Introduction: Problems with IRS Benefit Delivery and Goals of Reform

Over the last several decades, the tax code has become an essential component of the federal social safety net. The earned income tax credit (EITC)¹ disburses over $60 billion each year and is the country’s largest anti-poverty program for working families; the child tax credit (CTC),² if the American Rescue Plan’s expansions are made permanent, is poised to become the most significant new expansion of federal assistance since at least the Affordable Care Act, cutting deep poverty among children in half; and when Congress sought to urgently send families money throughout the COVID-19 crisis, it tasked the IRS (Internal Revenue Service) to distribute three stimulus checks, formally known as economic impact payments (EIPs). The IRS today is arguably the single most critical benefits administrator in the nation for workers and families.

But as with so many government programs, there is a gap between policy and reality. When it comes to delivery, these tax code safety net programs—and the IRS, which was not created as a benefits administrator and has never explicitly adopted a benefits administration mission—fall short in several ways.

First, the coverage of these broadly available benefits is far from universal. The EITC, despite its incredible success, reaches only 80 percent of eligible households, a rate stubbornly constant over the years—leaving 5-7 million unserved,³ with lower-income, less-educated, Latinx, and non-English-speaking households more likely to be left out.⁴ Closing this participation gap would send millions of American families an annual check as big as or larger than last year’s stimulus checks.⁵ The IRS does not publicly estimate CTC coverage rates at all, but several million households are likely left out.⁶ And while the IRS made great efforts to get EIPs out in the midst of the pandemic throughout 2020, it is likely that over 5 million eligible households—predominantly from low-income households who most needed it—did not get the first two payments, and can only access them now if they claim a so-called Recovery Rebate Credit (RRC) on their 2020 taxes.⁷ In a country where 40 percent of households could not afford a $400 unexpected expense, the millions of families unserved by these programs are missing assistance they desperately need.

Second, IRS benefits are governed by a tax code that has grown increasingly complex and difficult for its beneficiaries to understand. This not only makes interactions with the government complex and tedious, limiting the purported incentive effects of the credits,⁸ but it also actively impedes benefit delivery. The programs’ arcane rules (especially those governing the definition of a qualifying child) make it difficult or impossible for the government to automatically detect eligibility from other data sources, and are sometimes so opaque and misaligned with lived reality that families accidentally run afoul of them, subjecting themselves to onerous audits. The complexity further drives families to use private tax-preparation services, who often charge a hefty fee for the service of translating the government’s rules into plain English.

Third, not all of the money actually gets to beneficiaries. Tax preparation services take advantage of program complexity to insert themselves as middlemen between the IRS and low-income families, and then take a large cut from the benefit, with workers eligible for the EITC paying on average $400—13-22 percent of their refund⁹ — to tax preparers. Still worse, because the IRS does not have the authority to establish baseline competency standards for unregulated tax preparers, some preparers submit fraudulent tax returns and even steal their clients' payments altogether. The government itself also lessens the impact of these programs by garnishing IRS benefits—unlike all other federal anti-poverty benefits—to offset other government debts like student loans or outstanding tax bills. Meanwhile, predatory financial services charge hefty fees for unbanked families to deposit benefits they currently can only receive via check. Finally, because the benefits only come once a year at tax time, and because families do not know in advance how much they will receive, the effective value of the benefit is reduced.

With the Biden administration expanding the IRS’s benefits portfolio still further, it is essential that the IRS become a modern, effective, and user-focused benefits administrator, responsive to its taxpayers and beneficiaries.

This report envisions a short- and long-term agenda of delivery and design fixes to get there. The ideas detailed here would ensure that low-income Americans get the full assistance they deserve, and that all taxpayers, especially low-income families, have simple, transparent, and painless interactions with the agency. Specifically, we envision:

• Better uptake of existing policies:
  • At least 90 percent of EITC-eligible households get the credit, up from the current rate of 80 percent.
  • At least 98 percent of EIP-eligible households get their EIP, up from a current rate of roughly 95 percent.¹⁰
  • At least 95 percent of CTC-eligible households get the credit (current rate not known).
• Simplicity and transparency:
  • Most taxpayers have a simple, easy, and truly free method to file taxes directly with the IRS, with as much of the process automated as possible.
  • The tax code—and specifically its low-income credits—is clear and transparent, aligned to the realities of modern families, and simple enough to accommodate automation.
• Full access to benefits for low-income households:
  • Few low-income households—and far fewer than under existing rules and procedures—face invasive audits, especially over technicalities, like whether the “right” parent has claimed a child.
  • Low-income taxpayers do not lose large fractions of their refunds to tax preparers, predatory financial institutions, or the government.
  • Low-income households can elect to receive a portion of their benefits in advance, over the course of the year, rather than in a lump sum—via a simple process that puts the onus on the government to make the payment process seamless and easy.

Recommendations are split into four categories:

1. Ten immediate administrative fixes—short-term adjustments primarily to improve the implementation of EIPs, but also the implementation of the EITC and CTC. All of these items can be largely implemented without any congressional action,¹¹ and most can be fully implemented in 2021.
2. Medium-term filing reforms—a program to create a modern, government-run tax filing option, building on the important progress the IRS made with the EIP portal for non-filers in 2020. This is a two to three year roadmap to improve the interactions tens of millions of citizens have with the IRS.
3. Structural program changes—outlines of a legislative package to simplify the credits, making them more transparent to citizens and better mapped to the lived experience of modern families, and making it easier to infer eligibility from external sources. Such reform is critical to the long-term viability of these benefits.
4. Advance periodic payments of EITC/CTC—the implementation challenges inherent in proposals to periodically pay advances on EITC/CTC, and recommendations about how a successful implementation could be structured. While advance periodic payments are critical to truly make these credits work for low-income families, there is work to be done to ensure that such a program does more good than harm.