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Evidence to PolicyScaling up an evaluated pilot › Reminders to increase take-up of tax credits

Reminders to increase take-up of tax credits

Following an evaluation in California testing variations of reminder letters to low-income households to increase take-up of tax credits, the US tax agency scaled up nationally the use of reminders that simply and prominently displayed potential benefits.

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In the United States, many people who are eligible for social and economic benefits do not claim those benefits. Researchers partnered with the United States Internal Revenue Service (IRS) to test the effectiveness of different messages to taxpayers designed to encourage them to claim the earned income tax credit (EITC), one of the country’s largest cash assistance programs. Research by J-PAL affiliates Saurabh Bhargava (Carnegie Mellon University) and Dayanand Manoli (University of Texas, Austin) found that repeated mailings with simple, highly relevant information improved taxpayers’ likelihood of claiming benefits. Informed by the evaluation, the IRS redesigned their notification letters to remind eligible individuals to claim their EITC benefits based on the messaging researchers found to be most effective. This change has led to national improvements in take-up of EITC benefits.

The Problem: Each year, more than 20 percent of individuals and families eligible for EITC benefits fail to claim them.

As elsewhere, US public benefits programs suffer from low take-up rates, meaning individuals fail to enroll in benefits they are eligible for. The federal EITC is the largest means-tested cash transfer program in the United States. The amount of tax credit depends on an individual’s income, marital status, and number of dependent children.

The EITC was conceived as an incentive for low-income Americans to work. Workers receive credit beginning on their first dollar of earned income. The credit rises with income until it reaches a maximum level and then is phased out at higher income levels.1 If the amount of tax credit earned exceeds the amount of taxes owed, the IRS mails checks to individuals for the remaining balance.

In 2005, nearly a quarter of those eligible for the federal EITC failed to claim these benefits, which amount to 33 days of extra income on average per recipient. This means that approximately 7 million individuals are losing out on an average of US$1,100 each per year. This missed benefit could make a real difference to low-income Americans eligible for the EITC, who on average earn approximately US$14,000 a year.

Individuals might not claim their benefits for a number of reasons: They might be unaware of the program or confused about the program rules, put off filing to claim their benefits, or get overwhelmed by the small hassles involved in claiming. Traditionally, the IRS has sent reminder letters to help overcome some of these barriers, but these reminders were complicated. The results of this study suggest that most individuals fail to take up social benefits because of complex forms, confusion about program rules, or uncertainty regarding eligibility.

The Research: Researchers tested a variety of different reminder notices making information less complex and more salient, including specific messages related to social and economic stigma, in order to identify which messages had the most impact on EITC take-up.

J-PAL researchers partnered with the IRS to test different approaches to improving EITC take-up. This study involved more than 35,000 EITC-eligible taxpayers in California. In total, these taxpayers were missing out on US$26 million in unclaimed benefits. The IRS sends reminder notices and claiming worksheets to individuals who fail to claim their benefits when they file their taxes. All those selected for the study had not responded to previously sent reminder letters.

The researchers modified the content and appearance of a second reminder letter to test three possible explanations for non-response: They varied the complexity of the notices and worksheets, made information about benefits more or less salient, and varied whether or not they included messages related to social and economic stigma.

Overall, 22 percent of those receiving a second follow-up mailing as part of this study claimed their EITC credit, for a total increase in claims of about US$4 million. There was significant variation in response rates based on which notice individuals received. The results suggested that reminder letters that highlighted the amount of benefit individuals could expect to claim and those that presented information in a simpler format were the most effective. Thirty-one percent of those who received a notice that clearly stated the expected benefit amount and 23 percent who received reminders in simplified language claimed their EITC credit, compared to only 17 percent of those who received the standard notice. Including messaging that attempted to reduce personal stigma associated with claiming the EITC credit had no effect.

For more details, see the evaluation summary.

From Research to Action: This study is part of an ongoing research partnership that led the IRS to scale up the simplified reminder notices to encourage eligible individuals to file for their EITC benefits.

Based on the results of this project, the IRS redesigned the reminder notification letters sent to tax filers who fail to claim their EITC benefits. The revised notices are simplified and clearly communicate potential benefit amounts (see Figure 1). Because the research showed the effectiveness of an inexpensive and simple improvement in a key performance metric, the IRS was able to quickly apply changes nationally. These redesigned letters now reach all eligible beneficiaries who have not yet claimed EITC benefits, which in 2014 was over 361,000 people.

Simplified IRS notification letter

Figure 1: Simplified IRS notification letter

In addition, the IRS has built on this research in multiple ways. This study helped deepen a key relationship between the researchers and the IRS, which is now placing a higher priority on similar tax administration research. The IRS worked to build internal research capacity and apply behavioral insights to improve tax administration, and it has continued developing the Joint Statistical Research Program to create more partnerships between IRS researchers and external researchers to improve federal tax administration.2

References

Bhargava, Saurabh and Dayanand Manoli. 2015. "Psychological Frictions and the Incomplete Take-Up of Social Benefits: Evidence from an IRS Field Experiment." American Economic Review 105(11): 3489-3529. http://dx.doi.org/10.1257/aer.20121493.

1Center for Budget and Policy Priorities. “The Earned Income Tax Credit.” Last modified April 19, 2018. 

2Guyton, John, Pat Langetieg, Day Manoli, Mark Payne, Brenda Schafer, and Michael Sebastini. 2017. “Reminders and Recidivism: Using Administrative Data to Characterize Nonfilers and Conduct EITC Outreach.American Economic Review: Papers & Proceedings 2017, 107(5): 471-475.;

Guyton, John, Kara Leibel, Dayanand S. Manoli, Ankur Patel, Mark Payne, and Brenda Schafer. 2018. “Tax Enforcement and Tax Policy: Evidence on Taxpayer Responses to EITC Correspondence Audits.” NBER Working Paper No. 24465, March 2018.