The Effects of EITC Correspondence Audits on Low-Income Earners

John Guyton, Kara Leibel, Dayanand S. Manoli, Ankur Patel, Mark Payne, Brenda Schafer

NBER Working Paper No. 24465
Issued in March 2018, Revised in May 2019
NBER Program(s):Labor Studies, Public Economics

Each year, the United States Internal Revenue Service identifies taxpayers who may have erroneously claimed Earned Income Tax credit (EITC) benefits and requests additional documentation from these taxpayers to verify these claims. This paper exploits random variation inherent in audit selection processes to estimate the impacts of these EITC correspondence audits on taxpayer behaviors. Roughly 80% of EITC correspondence audits in the analysis sample have full disallowances due to undelivered mail, nonresponse or insufficient response. Cases of disallowances with confirmed ineligibility make up 15% of EITC correspondence audits in the analysis sample. In years after being audited, taxpayers have decreases in the likelihoods of claiming EITC benefits and filing tax returns so that they subsequently forego benefits from potentially legitimate EITC claims, other refundable credit claims and withholdings. For every $1 that is audited, roughly $0.63 to $0.73 of tax refunds is unclaimed in years after the audits. Additionally, spillovers from audited taxpayers to other taxpayers arise because qualifying children on audited returns are more likely to be subsequently claimed by other taxpayers after the audits. These spillovers indicate that net overpayments may be less than gross overpayments since ineligible qualifying children on audited returns could be potentially eligible qualifying children on other taxpayers’ returns. Lastly, EITC correspondence audits affect real economic activity as wage earners have changes in the likelihood of having wage employment in the years after being audited.

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Document Object Identifier (DOI): 10.3386/w24465

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