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.