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A tax loophole for common folks

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This is not the first time the EITC has been under scrutiny. The IRS looked at 1999 returns and concluded that the error rate was about 30 percent. In 2001, Congress made changes to the program in an effort to cut down on the problem. No one knows if they've worked. Mr. Williams says, "What I would say is that [the error rate] is lower and hopefully significantly lower than the 1999 study, but one of the reasons it remains high and sticky is that our entire economic base shifts rapidly."

This is particularly true, he points out, among low-wage earners. He says they frequently change jobs and move to find work. They also tend to have a high rate of family issues.

Yet even the IRS admits the rules are confusing. Last week at a Monitor breakfast, IRS Commissioner Mark Everson said, "I was in a conversation with someone yesterday - it is tough for a lot of people to figure out if they qualify or not."

To try to remedy the problems, the IRS runs what Williams terms "a very robust" audit of people who use the program. As soon as it finds out about "income tax preparation mills," which specialize in fraudulently preparing returns, it busts them.

It is now running a pilot program involving 25,000 people who must now "prequalify" their dependents. For example, to qualify as a dependent, the child must have lived with the tax filer for over half the year. A taxpayer in this pilot program must present records, such as school correspondence, utility bills, or even an official letter from a principal, to prove the child's residency. "We are trying to reduce the error rate while not driving away eligible taxpayers," says Williams.

It is also an effort that meets with a fair amount of criticism from those who work with those in need. "Everyone says, 'Why not go after the Enrons and the people who write off things they shouldn't?' " says Mary Dupont, executive director of the Nehemiah Gateway Community Development Corp., a nonprofit in Wilmington, Del. "By enforcing such an onerous process, you might be turning away thousands of people who need it to survive."

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