The Earned Income Tax Credit: Building a Better Way for Filers to Claim
We are on a mission at Column Tax to make filing easier for all low-income Americans. Rebuilding the way people claim tax credits is a key part of that: in particular, the Earned Income Tax Credit. In our first tax filing season, we learned what it takes to build a robust end-to-end system for claiming the Earned Income Tax Credit.
Earned Income Tax Credit overview
Every year, over 25M Americans receive $60B+ in Earned Income Tax Credits (EITC) on their tax returns, making it one of the largest and most important social benefits programs in the U.S. In 2018, the EITC lifted over 5 million people out of poverty, including about 3 million children. The credit reduced the severity of poverty for another 16.5 million people, including over 6 million children.
The credit can have a life-altering impact for families each year. The EITC has ripple effects for a family’s economic situation, as most use these funds to “pay for necessities, repair homes, maintain vehicles that are needed to commute to work, and in some cases, obtain additional education or training to boost their employability and earning power.”
Claiming the Earned Income Tax Credit
The Earned Income Tax Credit is one of the most complicated tax credits, due to complex eligibility requirements and difficult communications surrounding how to determine eligibility. The instructions are over 44 pages. The “Summary” table is hard to follow, even for a tax professional.
What this all leads to is a complicated set of requirements for tax filers.
For example, if your child lives with you, you may allow your ex-spouse to claim the child for the purposes of the Child Tax Credit, while you claim the child for the purposes of the EITC only. This is a tricky situation! But for the parent who has the ability to increase the size of their refund significantly by getting this right and claiming their child for the EITC, it’s quite important.
Audits, Paid Preparers, and the Earned Income Tax Credit
According to ProPublica: “If you claim the earned income tax credit, whose average recipient makes less than $20,000 a year, you’re more likely to face IRS scrutiny than someone making twenty times as much.” In fact, over a third of all audits conducted are recipients of the Earned Income Tax Credit. Unfortunately, this contributes to a tale heard far too often: that those who need credits and deductions most, are the ones who miss out or are penalized by an overly-complicated system.
Common and costly sources of errors often stem from a confusing set of rules. According to the Taxpayer Advocate Service, the most costly error is an error on reporting “qualifying children.” 76% of those were attributable to the “residency test.” Over a third of EITC claimants cycle in and out of eligibility each year which compounds the challenges here. In general, understanding and adhering to eligibility rules requires a deep understanding of IRS rules & requirements.
Each year, ~55% of tax filers use a paid preparer to file their taxes. For returns claiming the EITC, that figure is 68%. Even more unique is the makeup of those paid preparers. Unenrolled preparers (those who are not CPAs, Enrolled Agents or Attorneys) account for over 3/4 of all returns prepared where the EITC is claimed. In a study by the Taxpayer Advocate Service, half of those returns prepared by unenrolled preparers “contain overclaims average 33% of amount claimed.”
In combination: This means EITC recipients are likely to pay more for tax filing, work with unenrolled preparers and are more likely to be subject to an audit.
The Column Tax solution
At Column Tax, we provide an API that enables mobile banking and fintech companies to offer powerful tax products to their account holders. Embedded Tax Filing is a major step forward for individuals in the US making tax filing easier, more affordable and more accessible.
Ensuring that all tax filers receive a maximum tax refund is a critical piece of that. On the Earned Income Tax Credit, there are a number of ways we’re building a better way:
- Pre-filled returns. By partnering with financial apps, we have an opportunity to ingest data to pre-fill returns. By decreasing the amount of “new” information a tax filer has to enter, we decrease the likelihood of errors that could lead to an audit.
- Approachable products. Our goal is to help every filer understand and navigate a complex set of requirements. This starts with an intuitive UI and approachable language and fully connects through our e-file engine. We don’t use dark pattern upsells in our filing product. Our aim is to help every tax filer successfully file and maximize their refund in a compliant way.
- Increased reach. Every year, ~22% of filers eligible for the Earned Income Tax Credit do not participate in the program. That means that over a fifth of eligible filers miss out on an average $2,400 a year in credits (Source). There are a number of reasons for this, one if which is reach & access to this population. Many of our partners have built deep relationships with filers in this population which gives a new opportunity to increase awareness.
- Audit defense. Column Tax Embedded Filing comes with audit defense for all filers. Audits can feel scary. We ensure that all EITC recipients are not alone in the case they receive an audit notice.
Working with us
We’re excited to work with partners who are paving the way towards a more equitable America. If you are interested in seeing a demo of Embedded Tax Filing, please reach out!