Why Don't Americans Claim Their Earned Income Tax Credit?

Jan 28, 2016

For low-to-moderate income families, tax season can be a confusing and intimidating time.

The volume of information individuals sift through often results in overlooked benefits and unclaimed credits, and the earned income tax credit, or EITC, is one of the most frequently ignored refunds available to these families. 

Saurabh Bhargava, associate professor of economics at Carnegie Mellon University estimates 7 million Americans fail to claim about a month’s worth of income from it each year. 

CMU partnered with the Internal Revenue Service to study the psychology and economics behind non-claimants. They're hosting Earned Income Tax Credit Day on Friday, Jan. 29  in an effort to increase participation for eligible taxpayers.

Bhargava, part of the EITC research team, said people get confused by the complexity of the process and the presentation of the program.

To study this, his team sent varieties of tax forms and claiming worksheets to about 40,000 non-claimants in California and monitored their reactions. Ultimately, Bhargava said the documents with traditional “government language” was ignored by individuals, but if they changed the layout and simplified the text, it increased the likelihood of response. Follow-up calls also contributed to an increase in claims. 

Bhargava said he believes awareness will increase when there are systems in place to advocate for them in a meaningful way.

“This broad enterprise of realizing that policy should be sensitive to the psychology that underlies behavior can really improve outcomes, particularly to the poor,” he said.

Program Manager Kiandra Foster of the United Way of Allegheny County works with low-to-moderate income families in the area to ensure they’re recognizing their tax credit eligibilities. Unawareness and confusion about the EITC and stigma over qualification are the main reasons many don’t claim, she said. But they're also afraid of being audited.

“They’re worried that they’re going to do something wrong on their taxes,” Foster said. “For a lot of people, completing your taxes during the tax season is already something that can be stressful and daunting.”

During his study, Bhargava found most subjects believed the audit rate was about 25 percent. In truth, for the low-to-moderate income population, it’s closer to 2 percent. To counter the misconception and what he calls an “institutional fear of the IRS,” he recommended sending messages to eligible taxpayers ensuring protection from legal action if they accidentally incorrectly claim a credit.

Returns can be amended for up to three years for any unclaimed benefits, according to Foster.

For families struggling with understanding their taxes, she recommended the United Way’s “Helping Families Thrive” program and the timely “Money in Your Pocket Coalition” free tax preparation program. Both, she said, lessen the stress of tax season for low-to-moderate income households.

“Especially for those families that are struggling or they’re trying to get back on their feet after the downturn, this makes a huge difference for them,” she said.

Households making up to $54,000 annually are eligible for the United Way's free tax preparation program. Incomes up to $62,000 can qualify for the online program.

To celebrate Earned Income Tax Credit Day, United Way officials plan to highlight their tax filing resources and display physical sites throughout southwestern Pennsylvania where people can go to get help this season. 

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