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Fighting poverty by modernizing the tax filing system

Chukwudi Onike — Former Senior Associate, Innovation, The Rockefeller Foundation

The Earned Income Tax Credit (EITC) is one of the most effective ways of combatting poverty and inequality in the United States. The EITC supplements the earnings of low-income workers, especially for those supporting children. Last year over 25 million Americans tax filers received an average EITC of about $2,500 according to the IRS.

For many working families, the EITC could be the difference between affording a critical medical expense, unexpected car repairs, or additional resources to dedicate to childcare.

For example, the Center on Budget and Policy Priorities estimates that in 2017, the number of children in poverty would have been 25% greater without the EITC, a significant dent in the fight against childhood poverty.

However, not everyone who qualifies for the benefit takes advantage of it. An estimated 20% of eligible households miss out, leaving billions of dollars on the table. As with the child tax credit, you have to claim the credit by filing a personal income tax return.

It’s not clear why everyone doesn’t take advantage of the EITC. Many people aren’t aware that filing taxes can lead to receiving, rather than owing money. There is confusion about eligibility for the EITC and fear of the consequences of making an error can also play a role. Anyone who has filed taxes in the U.S. can understand that the process of filing itself can be intimidating—even more so for people who work multiple jobs, do gig work, or are employed informally.

The EITC could be the difference between affording a critical medical expense, unexpected car repairs, or additional resources to dedicate to childcare.

What would it take to get ever eligible tax filer to apply for the EITC? Solutions, such as awareness campaigns or simplified reminders have shown promise. However, these solutions only address part of the problem, ignoring the filing process itself which is a pain point for filers. Fortunately, early evidence shows that outreach coupled with efforts to make the tax filing process easier could potentially be even more impactful.

There are solutions available now. The Volunteer Income Tax Assistance (VITA) program, a collaboration between the IRS and community-based organizations across the country, provides extremely high quality, free tax preparation assistance to populations eligible for the EITC. VITA volunteers are trained by the IRS and have lower error rates than for-profit tax assistance services.

The question is how to scale VITA to meet demand. According to Prosperity Now, VITA volunteers already serve over three million tax filers annually, but the IRS estimates that about 19 million individuals and families would utilize the service if it was more readily available. Moreover, services are provided primarily in-person at VITA sites, which represents an obstacle for potential beneficiaries without means of transportation.

Could combining digital outreach and automation technology with VITA’s already effective services allow more people to take advantage of the EITC? Code for America thinks that this is possible, and we’re excited to be supporting them in taking up the challenge alongside partners in the VITA community. They have prototyped and tested a tax preparation tool that could cut the time volunteers spend on each application and allow filers to access VITA services remotely at any time.

This tax-filing season, Code for America will also work with VITA partners to digitize their outreach process to potentially eligible people. They believe this will make it possible to cut the time volunteers spend on each application and open up the program to those unable to access a VITA site. They will be testing this in a pilot for the 2019 tax season that will reach 10,000 eligible filers, with support from The Rockefeller Foundation and the Bill & Melinda Gates Foundation.

EITC is not enough, but it’s one of our best existing policy tools for supporting low-wage workers and their families. Code for America believes that “Government can work for the people, by the people, in the digital age.” Helping ensure that every eligible family benefits from what may be the country’s most broadly effective tool for promoting economic mobility, will be an important piece of that vision. And with the next tax season fast approaching, now is the time to act.

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