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A tax loophole for common folks

Some 25 percent of eligible filers don't use the Earned Income Tax Credit. The IRS is trying to reduce errors in the program.

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Not enough people are as honest about their taxes as Larry Featherly, an unemployed man who badly needs cash so he can get his car fixed, find a job, and move out of his parents' house.

Mr. Featherly volunteers that his two teenage daughters are in foster care. This admission means that Featherly will not get as much back from the government's main antipoverty program for working people, called the Earned Income Tax Credit (EITC). Instead of being eligible for up to $4,000 from the government, he will get $836.

"My goal is to get my kids back," he says while watching two students from nearby Colgate University prepare his return.

The accuracy of returns such as Featherly's - especially on the issue of children living with their families - is now at the heart of a debate over the $36 billion program for 21 million Americans. Despite efforts to fix the problem, the Internal Revenue Service believes there are still errors, either unintentional or fraudulent, in this program.

It is now experimenting with a pilot program to try to cut down on the mistakes. President Bush, in his budget proposal, suggests simplifying the program in yet another effort to improve it.

Yet advocates of the EITC say if there is any mistake, it is the fact that some 25 percent of the people who are eligible for the program don't apply - perhaps because they don't know they are eligible.

"We are basically running a social-services program without the administrative infrastructure," says David Williams, the EITC director at the Internal Revenue Service (IRS) in Washington. "We are administering the largest means-tested, antipoverty program."

A target for cuts

Last week, in part because of concerns about the error rate, the Senate Budget Committee voted to lop 10 percent off the program, a vote reversed by the full Senate. The House, in its version of the budget, has yet to tackle the program. "The House has said it would like $8 billion out of program cuts or tax increases," says John Wancheck, outreach coordinator for the earned-income credit at the Center on Budget and Policy Priorities in Washington. "When you look at places for cuts, Medicaid and EITC are at the top of the list."


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