GOP’s Proposed Changes to Low-Income Credit Poised to Swamp IRS

A provision in the GOP tax bill that would increase the documentation needed for millions of low-income households to claim a popular credit would likely burden those taxpayers and pile work onto a strained IRS.

Both House and Senate versions of the bill would direct the IRS to create a pre-certification program for taxpayers seeking to claim a child for the earned income tax credit and receive a refund of nearly $8,000 in some cases. Taxpayers with and without children in 2024 received about $64 billion worth of EITCs through their 2023 returns, according to the IRS.

Republicans say the requirements would help to prevent improper payments of the credit, but the proposed changes could prove an enormous burden for the 17 million taxpayers who claim EITC for a child and cripple the IRS as it sorts through all the paperwork to certify eligible taxpayers, according to tax researchers.

“It’s a perfect storm that risks filing season chaos,” Greg Leiserson, a senior fellow at New York University’s Tax Law Center and a former Treasury Department official during the Biden administration, said by email.

The tax bills would give the IRS until 2028 to develop a system to verify the relationship and residency status of children before taxpayers could claim them for EITC refunds. Taxpayers would apply to the IRS to have their child certified as eligible for the credit, providing supporting documents, though the bill doesn’t specify what documents and application information would be required.

But over the next few years, the IRS also will try to weather its most significant turmoil in decades. Half of its senior leaders are leaving alongside about a quarter of its staffers. The Trump administration also has proposed stripping $2.5 billion from the agency’s annual budget.

Balancing reduced resources and increased responsibilities from the EITC is “not at all” feasible for the IRS, said Kris Cox, director of federal tax policy at the Center on Budget and Policy Priorities, a think tank that has advocated for expanding the EITC.

And this combination leads some to worry if the credit, which helps to push millions of taxpayers over the poverty line each year, could lose its value to families.

“This credit has long-term benefits,” said Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center. “Delays, denials, deterrence of eligible individuals undermines the beneficial achievements.”

A Past Pilot

Senate Republicans wrote in their summary of the bill that the goal of their new provision is to help the IRS “detect and manage duplicative EITC claims,” and GOP lawmakers have long accused EITCs as being a breeding ground for tax abuse.

In recent years, the Government Accountability Office has listed EITCs as one of the largest sources of improper payments. Complex eligibility requirements sometimes make it unclear who qualifies for the credit.

The IRS in the early 2000s piloted pre-certifications similar to those proposed now. The agency caught about eight times the amount of money in improper claims through the pre-certifications compared to other enforcement mechanisms.

But the IRS—bigger than it will likely be later this year—didn’t move forward with pre-certifications, which were too unprofitable for the amount of work, said Holtzblatt, who helped review the pilot.

That pilot also was more limited in scope than the bills in the House and Senate, which would require documentation from every taxpayer claiming a child for the EITC.

“It’s the most extreme swing you could have,” Leiserson said.

The pre-certifications function, in its paperwork burden for taxpayers and the IRS, like a correspondence audit, Leiserson said. The IRS only performs some half-million audits per year, meaning the agency could see its workload increase 35-fold if all 17 million taxpayers filed for a pre-certification, he said.

Holtzblatt and Pete Sepp—president of the National Taxpayers Union, a group that broadly supports the GOP tax bill—said the pre-certifications, in theory, could reduce other work on the back end, like selecting taxpayers for audit. But Sepp said that he hasn’t seen evidence that the IRS has a plan to accommodate this shift in workload as it undergoes staff reductions.

The program’s final form is even murkier since the tax bills provide little guidance on what documentation to require from taxpayers or even deadlines for creating an implementation plan.

“It would be to everyone’s advantage to let the public in on what’s going on,” Sepp said. “To just offer some kind of assurance that, yeah, we’ve thought about it. We’re dusting off the reports on the pilot.”

Impacts on Families

Low-income taxpayers could bear the brunt of a botched implementation. Many of these taxpayers use the EITC to help pay for food or rent. And those who’ve been used to the current system could miss out on credits if they aren’t properly alerted to the change, Cox said.

As the IRS sorts through pre-certifications, delays in receiving tax refunds would hurt the families who rely on them, Holtzblatt said.

The legislation “asks 17 million families with children to provide more documentation to an IRS that may not be able to process it,” Cox said. “What does that mean for the family?”