Electronic Filing, Tax Preparers, and Participation in the Earned Income Tax Credit

Abstract

In 2002 more than 18 million low-income individual taxpayers received the Earned Income Tax Credit (EITC). Despite its size, non-participation in this program is a concern and substantial effort is devoted by the IRS, local governments and many non-profits to address it. Most of the tax returns for EITC recipients are filed electronically by paid tax preparers who often charge significant fees for their services. Using variation across states in the introduction of state electronic filing programs, we show that the introduction of electronic filing had a significant effect on participation in the EITC. Our results are robust to accounting for other welfare, EITC and IRS reforms introduced during the same period. We suggest that this effect is due to the impact that electronic filing opportunities had on the tax preparation industry, therefore providing an example of how a market-based approach can be effective in addressing the problem of program non-participation.