Refundable tax credits such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) are important policies for supporting American families, but they are plagued by persistent program integrity issues that undermine the public’s trust in them. According to the most recent GAO estimates, in FY 2024 the IRS mistakenly paid out $16 billion in EITC refunds — one‑quarter of the entire program — to individuals who were ineligible for the payouts. For the CTC, it sent another $3 billion — one-tenth of that program’s refundable portion — to ineligible individuals.
The Minnesota fraud scandal, entailing the theft of hundreds of millions of dollars from pandemic-era government programs for the poor and vulnerable, has catapulted program integrity to the top of the national agenda. Congress can and should address the high improper-payment rates in a manner that protects the families whom these tax credits serve and that restores public confidence in the IRS’s ability to administer payouts responsibly. Lawmakers can take a crucial first step by introducing new verification safeguards to ensure that payments go only to those who are eligible for them.
Bipartisanship is both key and achievable. A reform attempt last year foundered on a controversial EITC “precertification” measure included in the Republican tax package that polarized the issue across partisan lines. Such polarization is unwarranted and unhelpful given the urgency of bipartisan support for program integrity.
By taking a close look at two important case studies in tax credit verification — an early 2000s IRS pilot program and Canada’s decades-old program — we can tease out which aspects boost verification without adding administrative burden and outline a way forward for bipartisan reform.
The IRS struggles to stanch improper refundable tax credit payments
There is a broad consensus that improper payment issues, which have plagued both the EITC and CTC programs for decades, stem primarily from the IRS’s limited ability to verify whether children whom taxpayers claim for the credits meet the programs’ eligibility requirements. To meet these requirements, qualifying children must be related to and have lived with the claimant for more than half of the tax year. The increasing complexity of family arrangements — single parents with shared custody, married couples with nonbiological parents sharing custody, and intergenerational households — has made it more difficult to determine eligibility in many cases. It is true that in some instances, claimants might be shifting children on paper to maximize their refund. But experts largely agree that genuine confusion over who should or should not claim children each year drives many of the errors that lead to improper refund payments.
Whereas other family benefits such as TANF and Medicaid rely on application processes that verify eligibility before benefits are paid out, the CTC and EITC rely on self-attestation with limited use of third-party verification, as is the case with other parts of the tax code. This approach keeps administrative costs very low — about 0.5 percent of total costs for the EITC versus 5 percent to 15 percent for traditional family benefits.
Instead of verifying eligibility in the application process, the IRS conducts random audits after it’s made payments, hoping to detect and deter potential tax cheats and to claw back any improper payments. But the audit process can ensnare families who make honest mistakes. In fact, too often, families find out they have made mistakes only after they become subjected to what can be a very intimidating IRS audit, which is burdensome for both tax filers and the IRS. Audits have been on the rise but have done little to reduce the EITC’s and CTC’s stubbornly high improper payment rates.
The promises and pitfalls of annual precertification
In proposing a new precertification measure last summer, Congress drew on the IRS’s early 2000s pilot program to verify that qualifying children also met the eligibility requirements before the IRS sent out refunds.
Republicans’ reconciliation bill initially included an EITC precertification provision aimed at reducing improper payments, but it was dropped because it failed to meet Byrd rule requirements, which prohibit items viewed as nonbudgetary from being included in a budget reconciliation measure.
That earlier version of the bill would have directed the treasury secretary to establish a new EITC certification program to preempt eligibility errors at the outset. Under the proposal, the secretary would have had until 2028 to develop an application process, including an online portal through which EITC claimants could submit the required information and documentation to verify ahead of tax time that they met the tax-credit programs’ qualifying-child requirements. Once verified, claimants would receive an EITC certificate, which they would be required to submit with their tax return when claiming the credit at tax time.
The Congressional Budget Office projected that the certification program would have saved the government over $2 billion annually. In most cases, the IRS would have still sent out EITC refunds to the families of eligible children but certification would have helped ensure refunds went to those who could properly claim them rather than to another, ineligible family member. The goal was to reduce improper payments while increasing the proportion of legitimate refunds.
There is historical precedent for the reform: The IRS piloted and studied a similar program two decades ago and found that it reduced improper payments by deterring erroneous claims; gave families an opportunity to determine who is actually eligible to claim children for the tax credit; and prevented erroneous payments from going out. The idea of proving eligibility at the outset enjoyed broad support among pilot participants, with about two-thirds of those who responded to a survey in favor.
Despite some promising results, many advocates still worried that other elements of the proposed certification program would impose substantial administrative burdens on families and third parties (e.g., school administrators) in the community, and that it would prevent many eligible families from receiving credits. While the pilot program highlights several potential issues with certification, it also contained important lessons for future reforms.
First, it suggests the Treasury has the ability to make the process easy for families and the IRS by using third-party affidavits. These specialized forms, with dedicated lines filled out and signed by knowledgeable third parties such as school officials, social service agencies, or childcare providers were highly effective at verifying residency information. Childcare providers, for example, already provide families with required information for claiming the child and dependent care tax credit (CDCTC) at the end of the year. The IRS could make certification as easy as CDCTC certification for families — or even easier.
Second, taking advantage of advances in technology will be key to program success. The IRS declined to implement a full-scale certification program at the time specifically because it would have been labor intensive, requiring IRS agents to send out applications via regular mail and reviewing hard copies before issuing a certificate. The IRS was still in its digital infancy, having just launched its first online payment platform in 2006. Two decades later, the tax agency has developed an array of digital capabilities that have made it more accessible and user friendly. The Treasury could build on these successes by designing a program in a way that minimizes burdens on families while pursuing low-cost automated verification to the extent possible.
Third, it would be essential that Congress allocate generous funding for IRS outreach and support services to assist filers as the new process is implemented — something that was central to the pilot’s success. A smooth rollout that avoids the disastrous consequences we recently saw with the botched FAFSA overhaul will require dedicated resources. American families need to know that the IRS is a partner invested in making tax filing as easy as possible.
Lastly, many of the most onerous aspects of certification can be remedied by reforms that reduce the cadence of verification to better balance effective program integrity and minimizing burdens on families, third parties, and the IRS. For instance, because most children are part of relatively stable households whose composition does not change year to year, annual verification does not make sense in most cases in which there are no relevant changes to report to the IRS. Parents are likely to resent requirements to provide documentation to prove their circumstances are unchanged from the previous year.
In sum, the lesson of the EITC certification pilot is not that Congress cannot constructively pursue program integrity reforms with new verification measures. Rather, while wholesale adoption would have many drawbacks, Congress can build on the positive aspects. Importantly, it can also draw lessons from abroad to figure out where to take any such program from here.
Lessons from abroad: A worthwhile Canadian initiative
Canada also administers refundable tax credits for families and for workers through its revenue agency. In contrast to the U.S. experience, the Canada Revenue Agency (CRA) reports that its accuracy rates hover around 99 percent. The Auditor General of Canada recently confirmed that the process has “ensured timely and accurate payments” to families. What accounts for the CRA’s success where the IRS has struggled for decades?
Currently, parents in the United States must annually self-attest that their children meet the qualifying child requirements for refundable tax credits, and they may be audited to verify their eligibility. The same would have been the case under the precertification proposal discussed earlier, with the additional requirement that parents would have been required to submit documentation each year as well for EITC refunds.
Canadians, as with Americans, must file their taxes each year. Rather than require parents to self-attest or submit documentation annually, though, the CRA allows parents to verify their eligibility for tax credits at the time they register their child’s birth — and it only requires verification when family arrangements change. This system provides the best of both worlds: enough verification to prevent improper payments without burdening families.
In the Canadian system, parents verify that the child resides with them and designate which parent is “primarily responsible for the care and upbringing of the child” for the purposes of receiving child-related tax credits. Canada has developed an Automated Benefits Application whereby parents fill out forms to register the birth with their province’s vital statistics agency, which shares this information with the provincial and federal revenue agencies that administer child-related tax credits. These agencies retain the information and can administer credits accordingly. Parents are required to submit verifying documentation again only when household arrangements change as a result of divorce, custody, and so on.
The CRA has also developed an online portal on which the primary caregiver is required to update the agency on changes in family arrangements. Parents must provide relevant documentation for these changes so that the revenue agency can verify them before adjusting credit payments. Document requirements are similar to those used by the U.S. Treasury in the EITC pilot program discussed above, including letters from schools or childcare providers, signed court orders, decrees, separation agreements, or letters from other people in positions of authority who can attest to the child’s care and residence.
By limiting verification to circumstances that warrant it, Canada is able to confirm eligibility in a manner that minimizes improper payments and administrative burdens on parents, revenue agencies, and third parties.
Putting it all together
Congress’s habit has been to kick the can down the road on refundable tax credit programs’ integrity. Having done little, it has little to show. But as evidence from the IRS pilot program and Canada’s administration shows, there are effective solutions available if Congress is willing to consider a more comprehensive reform. It would require three major changes.
First, Congress should consider overhauling current qualifying child rules by shifting them toward something like Canada’s “primarily responsible for the care and upbringing of the child” standard. The American Family Act’s “care from the taxpayer” provisions are a good starting point but still lack means for verification.
This is why the second major change for Congress would be to create a process that allows new parents to designate a primary caregiver and send relevant documentation to the IRS on birth or in the adoption process. The IRS would be given the authority to keep this on file so that it would have access to the verified information when families file their tax returns each year.
Lastly, Congress would need to require the IRS to reestablish and upgrade an IRS portal to allow parents to easily update this information and submit documentation when family arrangements change.
Using these lessons, Congress can begin to build verification processes that reduce improper payments while ensuring that hardworking American families get the support they need and deserve to care for their children.
