Using Supplemental Nutrition Assistance Program Data in Earned Income Tax Credit Administration

Elaine Maag, Michael Pergamit, Devlin Hanson, Caroline Ratcliffe, Sara Edelstein, and Sarah Minton September 2015 The earned income tax credit (EITC) is the most effective antipoverty program targeted to working-age households. But the program has been criticized for its high error rate, and these errors often stem from complicated, hard-to-enforce rules about who counts as a “qualifying child.” Workers with qualifying children receive a much larger benefit from the earned income tax credit than workers without qualifying children. To be claimed by a tax filer, the child must meet requirements for age, residency, and relationship with the tax filer. A recent Internal Revenue Service (IRS) compliance study found that the largest share of overclaimed EITC benefits stems from errors in determining whether a child met those requirements, particularly that a child must live with the taxpayer in the United States for at least six months of the year. Many people who are eligible for the EITC also receive Supplemental Nutrition Assistance Plan (SNAP; formerly food stamps) benefits. SNAP administrative data often include information on all members of the household. In this brief, we use Florida as a case study to explore whether SNAP data could be used to improve EITC enforcement and whether SNAP data can provide information that would help the IRS identify EITC-eligible workers who have not claimed the tax credit.1 We found that, except in limited circumstances, the information that applicants report to SNAP is not detailed enough to conclusively verify eligibility, but the data could help the IRS spot potential overclaims worthy of further examination as part of the audit process. SNAP data could also help identify workers who appear to have a qualifying child but claimed the much smaller “childless” EITC and uncover some workers who are eligible for the EITC but did not claim the tax credit. The IRS would face several challenges in developing a data-matching program with states, including getting states to collaborate, navigating the varying organizational structures of states’ social service and revenue departments, and handling issues related to data confidentiality and sharing data with the IRS. State data are likely to be cumbersome to work with and may not be available in a timely manner. Using Supplemental Nutrition Assistance Program Data in Earned Income Tax Credit Administration A Case Study of Florida SNAP Data Linked to IRS Tax Return Data 2 U S I N G S N A P D A T A I N E I T C A D M I N I S T R A T I O N Congress could improve credit administration by simplifying the EITC’s rules or by creating a “worker credit” that is available to all low-income workers regardless of whether they have children. Examples of this type of reform have been developed in Maag (2015) and proposed by Bipartisan Policy Center (2010). However, such a proposal would represent a major change that would either substantially increase the cost of the program or require cuts in benefits for many current beneficiaries. Introduction The EITC is among the largest cash or near-cash transfer programs targeted at low-income families. In 2012, the credit provided $64.1 billion to 27.8 million tax units (IRS 2012). The lion’s share of EITC payments went to families with children (97 percent).2 The IRS faces two main challenges to the EITC’s efficient administration. First, some individuals and families that are ineligible for the EITC claim the credit erroneously. Second and conversely, some individuals and families that are eligible for the EITC fail to claim the credit. The IRS works to correct both of these errors. Using data from the IRS’s National Research Program from tax year 2009, the IRS estimates that for fiscal year 2013, between 22.1 percent and 25.9 percent of total EITC program payments were overclaims (US Department of the Treasury 2013). On tax returns claiming an EITC between 2006 and 2008, determining whether a child met the complex “qualifying child” rules was the largest source of error (IRS 2014). Determining whether a child passed the residency test was a source of error on 75 percent of returns with qualifying child errors. The Office of Management and Budget has identified the EITC as having the highest improper payment rate and second-highest improper payment amount among 13 “high-error” programs.3 Unlike some information necessary for calculating taxes (e.g., wages, interest payments, and mortgage interest), the IRS does not receive information from a third party verifying where and with whom a child resides, yet residency is an important element in determining whether a child meets the EITC test of being a qualifying child. To reduce errors associated with the qualifying child test, Congress could simplify the EITC eligibility criteria to remove the residency test or the IRS could develop third-party data that could verify EITC claims. We explore the latter option by using Florida SNAP data matched