You Earned It: How Simple Reminders Lead to Increases in Tax Filing and EITC Receipt

Each tax season, many individuals procrastinate or completely fail to pay their individual taxes. As of 2006, the federal government estimated that there is a total of $450 billion in outstanding taxes; this represents a large increase from the 2001 gap of $345 billion. The IRS attributes this increase to the corresponding increase in tax liabilities, as compliance rates have remained consistent. More updated numbers are not yet available from the IRS, but it is reasonable to infer that this total continues to increase as tax liabilities grow. While it is difficult to estimate just how much goes unpaid each year, this cumulative total is startling.

New research conducted by John Guyton, Dayanand S. Manoli, Brenda Schafer, and Michael Sebastiani explores how one-time reminders can increase the likelihood of an individual filing his or her taxes. The research demonstrates that these reminders effectively increase filing rates for those likely to receive the earned income tax credit (EITC), as well as for those who owe back taxes.

This research focuses solely on individuals who are likely to be eligible to receive the EITC. The potential positive economic impact for these individuals and their communities is significant. Guyton et al. report that, in 2012, there were an estimated 39 million nonfilers, 4 million of whom were potential recipients of the EITC, leaving billions of dollars of potential tax revenue uncollected. The average EITC amounted to $2,212 in the 2014 tax season. The Brookings Institute estimates that, in 2013, the EITC helped lift 6.2 million people out of poverty, including 3.1 million children.

The researchers performed a two-part randomized control trial, using a stratified random national sample of 360,000 EITC-eligible nonfilers from 2011 and 2012. A random selection of 200,000 individuals received information in the mail in the form of a postcard or brochure about filing and tax credits in the 2014 tax season. In the second phase of the trial, they used the same sample group but only selected from those who filed in 2014. Of the approximately 130,000 who filed, a random 30,000 received another reminder in the 2015 tax season. In both phases, those who received reminders had higher filing rates, of approximately 0.5 to one percent. This increase was present across all income groups, regardless of past filing history. At first, this change may seem minimal. However, the authors encourage readers not to dismiss these small findings because, while small in absolute terms, they are large compared to the original “baseline filing rates” for the control group.

There are two notable variations to these findings. First, repeated reminders reduce recidivism. Participants who received the reminders in both 2014 and 2015 had higher filing rates than both individuals who received no reminders, and those who only received one in 2014. Reminders delivered in both years reduced recidivism by four percent.

Second, multiple reminders within the same year do not have a significant effect. One reminder is as effective as multiple reminders separated by fewer than two weeks. These findings, paired with the study’s observation that the EITC-eligible population files inconsistently, reveal that yearly individual reminders could drastically increase this population’s likelihood of filing. A reminder program could operate fairly cheaply, as a one-time, yearly reminder seems to be sufficient. However, the reminders would have to be issued again the next year.

While it is impossible to extrapolate from this research whether this effect would be present at all income levels, reminders could still have a significant impact, not only in lost federal tax filings but also on local economies and at an individual level. In addition, local economies greatly benefit from their citizens receiving the EITC. Brookings cites a California State University study that finds that the EITC impacts local economies at a rate almost double that of original EITC dollars received. A once-per-year reminder to targeted populations could be a cost effective strategy for increasing filing likelihood, and could have incredible positive effects on individuals and local communities.

Article Source: Guyton, John, Dayanand S. Manoli, Brenda Schafer, and Michael Sebastiani. “Reminders & Recidivism: Evidence From Tax Filing & EITC Participation among Low-Income Nonfilers,” National Bureau of Economic Research, No. 21904 (2016).

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