10.4 EIC Audits and Disallowances

10.4 EIC Audits and Disallowances aetrahan Fri, 02/03/2023 - 11:14

The IRS audits many EIC returns due to high error rates.1  Correspondence audits are used to examine EIC claims. Because only 1 taxpayer may legally claim a child for the EIC, audits frequently occur when more than 1 taxpayer claims a child for the EIC.

Common reasons for disallowance of the EIC include:

  • The child’s residency with taxpayer was not documented.
  • The child’s relationship with taxpayer was not documented.
  • The taxpayer incorrectly filed as head of household and legally could have only filed as married filing separately.
  • The taxpayer’s EIC was reduced or denied by the IRS in a previous year, and a Form 8862 had not been filed with the new return as required.
  • The taxpayer was not a U.S. citizen or resident alien for the entire year.
  • The taxpayer did not provide evidence of the self-employment income that forms the basis for claiming the EIC.

Typically, an EIC disallowance will be accompanied by a disallowance of the head-of-household filing status, dependency exemptions, and the Child Tax Credit.

The vast majority of qualifying child errors occur because the residency test is not met.2  Documentation of the child’s residency and relationship is essential to defending an EIC claim. Many indigent taxpayers find the IRS demands for documentation daunting and are unable to satisfy the IRS without a tax professional’s assistance.

  • 1The EIC rules are complex. This complexity leads to errors by both the IRS and taxpayers. In prior years, the estimated EIC error rate has been about 30%. Internal Revenue Serv., Dep’t of the Treasury, Compliance Estimate for Earned Income Tax Credit Claimed on 1999 Returns (2002). The error rate remains high even though many low-income workers have their tax returns prepared by paid tax return preparers. The IRS error rate in its audits of EIC claimants is also high. You will find that some IRS auditors do not follow fairly basic EIC rules that are published on the IRS webpage.
  • 2Internal Revenue Serv., FS-2003-14, EITC Reform Initiative (2003).