Beruflich Dokumente
Kultur Dokumente
The New York State Earned Income Credit (the “EIC”)1 is considered one
of New York State’s most capable tools for helping low-income working
New Yorkers and their families make ends meet. Federal, state and local
earned income tax credits are refundable credits that return tax dollars to
qualifying families and individuals. The amount varies depending on
income, marital and parental status, but working families earning less than
$44,000 per year may be eligible for up to $7,354 from earned income tax
credits alone. To qualify, applicants must be between ages 25 and 64 (if
childless), have a valid Social Security number, report earned income and
file a tax return to the appropriate authority. (Source: http://www.otda.
state.ny.us/main/reform/#eitc).
In New York City, total EIC claims exceeded $1.6 billion in 2007. (Source:
NYC Department of Consumer Affairs Press Release, January 23, 2008).
Many of these low-income individuals and working families, however,
face significant difficulties in claiming the EIC because they hold jobs
that classify them, for tax purposes, as self employed,2 and/or for which
they receive cash wages. These self-employed low-income cash earners
(hereinafter referred to simply as “cash earners”) are a large and growing
population.3 As some of the lowest paid workers in our communities—
childcare providers, taxi drivers, hairdressers, day laborers—they stand to
benefit the most from the EIC. Yet, in addition to the ubiquitous challenges
faced by many low-income workers in navigating the tax system (including
lack of access to good tax preparation services and financial literacy issues),
cash earners must also confront income documentation requirements that
are ambiguously defined, poorly explained, and sometimes incompatible
with the everyday practices of cash earners and those who pay them. Cash
earners who do not comply with these requirements, however, considerably
increase the likelihood that their EIC claim will be denied, or that their tax
return will be audited.
New York City estimates that more than 150,000 City residents never claim
their federal, state and city earned income tax credits, totaling more than
$160 million. (Source: NYC Department of Consumer Affairs Press Release,
April 8, 2009). Thus, in spite of the considerable publicity given to the
EIC as an anti-poverty measure, the process for claiming the EIC and the
rules under which EIC claims are adjudicated need to be changed to ensure
that the EIC actually benefits cash earners. This policy brief addresses the
most significant obstacles that cash earners face when claiming the EIC
and suggests concrete changes that could remedy this problem. These
obstacles, rarely encountered in isolation but rather tending to compound
each other, include the following:
2
I. DOCUMENTATION PROBLEMS
Several of the most significant obstacles for cash earners claiming the
EIC have to do with some aspect of income documentation. The New
York State Department of Taxation and Finance (the “NYSDTF”) requires
that EIC claimants be able to present income documentation sufficient
to substantiate the earned income required to claim the credit. Because
the credit is available only to those who earn income, some form of
documentation requirement is understandable and desirable. But, as
simple as it is in principle, this requirement, as currently administered
by the tax authorities, trips up cash earners in ways that are unrelated to
whether or not they deserve the EIC.
It seems that, because most workers, who are not cash earners, have their
income substantiated by other standard documentation, such as a W-2,
the generalized tax instructions assume the existence of independently
generated statements of income.4 Cash earners are in a different situation
than most taxpayers in that their income is not independently documented
and submitted to the IRS. These general instructions are therefore
unhelpful to cash earners.
The tax forms, instructions, and web pages pertaining to the EIC offer
no useful guidelines about what sort of documentation is considered
sufficient to verify a person’s income. Thus, even if cash earners claiming
the EIC understand that they must document their earned income, they
still learn nothing about how they should do so. Though documenting
one’s income may not be particularly onerous for workers receiving a
W-2 or the like, cash earners need more guidance as to what records are
sufficient to claim the EIC.
3
Those cash earners who recognize that they are considered “self-employed”
for tax purposes may find some guidance in the IRS tax instruction forms
pertaining to recordkeeping by the self-employed.5 These guidelines,
though better than nothing, are not specific to EIC claims, may be too
general to provide practical advice for cash earners, and, most importantly,
are not specifically endorsed by the NYSDTF.
Cash earners claiming the EIC are generally not in a position to contest
income documentation requirements in tax court. Most are probably not
aware that the legal standard for income documentation is itself unclear.
But an examination of the appeals of adverse EIC determinations illustrates
that the documentation problems encountered by cash earners go much
deeper than simply the drafting of forms and instructions. Complicating
matters even further (yet perhaps explaining the lack of specific guidance
about documentation in the forms and instructions), there is little stated
law about what constitutes sufficient documentation of income for the
purposes of claiming the EIC.
4
1. Tax appeal decisions have no precedential value.
5
D. Documenting income is difficult for cash earners.
Documenting cash wages, particularly cash wages that vary greatly from
week to week and season to season, requires that cash earners be more
organized and more precise in their accounting than other workers ever
have to be. Workers who are paid by check and receive a W-2 every year
do not need to keep precise, coherent, standardized records; they are kept
for them, and often automatically supplied to the tax authorities. Cash
earners, by contrast, must develop and adhere to a system of documenting
their income, which, besides satisfying the ambiguously defined
requirements noted above, must be practical enough so that cash earners
can actually use it.
6
different types of income, make claiming the EIC a complicated and
confusing process for any claimant, cash earner or otherwise.12 Though
instructional publications issued by state tax authorities and taxpayer
assistance organizations certainly help individuals become aware of and
determine their eligibility for the EIC, these materials are generally less
effective in explaining in adequate detail how one applies for the EIC.13 In
terms of explaining how one applies for the EIC, as noted above, the tax
form instructions do not state clearly that submitting documentation of
earned income is required.
Given the complexity of the claim process, it is perhaps not surprising that
74% of New Yorkers claiming the federal earned income credit use a paid
preparer to navigate the filing rules.14 Using a paid preparer, however,
comes with its own set of risks for low-income workers unfamiliar with
the tax system, including deception by companies offering high interest
refund anticipation loans. Because refund anticipation loans are secured
by the eventual tax refund, the consumer ultimately bears the risk that
the refund will be smaller than expected or nonexistent. Since the risk of
adjustment is not theirs, the companies selling such loans have an incentive
to overstate EIC claims and understate documentation requirements.
EIC claimants’ finances are squeezed further when refunds are adjusted
downward.
7
• Limited access to quality low- or no-cost tax preparation
services;
• Inability to afford legal counsel for tax law assistance;
• Lack of access to computers and online resources for information
and correspondence with tax authorities;16
• Limited understanding of how the tax system works
(withholding, credits, refund, etc.);
• Difficulty with the English language; and
• Susceptibility to predatory lenders offering refund anticipation
loans.
Were these hindrances not enough, there is evidence that low-income
taxpayers may be more likely to be audited than higher income
taxpayers.
A robust and efficiently administered EIC has the potential to reduce state
spending on certain social services by transferring money directly to the
neediest workers in our communities. Given New York State’s perennial
budgetary challenges, there will be some opposition to any reform that
improves the efficiency of the EIC based on a concern for the state’s
bottom line. This concern is misguided and counterproductive. Reforms
that facilitate the delivery of the EIC do not necessarily correspond to an
equivalent tightening of the budget. Although less tax revenue is possible,
a portion of the state’s budget is currently allocated to services that low-
income cash earners would avoid if they had the financial stability that the
EIC affords. For example, households with more financial resources will
have fewer needs for emergency social services.
RECOMMENDATIONS
8
I. CLEAR AND SPECIFIC LEGAL STANDARD FOR
MINIMUM DOCUMENTATION
Cash earners who demonstrate a good faith effort to comply with the
legal standard for minimum documentation should be presumed to have
complied with the standard. A good faith compliance rule must take into
account that many low income cash earners do not have the resources or
the education to account for their income in the same manner as other self-
employed taxpayers.
9
II. CLEARER INSTRUCTIONS AND GUIDANCE
FOR THE AFFECTED POPULATION
As discussed above, one of the greatest challenges cash earners face is the
lack of clear and available instructions for how to document one’s income
for the purposes of making an EIC claim, as well as guidance regarding
one’s rights and responsibilities in an audit or disallowance of an EIC claim.
NYSTDF should prepare documents addressing these issues (perhaps
with the assistance of advocates for cash earners and/or tax preparers who
assist cash earners) and should make those documents easily available
to cash earners. Not only should the instructions reflect rules that bind
the tax authorities, but, when cash earners rely on this specific direction
from NYSDTF, their claims should be presumed compliant. Translations
of such documents would also be very helpful in reaching non-English-
speaking cash earners.
To the extent that NYSDTF presently adheres to policies that set auditing targets
relating to any aspect of the EIC or employs audit selection practices that cause
EIC claimants to be disproportionately more likely to be targeted for an audit
than other individuals filing tax returns, such policies and practices should be
eliminated. Inequitable policies such as setting benchmarks for the number of
EIC claimants to target for an audit or using “data-mining” computer software
should not be employed. The NYSDTF should implement and adhere to
policies that ensure that individuals, cash earning and otherwise, who claim
the EIC are not placed at greater risk of audit than other taxpayers.
10
In addition to evening the playing field for individuals who are more likely
to be disadvantaged, a “one-time pass” policy allows the NYSTDF to educate
the taxpayers who are most in need of direction without penalizing their
initial effort. In fact this policy might be most effective if it were coupled
with an opportunity for more thorough instruction. One possibility would
be that NYSTDF, in cooperation with tax preparers assisting low-income
populations, would offer short classes or multimedia materials that would
teach cash earners how to account for their income.
New York Appleseed and the Financial Clinic would like to thank White
& Case LLP for their generous support of this project, including primary
briefing authors Brendan Driscoll, Allison Harder and Richard Chen.
Thanks to Padraic Driscoll for the design and layout of this policy brief.
For more information about All Work and No Pay, contact New York Appleseed
at 212.848.5468 or eic@appleseednetwork.org.
11
1
This policy brief focuses on the New York State EIC, also referred to as the Earned Income Tax Credit, or “EITC.”
Because the New York State EIC is determined as a percentage of the federal EIC, this brief addresses the federal Credit
indirectly, but does not address the New York City Earned Income Tax Credit. To avoid doubt, the term “EIC” as used
herein refers to the New York State EIC unless otherwise specified.
2
In tax contexts, self-employed workers are occasionally also referred to as “independent contractors.”
3
Need statistic – Appleseed to supply?
4
The federal earned income credit documentation is similarly silent on the requirement. IRS Publication 596 (2007),
“Earned Income Credit (EIC),” is quite thorough in explaining who qualifies for the EIC. It is less clear in explaining
how one who qualifies should claim the credit, at least as far as documentation is concerned.
5
See IRS Publication 583 (1/2007), “Starting a Business and Keeping Records,” which offers the following guidelines:
Except in a few cases, the law does not require any specific kind of records. You can choose any recordkeeping
system suited to your business that clearly shows your income and expenses.
The business you are in affects the type of records you need to keep for federal tax purposes. You should set up your
recordkeeping system using an accounting method that clearly shows your income for your tax year. See Accounting
Method, earlier. If you are in more than one business, you should keep a complete and separate set of records for
each business. A corporation should keep minutes of board of directors’ meetings.
Your recordkeeping system should include a summary of your business transactions. This summary is ordinarily
made in your books (for example, accounting journals and ledgers). Your books must show your gross income, as
well as your deductions and credits. For most small businesses, the business checkbook (discussed later) is the main
source for entries in the business books. In addition, you must keep supporting documents, explained [in subsequent
sections].
The NYSDTF webpage provides a link to the IRS webpages about self-employed workers.
6
See Matter of Gallego, N.Y. Div. of Tax Appeals, Small Claims, DTA No. 819528 (Nov. 24, 2004). In that case, the
petitioning taxpayer, a Queens jewelry vendor whose EIC claim was disallowed, was issued a Statement of Refund
Adjustment that noted the following documentation requirements:
In order to qualify for the Earned Income Tax Credit and/or Dependent Care Credit, a taxpayer must be able to
document that he received earned income during the tax year. In the case of business income, the taxpayer must
be able to provide records which support when the income was earned, to whom services were provided, and the
exact amount of compensation received from each transaction. Some examples of acceptable proof include: copies
of your receipt booklet, pages from any ledgers you maintain, bank statements, paid receipts, canceled checks and/
or invoices.
7
See list of cases and outcomes in the Appendix.
8
New York Chap. 60 Tax Law Art. 40, Sec. 2010.5
9
See Matter of Suburban Restoration Co., Inc. v. Tax Appeals Tribunal, 299 A.D.2d 751, 752 (Appellate Division, Third Dept.
2002).
10
The amount of the EIC is determined as a function of both income and the number of qualifying children in the
household.
11
For example, the definition of a qualifying child for purposes of the EIC is different than the Food Stamp program and
Temporary Assistance for Needy Families (“TANF”).
12
Although this policy brief focuses on the documentation requirement that prevents cash earners from successfully
claiming the EIC, several other documentary hurdles are evident. For a brief overview of the complexity of the EIC,
see National Taxpayer Advocate’s 2008 Annual Report to Congress, 8 (December 31, 2008) (available at http://www.irs.
gov/pub/irs-utl/08_tas_arc_intro_toc_msp.pdf). A more thorough examination appears in FY 2002 National Taxpayer
Advocate’s Annual Report to Congress, 47-51 (December 31, 2002) (available at http://www.irs.gov/pub/irs-utl/
arc2002_section_one.pdf).
13
See, e.g., Publication 310-NY (12/07) (“Information on New York’s Earned Income Credits”) and Form IT-215-I (2007)
(“Instructions for Form IT-215, Claim for Earned Income Credit”), neither of which mentions income documentation
requirements.
14
By comparison, 66% of all filers in New York use a paid tax preparer. These proportions are calculated from tax data
for 2006 available from The Brookings Institution on their website at http://www.brookings.edu/projects/EITC.aspx
(last visited July 22, 2009).
15
See, e.g., the New York City Department of Consumer Affairs flyer addressing this misconception, available at http://
www.nyc.gov/html/dca/downloads/pdf/wceca_eitc_flyer_2008.pdf.
16
Recent efforts to streamline the IRS and state tax agencies have aggravated this problem. See generally Janet R.
Spragens & Nancy Abramowitz, “Low-Income Taxpayers and the Modernized IRS: A View from the Trenches,” Tax
Notes, Vol. 17, No. 11 (June 13, 2005).
17
See Matter of Moreno, N.Y. Div. of Tax Appeals, Small Claims, DTA No. 820959 (Jun. 14, 2007), Matter of Moreno, N.Y. Div.
of Tax Appeals, Small Claims, DTA No. 820316 (Jun. 14, 2007), Matter of Defreitas, N.Y. Div. of Tax Appeals, Small Claims,
DTA No. 820364 (Apr. 6, 2006) and Matter of Valoy, N.Y. Div. of Tax Appeals, Small Claims, DTA No. 819191 (Feb. 19,
2004).
18
The decision did not specify what “documentation” was provided by petitioner.
12
APPENDIX
The following cases adjudicate proof of earned income for the purposes of
claiming the EIC. These decisions are not binding precedent for any New
York judicial proceeding, but may be a useful resource in determining which
factors are relevant in documenting EIC income.
Also, note that these cases were only considered for their analysis of
income documentation, not other EIC-related issues such as verification of
dependents.
13
14
15
16
Copyright Appleseed 2010
All rights reserved
Please contact Jeremy Cook for permission to reproduce.
202.347.7960 or jcook@appleseednetwork.org