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Individual Tax

EIC can be disallowed for two years even for partial denial in previous year

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

Chief Counsel Advice 201931008

In Chief Counsel Advice, the IRS has stated the earned income credit (EIC) can be disallowed for two years even if the EIC was only partially denied in the previous year due to reckless or intentional disregard of the EIC rules.

Background. Certain low-income workers with qualifying children can claim an earned income credit (EIC). (Code Sec. 32) The amount of the credit is partially a function of the number of qualifying children. (Code Sec. 32(b)(1))

Where there is a final determination that a taxpayer’s claim of an EIC was improper due to reckless or intentional disregard of rules and regulations (but not fraud), the taxpayer may not claim an EIC for two years after the most recent tax year for which the final determination was made (two-year ban). (Code Sec. 32(k)(1)(A) and Code Sec. 32(k)(1)(B)(ii))

Facts. TP claimed three children for the EIC, but the IRS disallowed the credit for one child. TP continued to claim that child in subsequent years even though TP knew that she was not entitled to claim the child.

Issue. Can TP be subject to the two-year ban, even though she was entitled to the EIC for the other two children?

Decision. Yes. The IRS may subject a taxpayer to the two-year ban for claiming a child that did not qualify for the EIC, when the taxpayer knows that she is not entitled to claim that child, if a final determination is made that the taxpayer’s claim for that child was due to reckless or intentional disregard for the rules and regulations.

Code Sec. 32(k)(1)(B)(ii) does not prohibit imposition of the ban where there was a partial disallowance.

The two-year ban applies even though the taxpayer otherwise would have been entitled to the EIC for her other two children.

References: For the two-year ban of the EIC, see FTC 2d/FIN ¶A-4206United States Tax Reporter ¶324.02.

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