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).