The Earned Income Tax Credit faces an improper payment rate of 33%, while 15% of Child Tax Credit refunds are paid incorrectly, according to a new issue brief published by the Bipartisan Policy Center. The report identifies a core problem: the IRS struggles to confirm income from gig work and self-employment because third-party reporting is scarce, leaving workers to track and declare earnings themselves. While these credits lift families out of poverty and encourage workforce participation among lower earners, the verification gap undermines their credibility and accuracy.

Income misreporting drives a substantial portion of returns that get flagged for potential mistakes, the report finds, with self-employment earnings posing the toughest verification challenge. Roughly 50% of gig workers earn less than $50,000 annually, placing many in the income ranges where the EITC and CTC phase in or plateau. A single parent with two children qualifies for the maximum EITC of $7,152 when earnings fall between $17,880 and $23,350, while a married couple with one child receives a top credit of $4,328 with income between $12,729 and $30,470. Because platforms and businesses only issue Form 1099-K to gig workers whose payments exceed $20,000 and 200 transactions per year—and Form 1099-NEC only when contract payments top $2,000—much of this income goes unreported to the IRS at filing time, even though it remains fully taxable. Income volatility among lower-wage workers makes year-to-year credit size difficult to predict, and research shows taxpayers cluster around the first kink point, the income threshold at which the credit reaches its maximum, with self-employed claimants showing higher concentration, likely reflecting strategic reporting of otherwise-unverifiable informal earnings.

More than three-quarters of paid tax preparers are unenrolled, meaning they face no government certification, training requirements, ethical standards, or competency tests, and they commit errors at higher rates. Earlier IRS research found that roughly half of EITC returns filed by unenrolled preparers claimed refunds larger than clients were eligible for, the report states, and these returns made up 91% of all EITC audits and 94% of post-audit adjustments due to inaccuracies. Taxpayers remain responsible for correcting mistakes and paying penalties even when the error originated with the preparer, who faces comparatively light consequences. When the IRS suspects an error on a return claiming these credits, it typically opens a correspondence audit, sending the taxpayer a written notice explaining the problem and correction process, experiences that often increase confusion and delay returns.

The rise of the gig economy has given millions of Americans flexible earning opportunities, but the varied tax structures complicate how behavior is captured and verified. In the EITC's phase-in range, an additional dollar of earned income boosts take-home pay by more than a dollar once the credit is factored in, continuing until earnings reach the level where the credit is fully phased in at its maximum amount. Because this income is often unverifiable by the IRS, it's difficult to distinguish whether resulting patterns reflect genuine changes in work behavior or strategic reporting, the report explains. Some research suggests this incentive leads to increased self-reported income only up to the level at which the maximum credit is reached, even if more income was earned, while the research remains unclear on how much of this altered claiming behavior reflects intentional efforts to maximize the credit versus honest confusion about eligibility rules.

The Bipartisan Policy Center recommends three reforms to address the verification challenges. Congress should amend tax code to allow businesses and independent contractors, including gig workers, to voluntarily agree to withhold income for taxes, similar to how withholding works for employees, simplifying income tracking for millions of workers. Policymakers should also increase oversight and penalties for unenrolled paid preparers, including imposing or raising penalties for altering returns after taxpayers sign them, preparing improper returns, misappropriating refunds, and using invalid preparer identification numbers. The report also calls for bolstering funding for government-run free tax preparation services like Volunteer Income Tax Assistance sites and Low-Income Taxpayer Clinics, ensuring taxpayers have access to trusted support that can reduce filing errors and sometimes remove the need for paid preparers altogether. Together, these changes would strengthen the integrity of the EITC and CTC and deliver them more effectively to eligible workers and families.