I.R.C. § 32 provides the statutory rules for the EIC. The easiest way to understand all the EIC rules is to consult Chapters 1 to 3 of IRS Publication 596, which allows you to quickly assess your client’s EIC eligibility.

This publication cogently groups the various EIC rules into 3 sets:

• Rules for Everyone
• Rules If You Have a Qualifying Child
• Rules If You Do Not Have a Qualifying Child

Chapter 4 explains the income limits for the EIC.

The basic rules for the EIC are income limits, earned income, ineligibility of persons who legally must file as “married filing separately”, and the relationship, age, and residency tests for any qualifying child. A low-wage worker can receive an EIC refund even if there is no dependent, but most of the issues confronted by the tax attorney will involve the claiming of dependents and whether the dependent is a qualifying child or relative for EIC purposes.

For each tax year, there will be AGI limits for the EIC by family size and filing status.

Historically, the AGI limits have increased each year. In 2021, the AGI limits will range from $48,000 to $57,000 for married couples with children. Look to the Form 1040 instructions for the current AGI limits.

Earned income includes wages, salaries, tips, and other employee compensation (but only if these are includible in gross income)1  plus net earnings from self-employment.2  Earned income may also include an employer’s disability retirement plan benefits until the worker reaches minimum retirement age.

Earned income does not include pensions, annuities, unemployment compensation, social security, welfare, alimony, child support, inmate compensation, nontaxable workfare payments, and scholarship or fellowship grants not reported on a Form W-2.

If a married couple in a community property state such as Louisiana has been separated for more than 6 months and is separated at the end of the year, one spouse may elect to file a separate return as a “Head of Household” and use their own earned income to qualify for the EIC.

Proof of “earned income such as W-2 or 1099 Forms may be required by the IRS. Self-employed individuals should have records of their income, such as check stubs, bank statements showing deposits, or other business records.

• 1Prior to 2002, earned income included nontaxable earned income, e.g., voluntary salary reductions, 401(k) contributions, mandatory contributions to a state or local retirement plan, etc.
• 2Compensation paid by a third party for damages due to lost self-employment income will not constitute “earned income” for the purposes of the EIC.

Taxpayers who are married on December 31 of the tax year and who cannot file as “married filing jointly” face special problems. These taxpayers will not qualify for the EIC unless they meet the requirements for head-of-household filing status.1

If a married taxpayer did not live with the spouse at any time in the last 6 months of the year, the taxpayer may be able to file as the head of household if the taxpayer furnished more than half of the cost of maintaining the household.2  Unmarried taxpayers do not have to be the head of household in order to get the EIC.

Many EIC errors involve married taxpayers who could not legally file as single or head -of-household. If a taxpayer was married on December 31 of the tax year, review the taxpayer’s proof of separate residences and the 50% support test for head-of-household filing status.

If married taxpayers incorrectly filed as head-of-household or single, they may be able to file an amended tax return to get the allowable EIC for their income level. However, they are precluded from filing a joint return after a Notice of Deficiency has been issued and a Tax Court petition filed.3  Therefore, a joint return claiming an EIC should be filed before either spouse files a Tax Court petition if this is a feasible option.

• 1I.R.C. § 32(d); Mischel v. Comm’r, T.C. Memo 1996-553.
• 2I.R.C. §§ 2(b)(1), 7703(b).
• 3See, e.g., I.R.C. § 6013(b)(2); Pelayo-Zabalza v. Comm’r, T.C. Summ. Op. 2002-134; Benitez v. Comm’r, T.C. Summ. Op. 2002-12.

Only taxpayers with a “qualifying child” get large EICs. A “qualifying child” must meet 3 tests: relationship, age, and residency. The definition of “qualifying child” also requires that the child be younger than the person claiming the child and that the child have not filed their own return. This situation can happen when a person adopts an older adult to insure that benefits or property flow to that person upon death.1

• 1This was a common estate planning technique for same-sex couples before the U.S. Supreme Court legalized same-sex marriage in Obergefell v. Hodges, 576 U.S. 644 (2015).

Under the relationship test, a qualifying child is a child who is the taxpayer’s (a) child, stepchild, adopted child, foster child,1  or a descendant of any of them; or (b) sibling, step-sibling, half-sibling, or a descendant of any of them.

Under the age test, to be a qualifying child, the child at the end of the tax year must be (a) under the age of 19; (b) under the age of 24 and a “full-time” student; or (c) permanently and totally disabled at any time during the year, regardless of age.

• 1An eligible foster child is a child placed by an authorized placement agency, i.e., a court, state or local government agency or a tax-exempt organization licensed by the state. Hegwood v. Comm’r, T.C. Summ. Op. 2002-156.

The majority of issues that arise under the “qualifying child” definition involve the residency test. Generally, the contested issues involve documentation of the child’s residency and not legal issues.

The child must have lived with the taxpayer in the United States for more than half of the year.1  Note that for the EIC, there is no “support” or “household maintenance” test if the taxpayer can properly file as single or married filing jointly. A taxpayer can meet the residency test even if the other parent has custody under a court decree and provided more than half the support.2

A home is anywhere the taxpayer regularly lives and can include nontraditional homes such as homeless shelters. The legislative history of the EIC indicates that determinations of an individual’s principal abode should be made under rules similar to those for the head-of-household filing status.3

Temporary absences can count toward the half-year or whole-year requirements if the taxpayer or child is away from home due to special circumstances such as illness, school attendance,4  business or military service, vacation, detention in a juvenile facility, kidnapping (if not committed by a family member), or disaster displacement. Although not listed in IRS Publication 596, pre-conviction detention in a jail and custody agreements where the child is absent for less than 6 months may also count.5  In Rowe v. Commissioner, the taxpayer was eligible for the EIC even though she was absent from the household for the last 7 months of the year due to her confinement in jail.6

Tax preparation services often counsel a taxpayer not to claim a resident child if someone else has already filed for the EIC based on that child, even if the other person was not eligible to claim the child. The IRS will deny an electronic return where someone else has already filed for the EIC. In this situation, the proper procedure is to file a paper return, which will prompt an IRS examination to determine which taxpayer is entitled to claim the child for the EIC. The taxpayer will then have the chance to offer evidence of residency and to appeal if necessary.

• 1Prior to 2002, an “eligible foster child” had to live with the taxpayer for the whole year in order to be a qualifying child for the taxpayer’s EIC claim.
• 2Webb v. Comm’r, T.C. Memo 1990-581.
• 3H.R. Rep. No. 101-964 (1990).
• 4College attendance cannot count as a “temporary absence” if the child resided away from home at college and does not intend to return to the taxpayer’s home. Schatz v. Comm’r, T.C. Memo 1981-341.
• 5Cf. 26 C.F.R. § 1.2-2(c)(1) (temporary absence pursuant to custody agreement is “special circumstance”); Rowe v. Comm’r, 128 T.C. 13 (2007).
• 6Rowe, 128 T.C. 13.

Sometimes, a child is the “qualifying child” of more than one person. However, only one taxpayer (or a married couple filing jointly) can claim the EIC for the child.

If the EIC is claimed by two individuals who are each eligible to claim the child, a series of tiebreaker rules apply:

1. A parent wins over a non-parent.1
2. Where parents lived apart for some portion of the year, but each lived with child for at least 6 months, the parent who lived with child longer wins.
3. Where the child lived with each parent same amount of time, the parent with the higher AGI wins.
4. If neither parent is an eligible claimant, caretaker with highest AGI wins.

The law presents some planning opportunities for unwed parents who live together, but cannot file as “married.” If both unwed parents are the biological parents of a child, they can decide who claims the child for the EIC. If they have more than 1 child together, they can split their children. If both claim a child, the first tie breaker favors the parent who lived longer with the child. If residency is equal, the parent with the higher AGI wins.

When evaluating cases involving the EIC, take care to check if the claimed dependent was claimed by another household for public benefits, such as housing subsidies, food stamps, or Medicaid. This will be an obstacle to proving residency. If another claimant wrongly claimed the dependent as living in their household, that claimant may be examined if your client prevails on their EIC claim and may have to repay the benefits that were received. This should be explained to the client, especially if the other claimant is a family member.

• 1A parent should win over a step-parent.

The IRS seems to deny any EIC when it finds that the taxpayer does not have a qualifying child. However, a taxpayer whose income is low enough may qualify for the EIC even without a qualifying child.1  To be eligible, such a taxpayer (or the spouse, if filing jointly) must be at least 25 but under 65, not be a dependent or qualifying child of another person, and have lived in the United States more than half of the year.

If a parent’s dependent is not a “qualifying child”, check to see if the dependent qualifies as a “qualified relative.” Receipt of Social Security, food stamps, and rental subsidies may affect an indigent taxpayer’s ability to claim a dependency exemption for a “qualifying relative” as distinguished from a “qualifying child.”

• 1Chandler v. Comm’r, T.C. Summ. Op. 2002-74.

In the past, low-income taxpayers and their paid tax preparers have not developed documentation to support EIC claims as part of the tax return preparation. If the tax return is selected for audit, the IRS will demand documentation. It can be more difficult to obtain such documentation when the audit occurs. Taxpayers throw out or lose documentation. Agencies or businesses that may have documentation may close, have a difficult time locating older records, or be unwilling to cooperate. Witnesses may move. Therefore, if you have the opportunity to prepare the return, you should advise the taxpayer to obtain and maintain documentation of residency and support for that tax year.

A mother claiming a child can prove relation simply by submitting the child’s birth certificate. More birth certificates may be required if the taxpayer is claiming a grandchild or a niece or nephew. Submit all the birth certificates needed to show the relationship between the taxpayer and the claimed child.

Problems can arise for male taxpayers who may not be listed as the father on a birth certificate. That taxpayer will have to take steps to legally acknowledge the child if he wants to claim the child on his tax return. The taxpayer may have already done this in the context of a child-support proceeding. New birth certificates can be obtained when the legal acknowledgment is done.

Taxpayers claiming adopted children and children placed in foster care by a state agency will have to show documentation of those facts.

Residency is commonly contested in an EIC audit. The key is to provide third-party records that show the names, common addresses, and dates of common addresses of the taxpayer and any qualifying children. Low-income people frequently change apartments. This can make the documentation quite burdensome. Nonetheless, the taxpayer can generally find some records to establish her own address, e.g., leases, rent receipts, subsidized housing records, utility bills, other bills, food stamp records, public assistance notices, medical records, driver licenses, pay stubs, etc.

On the other hand, it can be difficult to find third-party records that establish the address of a child, particularly a young child. The IRS suggests school records, day care records, medical records, and social service agency or community-based organization records to establish a child’s address. Records submitted to the IRS should show a common residency of more than 6 months, e.g., a record from the beginning of the year and a record at least 6 months later with the same address.

If these records do not exist, the taxpayer should try to get a letter on official letterhead from the child’s school, medical provider, childcare provider, or the taxpayer’s clergy, employer, or landlord. Ask the potential affiant if they would be willing to testify in Tax Court if necessary. Explain that they can probably participate virtually if needed. If possible, the affidavits should be notarized. They should state that the taxpayer and children lived together for 6 months or more during the tax year in question. This can be difficult since these third parties may not know the exact duration of the common residency.

IRS examiners are less impressed by letters and affidavits from relatives, friends, and neighbors. You should try to get another letter or some corroborating documents if the taxpayer must rely on letters from relatives, friends, and neighbors. As a practical matter, relatives, friends, neighbors, school bus drivers, or lawyers handling divorce or custody matters are often more competent witnesses on the issue of common residency than the affiants preferred by IRS auditors. Fortunately, the IRS Appeals officers and the Tax Court, unlike the IRS examiners, can and do give weight to affidavits or testimony by such witnesses.

Tax Court judges can and do rule in favor of the taxpayer based primarily or exclusively on a taxpayer’s credible testimony. Of course, testimony by other credible witnesses is also helpful. As a practical manner, the IRS generally will not have any witnesses on the EIC issues with the possible exception of a competing claimant. The Tax Court has even ruled in taxpayers’ favor when the testimony as to the child’s address is contrary to the address in school records. The taxpayer’s credible testimony can be given more weight than “official” records.1  Never send original documents to the IRS. The IRS routinely loses documents. You should write the taxpayer’s Social Security number on each document that you send to the IRS.

• 1See, e.g., Coats v. Comm’r, T.C. Memo 2003-78; Sliwinski v. Comm’r, T.C. Summ. Op. 2003-49; Gingrich v. Comm’r, T.C. Summ. Op. 2002-158.

Lastly, the IRS may contest the “earned income” claimed by the taxpayer if it is not collaborated by a W-2 or 1099. This can eliminate the EIC even if the taxpayer can prove a qualifying child. Many low-income taxpayers have small businesses such as styling hair, cutting grass, or childcare, in which their income is not reported to the IRS by a third party. They will have to provide evidence of their income through bank records, cancelled checks, or other business records. Receipts can be used to substantiate the expenses incurred with the business. Affidavits from customers or suppliers may have to be used if no other records exist.

There are several “big picture” principles that you should know for the defense of a typical EIC audit or disallowance.

For most low-income taxpayers, the disallowance of the EIC will account for most, if not all, of the tax adjustment or deficiency proposed by the IRS. Therefore, your primary goal is to protect the EIC. The related Child Tax Credit can also be large.

Even one qualifying child can get a taxpayer a large EIC. The IRS wrongly denies the entire EIC claim when it finds that a claimed child does not meet the residency, relationship, and age tests. You may find that a taxpayer who claimed more than one child has one qualifying child and another child that is not eligible. It is worthwhile to appeal on the issue of claiming the second child.

Single and head-of-household filers get the same EIC. The amount of the EIC is based on the taxpayer’s AGI. Therefore, the head-of-household filing status generally does not affect the amount of the EIC. If a married but separated taxpayer needs head-of-household status to qualify for the EIC, the taxpayer will need to document expenses for the household and dependents.

An unwed or divorced taxpayer can qualify for the EIC because that taxpayer can legally file as “single.” It is amazing how many IRS agents and paid tax preparers do not know this. Instead, they take the position that a single taxpayer has to meet the head-of-household filing status to get the EIC. They are wrong. The head-of-household status is, however, absolutely crucial for taxpayers who are married on December 31 of the tax year and who cannot file as “married filing jointly.”

Many low-income taxpayers receive money from third parties, e.g., Social Security, welfare, or subsidized housing assistance. These funds do not count as support by the taxpayer.1

Therefore, these taxpayers may not qualify for the head-of-household filing status if their earned income is less than their income from third parties.

• 1See, e.g., Huynh v. Comm’r, T.C. Memo 2002-237 (HUD rental assistance); Gulvin v. Comm’r, 644 F.2d 2 (5th Cir. 1981), aff’g T.C. Memo 1980-111; Lutter v. Comm’r, 514 F.2d 1095 (7th Cir. 1975); Rev. Rul. 74-543, 1974-2 C.B. 39; IRS Pub. 501.

A taxpayer whose EIC was reduced or denied by the IRS must file a Form 8862 with a subsequent return in order to claim the EIC.1  This form asks for additional information about claimed dependents.

• 126 C.F.R. § 1.32-3.

If the EIC was denied for tax returns (beginning in 1997) and the IRS determines that the error was due to reckless or intentional disregard of the EIC rules, the taxpayer cannot claim the EIC for the next 2 years. If the error was due to fraud, the taxpayer cannot claim the EIC for 10 years.1  Such disallowance could cost the taxpayer several thousand dollars per year in tax refunds. IRS determinations of reckless disregard or fraud are reviewable through the Tax Court deficiency procedures.2  The EIC 10-year ban is often asserted with a civil fraud penalty. The IRS generally finds fraud if they see the taxpayer has made the same errors for three or more continuous years.

Such determinations can be appealed if you believe your client made a good-faith effort to follow the rules and was not alerted to the errors. A client may file several returns before the IRS makes a final decision on an EIC audit. You would want to appeal if the client has cognitive or mental disabilities. You may also be able to shift blame to a tax preparer who gave bad advice, did not question the client about eligibility, or did not collect the correct documentation. It is helpful to file a Tax Preparer Complaint in this situation. If a client filed a return without assistance, the client’s level of education or experience with tax returns may be a relevant issue. Lastly, clients with limited English proficiency may provide an opportunity to argue that they were unable to understand the complex EIC rules or that they were taken advantage of by an unscrupulous preparer.

• 1I.R.C. § 32(k).
• 2I.R.C. § 6213(g)(2).

In most cases, a child of divorced or separated parents is the “qualifying child” of the custodial parent for EIC purposes. The “custodial parent” is the parent with whom the child lived for the greater part of the year.1

• 1I.R.C. § 152(c)(1)(B).

Even if a noncustodial parent may have been able to take a deduction or a tax credit for a “qualifying child” under I.R.C. § 152(e),1  the fact that a noncustodial parent may claim a child as a dependent under the general rules of the Tax Code does not automatically allow the noncustodial parent to claim that child for the EIC; these rules only allow the noncustodial parent to claim other child-related credits such as the childcare credit.

Many noncustodial taxpayers claim the EIC, believing that the same rules apply to all child-related credits. A state divorce or custody decree cannot change the federal requirements for the EIC. In order for a taxpayer to claim a dependent for the EIC, the dependent must reside in the taxpayer’s household for 6 months or more. As a result, few noncustodial parents will be eligible for the EIC. Many family law attorneys do not adequately explain this to their clients, leading noncustodial parents to wrongfully claim the EIC.

Nevertheless, a parent who meets the relationship, age, and residency tests should still get the EIC regardless of the custody arrangement.

Federal law deems the EIC to be the taxpayer’s separate property.2  One-time tax refunds are not “income” for the purposes of child support calculations.3

• 1See Section 9.4.
• 2Rev. Rul. 87-52, 1987-1 C.B. 347.
• 3La. R.S. 9:315(C)(3)(a).