Making more people aware of the availability of free income tax return preparation services may help increase the use of the Earned Income Tax Credit and the Child Tax Credit, new research shows.
“Take-up of tax-administered benefits, like the Earned Income Tax Credit [EITC], is far from complete,” says Tatiana Homonoff, associate professor of economics and public policy at New York University’s Robert F. Wagner Graduate School of Public Service and coauthor of a new study in the Journal of Public Economics.
“EITC can only be obtained through filing an income-tax return, and if you look at individuals who don’t file their taxes, that’s really where a lot of EITC take-up problem is coming from.”
The Earned Income Tax Credit is the largest poverty relief program in the US. Each year, according to the paper, about 80% of all eligible Americans receive it. An estimated 5 million don’t receive the benefit. Nonprofit groups have long worked to raise awareness of tax credits for lower income people. There is even an EITC Awareness Day, the last Friday of January.
Homonoff and her co-investigators wanted to explore whether EITC take-up would improve if the availability of free tax preparation services—rather than the tax credit itself—were marketed to non-filers.
About 70% of households are eligible for no-cost tax preparation services from the government, but less than 3% take advantage of them.
The paper, conducted in cooperation with the Internal Revenue Service, found that such mailings increased the percentage of tax filers by one percentage point in a field experiment. More importantly, a large fraction of these new filers claimed the EITC and the Child Tax Credit (CTC) benefits.
In the field experiment that constituted the foundation of the paper, 55,000 prior non-filers received IRS letters touting the availability of free tax preparation services, such as TurboTax or H&R Block software, as well as the in-person Volunteer Income Tax Assistance program.
Nationally, about 70% of households are eligible for such no-cost tax preparation services from the government, but less than 3% take advantage of them, studies have shown.
Of the individuals who received IRS letters, 22% went on to file their 2019 tax returns. Eligible non-filers who did not receive any communications—the field experiment’s control group-—had a 21% filing rate. This one percentage point rise was a statistically significant, 4% increase in the proportion taxpayers who filed a tax return.
Additionally, the intervention led to a significant increase in both EITC and CTC benefits claimed. Taxpayers induced to file as a result of receiving a letter received an average of $861 in EITC benefits and $976 in CTC benefits.
“The overall results on take-up are modest in magnitude, suggesting that the intervention we study is likely not a silver bullet for increasing EITC or CTC take-up,” Homonoff says.
“Instead, we see our results as a helpful proof of concept: If we are able to find a different intervention that more meaningfully reduces barriers to filing, that could be a helpful avenue for increasing take-up of these tax-administered social benefits.”
Homonoff also points to the cost-effectiveness of the intervention: The study shows that every dollar that the IRS spent to promote free tax preparation services, an additional $15 in tax credits was claimed, providing a net benefit for both lower income households and economic activity.
Additional coauthors are from Stanford Law School and the IRS.