It’s Fix The Tax Code Friday!
Donald Trump ruffled some feathers in Kansas City when he suggested that what he wanted most in terms of tax reform was:
I want to put H&R Block out of business. I want to put ‘em out of business. A person with a simple tax return can’t figure it out. They have go out and pay a lot of money to these companies that go out and do your tax return for you. I want to put H&R Block out of business.
H&R Block, the nation’s top-ranked tax preparation company, was painted in an even more unfavorable light this week when it was heavily criticized for its role in writing the new rules for the Earned Income Tax Credit (EITC). The EITC is a refundable federal income tax credit targeted to low to moderate income working individuals and families. Refundable means that even if the amount of the credit exceeds a taxpayer’s liability, the taxpayer doesn’t lose the “extra” and is, instead, entitled to receive any overage as a refund. The amount of the EITC varies depending on income, family size and filing status but it can be pretty significant. A taxpayer with three or more qualifying children could be entitled to up to $6,242 for tax year 2015 – even if the taxpayer owed no tax and had no withholding.
According to the Internal Revenue Service (IRS), in 2013, about 28 million taxpayers took advantage of the credit to the tune of $66 billion. The average credit was $2,400.
Proponents of the EITC claim the credit gets money into the hands of taxpayers more quickly than traditional welfare programs; that’s statistically true since more families take advantage of the EITC than the Supplemental Nutritional Assistance Program (SNAP) or Temporary Assistance to Needy Families (TANF).
Critics call the credit confusing and an opportunity for fraud; that’s also statistically true since most billions of dollars are paid out for EITC in error every year. That fraud is what prompted the IRS to change the rules for EITC a few years ago with a Schedule EIC, used to verify eligibility for the credit – but those were only for taxpayers who claim EITC and used a paid preparer. This year, H&R Block lobbied to expand the Schedule EIC and have it apply to all taxpayers who claim the credit, including those filing self-prepared returns.
It’s a tough spot for preparers and taxpayers. On the one hand, the EITC is meant to apply to low-income taxpayers who are those who might not always have access to quality tax preparers. On the other hand, EITC fraud is a huge concern and cracking down of those fraudulent returns is a tough job.
That brings us to today’s Fix The Tax Code Friday question:
Should Congress make it more difficult for taxpayers to claim the EITC? And if so, should it only apply to taxpayers with paid preparers or should it also apply to self-prepared returns?
