Eligibility Requirements after Denial of the
Earned Income Credit
DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8953] RIN 1545-
AV61
TITLE: Eligibility requirements after denial of the earned income
credit
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
SUMMARY: This document contains final regulations that provide
guidance to taxpayers who have been denied the earned income credit
(EIC) as a result of the deficiency procedures and wish to claim the
EIC in a subsequent year. The temporary regulations apply to
taxpayers claiming the EIC for taxable years beginning after
December 31, 1997, where the taxpayer's EIC claim was denied for a
taxable year beginning after December 31, 1996.
DATES: Effective date: These regulations are effective June 25,
2001. Applicability
DATES: For dates of applicability, see §1.32-3(f) of these
regulations.
FOR FURTHER INFORMATION CONTACT: Karin Loverud at 202-622-6080 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and
Budget in accordance with the Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545-1575. Responses to this collection
of information are mandatory.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number assigned by the Office
of Management and Budget. The burden is reflected in the burden of
Form 8862.
Comments and suggestions for reducing the burden imposed by this
regulation should be sent to the Internal Revenue Service , Attn:
IRS Reports Clearance Officer, W:CAR:MP:FP, Washington, DC 20224,
and to the Office of Management and Budget , Attn: Desk Officer for
the DEPARTMENT OF THE TREASURY, Office of Information and Regulatory
Affairs, Washington, DC 20503.
Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.
Background
Section 32(k) was added by the Taxpayer Relief Act of 1997. Section
32(k)(2) provides that, in the case of a taxpayer who is denied the
EIC as a result of the deficiency procedures, no EIC is allowed for
any subsequent taxable year unless the taxpayer provides such
information as the Secretary may require to demonstrate eligibility
for the credit. On June 25, 1998, temporary regulations (TD 8773)
relating to earned income credit eligibility requirements under
section 32(k)(2) were published in the Federal Register (63 FR
34594). A notice of proposed rulemaking (REG-116608- 97) cross-
referencing the temporary regulations was published in the Federal
Register for the same day (63 FR 34615).
No written comments responding to the notice of proposed rulemaking
were received. No public hearing was requested or held.
As part of an audit pertaining to the IRS's management of the EIC
eligibility program, the Treasury Inspector General for Tax
Administration recommended that the Treasury and the IRS reconsider
(1) the time at which the taxpayer should be required to establish
eligibility to claim the EIC, and (2) whether the eligibility
requirement should pertain to the reason the EIC was denied. For
example, under the temporary regulations, a taxpayer who is denied
the credit on the basis of a child who is determined not to be a
qualifying child must establish eligibility the next time the
taxpayer claims the EIC, regardless of whether the taxpayer is
claiming the credit on the basis of one or more qualifying children
or on the basis of no qualifying children. Treasury and the IRS
believe that the purpose of the eligibility requirement (to prevent
erroneous claims) is better effectuated if the taxpayer establishes
eligibility the next time the taxpayer claims the credit with one or
more qualifying children, rather than the next time the taxpayer
claims the credit.
The IRS is currently exploring whether, and to what extent, its
system is capable of undertaking such a change. If a change is made,
it would not affect the method of establishing eligibility, that is,
the taxpayer would continue to be required to attach a completed
Form 8862 to his or her tax return. The Treasury and the IRS do not
expect any change will affect returns for tax year 2001.
If a change is made, the IRS expects to inform taxpayers of the
change in two specific ways. First, the IRS would revise Letter
3094, which informs the taxpayer of the eligibility requirements.
Second, the IRS would revise the instructions for Form 8862 to
clarify the return to which it must be attached. In addition, the
IRS would include information regarding the change in all IRS
taxpayer publications that deal with the EIC eligibility
requirements.
The proposed regulations under section 32(k)(2) are adopted as
revised by this Treasury decision. The revisions are discussed
below.
Explanation of Revisions
To permit the IRS to make changes to the EIC eligibility program as
indicated above, §1.32-3(c) is revised to state that the Form
8862 instructions will instruct the taxpayer when to file Form 8862.
A new sentence is added to §1.32-3(c) to the effect that, if
the taxpayer attaches Form 8862 to an incorrect return, the taxpayer
will nevertheless be required to attach Form 8862 to the correct
return.
The IRS and Treasury will consider written comments pertaining to
these revisions. Submissions should be sent to: CC:ITA:RU (TD8953),
room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044.
Submissions may be hand delivered Monday through Friday between the
hours of 8 a.m. and 5 p.m. to: CC:ITA:RU (TD 8953), Courier's Desk,
Internal Revenue Service, 1111 Constitution Avenue, NW., Washington,
DC. Alternatively, taxpayers may submit comments electronically via
the Internet by selecting the "Tax Regs" option on the IRS Home
Page, or by submitting comments directly to the IRS Internet site
at.
Special Analyses
It has been determined that these final regulations are not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations. It is
hereby certified that these regulations will not have a significant
economic impact on a substantial number of small entities. This
certification is based upon the fact that the underlying statute
applies only to individuals. Therefore, a regulatory flexibility
analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6)
is not required.
Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking preceding these regulations was submitted to the Chief
Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regulations is Karin Loverud, Office
of Division Counsel/Associate Chief Counsel (Tax Exempt and
Government Entities). However, other personnel from the IRS and the
Treasury Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 2. Section 1.32-3 is added to read as follows: §1.32-3
Eligibility requirements after denial of the earned income credit.
(a) In general. A taxpayer who has been denied the earned income
credit (EIC), in whole or in part, as a result of the deficiency
procedures under subchapter B of chapter 63 (deficiency procedures)
is ineligible to file a return claiming the EIC subsequent to the
denial until the taxpayer demonstrates eligibility for the EIC in
accordance with paragraph (c) of this section. If a taxpayer
demonstrates eligibility for a taxable year in accordance with
paragraph (c) of this section, the taxpayer need not comply with
those requirements for any subsequent taxable year unless the
Service again denies the EIC as a result of the deficiency
procedures.
(b) Denial of the EIC as a result of the deficiency procedures. For
purposes of this section, denial of the EIC as a result of the
deficiency procedures occurs when a tax on account of the EIC is
assessed as a deficiency (other than as a mathematical or clerical
error under section 6213(b)(1)).
(c) Demonstration of eligibility. In the case of a taxpayer to whom
paragraph (a) of this section applies, and except as otherwise
provided by the Commissioner in the instructions for Form 8862,
"Information To Claim Earned Income Credit After Disallowance," no
claim for the EIC filed subsequent to the denial is allowed unless
the taxpayer properly completes Form 8862, demonstrating eligibility
for the EIC, and otherwise is eligible for the EIC. If any item of
information on Form 8862 is incorrect or inconsistent with any item
on the return, the taxpayer will be treated as not demonstrating
eligibility for the EIC. The taxpayer must follow the instructions
for Form 8862 to determine the income tax return to which Form 8862
must be attached. If the taxpayer attaches Form 8862 to an incorrect
tax return, the taxpayer will not be relieved of the requirement
that the taxpayer attach Form 8862 to the correct tax return and
will, therefore, not be treated as meeting the taxpayer's obligation
under paragraph (a) of this section.
(d) Failure to demonstrate eligibility. If a taxpayer to whom
paragraph (a) of this section applies fails to satisfy the
requirements of paragraph (c) of this section with respect to a
particular taxable year, the IRS can deny the EIC as a mathematical
or clerical error under section 6213(g)(2)(K).
(e) Special rule where one spouse denied EIC. The eligibility
requirements set forth in this section apply to taxpayers filing a
joint return where one spouse was denied the EIC for a taxable year
prior to marriage and has not established eligibility as either an
unmarried or married taxpayer for a subsequent taxable year.
(f) Effective date. This section applies to returns claiming the EIC
for taxable years beginning after December 31, 1997, where the EIC
was denied for a taxable year beginning after December 31, 1996.
§1.32-3T [Removed ]
Par. 3. Section 1.32-3T is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION
ACT
Par. 4. The authority citation for part 602 continues to read as
follows: Authority: 26 U.S.C. 7805.
Par. 5. In §602.101, paragraph (b) is amended by:
1. Removing the entry for 1.32-3T from the table.
2. Adding an entry for 1.32-3 to read as follows:
§602.101 OMB Control numbers.
* * * * *
(b) * * *
CFR part or section where Current OMB identified and described
control No.
* * * * *
1.32-3.......................................1545-1575
* * * * *
Robert E. Wenzel
Deputy Commissioner of Internal Revenue
Approved: June 20, 2001
Mark Weinberger
Assistant Secretary of the Treasury
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