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A tax loophole for common folks

Some 25 percent of eligible filers don't use the Earned Income Tax Credit. The IRS is trying to reduce errors in the program.

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It is now running a pilot program involving 25,000 people who must now "prequalify" their dependents. For example, to qualify as a dependent, the child must have lived with the tax filer for over half the year. A taxpayer in this pilot program must present records, such as school correspondence, utility bills, or even an official letter from a principal, to prove the child's residency. "We are trying to reduce the error rate while not driving away eligible taxpayers," says Williams.

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It is also an effort that meets with a fair amount of criticism from those who work with those in need. "Everyone says, 'Why not go after the Enrons and the people who write off things they shouldn't?' " says Mary Dupont, executive director of the Nehemiah Gateway Community Development Corp., a nonprofit in Wilmington, Del. "By enforcing such an onerous process, you might be turning away thousands of people who need it to survive."

Mr. Everson has defended the audits, especially since the General Accounting Office calls the program one of only two dozen high-risk areas that the government needs to manage to prevent fraud. "This has been highlighted for a long time," he said.

Helping tax filers

The EITC plays no insignificant role in Wampsville, the county seat of Madison County, a mostly rural part of New York. Last year, nearby Colgate University joined some 14,000 others groups that are part of the IRS's Volunteer Income Tax Assistance (VITA) program. The IRS trained Colgate students how to use government software and electronically file returns. As of last Wednesday, the students had filed 121 federal tax returns this year for people with an average income of $11,946. The average federal and state EITC refund is $1,588.

"We are taking a survey on what people plan to do with the money, and the top five responses are to get an apartment, buy a durable, move to another place, purchase a car, or pay bills," says Jill Tiefenthaler, an associate dean who initiated the program0 at Colgate.

Many of the recipients view the EITC almost as a savings account. At the county offices, Tiffany Mahady and Janet Orcutt both work as Medicaid social welfare examiners, helping to determine if people qualify for the program. Both have low enough incomes that qualify them for the tax credit.

Ms. Mahady, a young woman with a 2-1/2 year old daughter, is using the $4,000 she is receiving to pay off her credit card and buy a more reliable used car. This is her second year receiving the check.

Ms. Orcutt, who is filing for the program for the first time, will use her $4,000 to pay off bills and buy her two teenage sons some new clothes. "Their pants are too short," says Orcutt.

For some others, the EITC is a welcome surprise. Gorgene Schmidka of Oneida, a home healthcare provider, hurt her back and hardly worked last year. Her sole income was the Social Security check her mentally impaired daughter received each month. So she was pleasantly surprised when she found out she would receive a check for $3,000.

"It will be very useful," she says as she smiles.

David T. Cook contributed to this report from Washington.