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November 02, 2011 The Tax Lawyer

The Low-Income Tax Gap: The Hybrid Nature of the Earned Income Tax Credit Leads to Its Exclusion from Due Process Protection

Vol. 64, No. 3 - Spring 2011

Megan Newman


     Sandra Booker lives in southeast , with her three children. She earns $20,000 per year as a receptionist and has lived in the same rented apartment for 20 years. This year she spent a month in the hospital and fell behind on rent. She convinced her landlord to delay eviction until her tax refund arrived, but weeks passed without a check. Finally she receives a letter stating that her refund has been frozen pending further evidence of eligibility for the Earned Income Tax Credit (EITC). Her landlord grows impatient and evicts her. For the first time, her family is forced to enter the emergency shelter system. Her teenage son is directed to a men’s shelter and the rest of the family moves to a family shelter. With the move and weighty concerns about maintaining her job, Ms. Booker misses the deadline to prove eligibility for the EITC and it is disallowed. This income would have been sufficient to provide first and last month’s rent and a security deposit on a new apartment.

    Imagine an alternative scenario. Ms. Booker receives a portion of her tax refund every two weeks as a $200 stipend. One day, she receives a letter stating that her eligibility for the work supplement is in question and she will be terminated from the program. She can appeal this decision by sending a list of documents to an address in . Ms. Booker has trouble deciphering the bureaucratic language in the letter, has no idea where to get a letter notarized, and has no source of legal assistance. The loss of the supplement causes her to fall behind in rent payments and she becomes homeless.

    The first version of Ms. Booker’s story represents the current distribution system for the EITC, the national low-income wage supplement. The credit is executed through the Code—not as a traditional welfare benefit as described in the alternative version of the story. The EITC is refundable: eligible taxpayers receive the subsidy through their tax refund checks even if they do not have a tax liability. However, one could easily imagine the latter model, where Congress chose to deliver this work supplement through a traditional transfer program like food stamps, unemployment insurance, or disability benefits. If the EITC were delivered through the welfare system, the deprivation of assistance described in the second story would be recognizable as a potential due process violation. The credit’s placement in the tax code, however, conceptualizes the benefit like other tax credits or overpayments, thus obscuring the impact of its deprivation. In the second context, the seizure seems more egregious than in the setting of the Service’s internal—and often mysterious—audit and collection procedures, but the effect of the seizure in both stories is identical.

    There is essentially no distinction between a direct grant of aid and a refundable tax credit in terms of the economic substance of the transaction. In both instances, the government agency uses statutorily defined criteria and formulas to determine a benefit amount and transfers the money to eligible recipients to reduce the effect of poverty. However, the difference in delivery mechanism has caused Congress to overlook the fact that, while most tax returns reflect an obligation of citizens to support the government, the EITC, like other transfer programs, reflects an obligation of the government to support a subgroup of citizens it has deemed vulnerable. The understanding that recipients of public benefits have a dire need for financial support and consequently need protection from deprivation is not reflected in the Service’s procedures for freezing and withholding the EITC. Further, congressional efforts—embodied in the 1998 Reform and Restructuring Act (RRA)—to protect taxpayers with deficiencies from property seizures without due process does not include EITC filers.

    Scholars have addressed the question of whether the Service’s audit and collection procedures for EITC returns meet constitutional due process requirements tangentially but not directly. Explorations of the essence of the EITC, its political and theoretical implications, the challenges and benefits to its placement in the tax system, and its impact on low-income working families reflect the philosophical enigmas of this hybrid program. Scholars have highlighted the disparate negative impact of the prevailing one-size-fits-all approach to tax assessment and collection on the low-income population but have not questioned the constitutionality of these procedures.

    This Comment analyzes the examination and collection procedures for the EITC through a due process lens and concludes that the hybrid nature of the EITC requires a conceptual shift in the traditional assumptions underlying both the tax system and due process requirements. Part II provides an overview of the credit and the intended beneficiaries. It charts the journey of an EITC tax return from the pre-assessment stage, to the assessment of liability, to the collection process. Part III reviews jurisprudence on the property interest and protections afforded public benefits recipients. Part IV applies this precedent to the EITC and explains the conceptual re-framing the EITC requires. Finally, Part V reviews reforms proposed by leading scholars and practitioners to enable the Service to conform more fully to its due process requirements.

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