying child, (2) meet income tests, (3) file with any filing status except “married filing separately,” and (4) were not a nonresident alien for any part of the year. To claim the EIC without a qualifying child, taxpayers must meet requirements 2, 3, and 4; be at least 25 years old but less than 65 at the end of the year; have lived in the United States for more than half the year; and not be claimed as a dependent on another return. Although the EIC has been credited with reducing welfare participation and lifting millions of low-income earners out of poverty, it has also been susceptible to error and abuse. In a February 28, 2002, report on its study of tax year 1999 EIC claims, IRS said that of the estimated $31.3 billion in EIC claims for that tax year, between $9.7 billion and $11.1 billion (30.9 to 35.5 percent) was overclaimed. Of the overclaims, the largest amount (about $2.3 billion) was caused by taxpayers claiming children who did not meet the qualifying child criteria. Most often, according to IRS, these errors were due to taxpayers claiming children who did not meet the residency requirements. EIC eligibility, particularly related to qualifying children, is difficult for IRS to verify through its traditional enforcement procedures, such as matching return data to third-party information reports. Correctly determining whether a child claimed by the taxpayer for EIC purposes meets the qualifying tests requires IRS to have detailed knowledge of the taxpayer’s household composition and living arrangements. However, IRS does not have the necessary resources to visit taxpayers’ homes and conduct the kind of interviews that would help it obtain that kind of detailed knowledge, and there is no certainty that the cost of such an effort would be worth the results. Thus, IRS must rely on its ability to clearly communicate to taxpayers what information is needed to certify them for the EIC and on taxpayers’ ability to produce documentation to substantiate their qualification for the EIC. IRS began implementing the recertification process in 1998, when, through audits, it disallowed in whole or in part, the EIC claims on about 312,000 tax year 1997 returns and placed recertification indicators on its computerized accounts for those taxpayers. The indicators, which, in effect, tell IRS’s computers not to allow payment of any EIC claim to the taxpayers, are to remain until the taxpayers successfully recertify. To begin the recertification process, taxpayers are to attach a Form 8862 (Information To Claim Earned Income Credit After Disallowance) to the next tax return they file that includes an EIC claim. If a taxpayer claims the EIC without attaching Form 8862, IRS is authorized to disallow the credit, process the return without considering the EIC claim, and inform the taxpayer why it denied the claim. Upon receipt of Form 8862, IRS procedures call for freezing the entire refund claimed on the return (not just the portion related to the EIC) and determining whether the return should be selected for audit. IRS examiners are to select the return for audit unless the taxpayer is no longer claiming the EIC child(ren) previously disallowed and is not claiming a new EIC child. Once the return has been selected for audit, the recertification process, with some minor differences, essentially follows IRS’s normal procedures for correspondence audits. These procedures generally involve examiners (1) asking taxpayers to provide support, (2) reviewing any support provided, and (3) advising taxpayers of the audit results. Since the EIC recertification program’s implementation, IRS has, among other things, expanded the information on recertification available to taxpayers, revised some of the correspondence it sends to taxpayers, and improved examiner training. Many of these changes were in response to recommendations resulting from prior reviews by us and the Treasury Inspector General for Tax Administration (TIGTA). (See app. I for a detailed discussion of the changes in the EIC Recertification Program since 1999, and see app. II for information on prior recommendations by us and TIGTA and IRS’s corrective actions.) There have also been some significant program developments since 1998. Most relevant to this report, (1) the definitions of qualifying child and eligible foster child for EIC purposes have changed and (2) starting with tax returns filed in 2001, IRS, as authorized by TRA97, began imposing a 2-year ban on credits to taxpayers who it determines negligently claimed the EIC through reckless or intentional disregard of the regulations. These developments are discussed in more detail later in the report. To determine whether IRS’s communications with taxpayers about recertification meet the needs of IRS and taxpayers, we analyzed IRS’s forms and correspondence related to recertification, interviewed a representative sample of IRS examiners (as described in the next paragraph) about certain forms, and reviewed the results of related work done by TIGTA. To determine whether information taxpayers are told to provide to prove their entitlement to the EIC is reasonably easy to obtain and consistent with what examiners accept, we did the following: We surveyed, via telephone, a random sample of 90 tax examiners from a list of 323 tax examiners, which, according to IRS, represented the population of examiners in its 10 processing centers who were working on recertification cases as of April 2001. The purpose of our survey was to determine how examiners evaluated evidential support from taxpayers and to help identify aspects of the EIC eligibility criteria that taxpayers had the most difficulty documenting. More details on our survey methods, as well as the confidence intervals of the estimates for all examiners that we made from our sample are provided in appendix III. We talked with representatives from 10 LITCs about any problems taxpayers have in understanding IRS correspondence related to recertification and in complying with IRS’s documentation requirements. We obtained a list from IRS’s Taxpayer Advocate’s Office of the 102 LITCs that were operating in 2001. From that list, we randomly selected 20 LITCs. After eliminating those LITCs that either chose not to participate or said that they did no EIC recertification work, we talked with representatives of 10 LITCs. Given our relatively small sample size and the relatively small proportion of the sample from which we were able to get useful information, we have no assurance that the results from this sample can be reliably generalized to all 102 LITCs. However, our sample does provide the views of about one-tenth of the listed 102 LITCs. To determine whether IRS’s treatment of similarly situated taxpayers is consistent, we analyzed IRS guidance and criteria related to the EIC and recertification; developed five scenarios involving various kinds of documentation that taxpayers might provide IRS in an attempt to prove their eligibility for the EIC; and held structured interviews with 21 examiners to determine, among other things, how they interpreted IRS’s recertification guidance and how they assessed the documentation in our five scenarios. We obtained the documents for our scenarios from EIC recertification cases that we had reviewed, and we deleted taxpayer- identifiable information, such as Social Security numbers, from the documents before giving them to the examiners. We subjectively selected the 21 examiners, on the basis of their availability to meet with us, from the 187 EIC recertification examiners at 4 of IRS’s 10 processing centers (Atlanta, Brookhaven, Kansas City, and Memphis). As such, the results of this analysis cannot be generalized beyond the 21 examiners. We also reviewed IRS’s plans for developing and implementing a decision support tool to be used by examiners working EIC cases, including those involving recertification. We performed our work between February 2000 and January 2002 in accordance with generally accepted government auditing standards. Although IRS has revised some of the correspondence it sends taxpayers as part of the recertification process, two standard forms that are an integral part of the process can lead to unnecessary taxpayer burden because they (1) are of questionable value to the recertification process and/or (2) provide the taxpayer with inadequate or confusing information. The forms are Form 8862 and Form 886-R (Supporting Documents). Copies of the two forms are in appendix IV. Taxpayer confusion can have even more critical implications now that IRS has begun imposing a 2-year EIC ban on credits to taxpayers who it determines have negligently claimed the EIC through reckless or intentional disregard of the regulations. Accurately determining whether a taxpayer’s erroneous claim is due to a simple mistake versus reckless or intentional disregard of the regulations can be complicated when the requirements for claiming the EIC are confusing. Taxpayers begin the recertification process by filing Form 8862 with their tax return. In a 1999 report, we raised concerns about the usefulness of Form 8862 and its potential for misleading or confusing taxpayers. We recommended that IRS stop using the form if it is not needed for recertification purposes. IRS did not eliminate the form because it said it relies on the form to “identify the type of action to be taken for taxpayers required to recertify.” In that regard, IRS does use Form 8862 to decide whether or not to initiate the recertification process.