Business Corner

Many employers miss chance to offer no-cost employee benefit

Reprinted from Small Business Tax News

The latest government report on the Advance Earned Income Tax Credit suggests that small businesses might be missing an opportunity to provide a valuable employee benefit, at no cost to them.

The AEITC allows individuals who qualify for the Earned Income Tax Credit to receive a portion of the EITC in their paychecks, instead of receiving all of it when filing their year-end tax return. However, the Government Accounting Office recently announced that only a fraction of those eligible for this benefit are taking advantage of it.

“AEITC use was low -- only about three percent of EITC recipients potentially eligible for the advance received it in tax years 2002 through 2004, or about 514,000 of the 17 million potentially eligible individuals each year,” the GAO said in a report to the Joint Committee on Taxation. “About half of all recipients received $100 or less in AEITC and 75 percent received $500 or less for the year, with a total benefit paid of about $146 million each year.”

The Congressional watchdog agency noted that several efforts have aimed to increase use of the AEITC over the last 15 years, such as sending notices to individuals to inform them that they were potentially eligible for the AEITC, as well as making changes to IRS forms.

“Despite these efforts, use did not substantially increase and, for several reasons, it may be difficult to increase in the future,” GAO said. “For example, IRS officials, other experts, and prior GAO work suggest that individuals often do not elect the AEITC because they prefer receiving the entire EITC as a lump sum after filing their tax return.”

The report also found some compliance issues. “As many as 80 percent of AEITC recipients did not comply with at least one of the program requirements GAO reviewed, and some were noncompliant with more than one during the three years we reviewed,” the agency said.

For example, in tax years 2002 through 2004, about 20 percent, or more than 100,000 AEITC recipients, may not have been eligible for the AEITC because they had an invalid Social Security number. Also, nearly 40 percent (about 200,000 recipients) did not file the required tax return. And of the about 60 percent (more than 300,000) of AEITC recipients who did file a return, two-thirds misreported the amount received, GAO determined.

GAO recommended that IRS officials analyze various options to reduce noncompliance such as implementing a “soft notice” test. “If these options are deemed ineffective, and no other options are viable, the Treasury Secretary should provide an opinion to the Congress as to whether the AEITC should be retained,” the agency concluded. IRS agreed with the recommendation.

The AEITC can be a real help to some small businesses. Workers having larger paydays are more likely to meet their day-to-day expenses and are less likely to miss work. v

Reprinted with permission of Small Business Tax News, Copyright 2007, 1-301-951-1240. This information is distributed with the understanding that the editor and publisher are not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

Reprinted from Central Vac Professional, December 2007