4.22.8. NRP EITC Component of the Individual Reporting Compliance Study

(1) The examiner should be alert for cases with post-processing adjustments related to taxpayer responses to math errors.

(2) For cases with these types of adjustments, the examiner needs to ensure the correctness of the per return RGS data and make changes as necessary. The examiner should also notify the NRP coordinator of the changes in the per return data.

(1) The examiner should be alert for changes to the EITC made on an amended return filed prior to the start of the examination. Look on the tax module transcript for a TC 764 or 765.

(2) The examiner should follow standard NRP procedures for adjusting RGS per return data, incorporating the amended return into the examination, and providing a copy of the amended return to the NRP Coordinator.

(3) A case where EITC was not claimed on the original return but was claimed on an amended return will be treated as an EITC component case if the amended return was filed and processed prior to examination notification.

(1) The examiner should always review case-building material to identify taxpayers who are subject to an EITC ban. This prevents ineligible taxpayers from receiving the EITC.

(2) For cases where there are indications that the taxpayer may be eligible for EITC but did not claim it, one of the first steps toward establishing EITC eligibility should be a check that the taxpayer is not subject to the ban.

(1) The requirement to recertify indicates that a taxpayer previously had EITC disallowed through deficiency procedures. As appropriate, the examiner should include this information in planning the examination, especially if it is relevant to imposing an EITC ban should EITC again be disallowed or reduced.

(1) The Advance EITC was eliminated for tax years after TY2010. For tax years 2010 and earlier, examiners should analyze the Forms W-2 data from the information return transcript and the return data to confirm that a taxpayer properly reported any advance payment of the EITC. If information from the Information Returns Master File (IRMF) suggests that advance payment of EITC was reported inaccurately, and if this was not previously classified, the examiner should add it to RGS.

(1) The tables in Exhibits 4.22.8-1 through 4.22.8-4 provide guidance on the use of case-building and document requests to substantiate the taxpayer’s eligibility for receiving the EITC.

(1) The NRP EIC Lead Sheet is an Excel workbook file that contains 10 worksheets or tabs. These worksheets consist of the Cover, EIC Lead Sheet, QC Summary Worksheet, Valid SSN Worksheet, QC-Relationship Test Worksheet, QC-Age Test Worksheet, QC-Residency Test Worksheet, QC-Tie Breaker Test Worksheet, EIC Earned Income Worksheet (optional), and EIC Disqualified Income Worksheet (optional).

(2) At the top of the worksheet titled EIC Lead Sheet, there is a section for the examiner to input the per exam EIC amount and summary information, regarding the conclusion of the exam. Other information in this section is auto-populated, either when the case is created or once the supporting worksheets are completed.

(3) For all cases where EIC is claimed or allowed, the examiner must complete this exam summary section and the EIC Eligibility Rules section on the same worksheet. These sections must be completed in their entirety. Even if a response to a question indicates ineligibility for EIC, the remaining questions should still be completed.

(4) The examiner must also complete additional sections depending on whether or not the taxpayer has at least one qualifying child (QC). If the taxpayer has no qualifying children, the examiner must complete the section titled EIC Eligibility Rules for Taxpayers who have no EIC Qualifying Children. This section is on the main EIC Lead Sheet tab. If the taxpayer does have a qualifying child or children, the examiner must complete the QC Summary Worksheet and all related test worksheets. These additional sections must be completed even if the taxpayer is determined to be ineligible to receive the EIC by the EIC Eligibility Rules section.

(5) The EIC Earned Income worksheet and the EIC Disqualified Income worksheet are both optional but may be used to compute earned income and disqualified (investment) income manually, if desired.

(6) The NRP EIC Lead Sheet workbook is color-coded throughout, with the Workbook Color Legend shown on the Cover tab. Green fields are to be completed by the examiner. Other colors designate other meanings: blue fields are auto-populated when the case is created; yellow fields show suggested audit steps to assist in examining the EIC issue; grey fields are not applicable; and pink fields show NRP Interview Questions.

(1) The fields shown in blue will auto-populate when the case is created. These fields include Taxpayer Name, TIN, Tax Period and Per Return amount.

(2) Fields requiring examiner input are shown in green. These include Examiner, Date, Per Exam, Reference, and Examiner Conclusion. The Per Exam amount and the Reference field should be entered upon completion of the exam. The Adjustment field will calculate automatically once you enter the Per Exam amount.

(3) The Workbook Conclusion section will be auto-populated based on responses to questions in the rest of the EIC Lead Sheet workbook.

(4) The Examiner Conclusion field reflects the final determination. Either select "see explanation below" and type in your conclusion in the space below, or select "see related workpaper" and enter the workpaper reference in the space that becomes enabled. If you choose the related workpaper option, ensure that it is completed electronically and attached as referenced.

(1) The EIC Eligibility Rules section addresses the basic eligibility requirements for the EIC and must be completed for all taxpayers for whom the EIC is claimed or allowed. These criteria are as follows. The taxpayer must:

• Have a valid SSN for EIC purposes,

• Not claim married filing separate (MFS) filing status,

• Be a US citizen or resident alien for the entire year,

• Not claim certain benefits under IRC § 911,

• Not have investment income in excess of a threshold amount,

• Have earned income and AGI below the threshold amount for their filing status and number of qualifying children (if applicable), and

• Not be the qualifying child of another person

(2) Some responses to the questions in this section will indicate that the taxpayer is not eligible for EIC. You must still answer all remaining questions in the section.

(3) Questions 1 through 4 in this section address the requirement for having a valid SSN. Answer question 1 (and 3, if applicable) regarding whether the taxpayer (and spouse, if applicable) has a social security number. These questions have drop down menus that require a "Yes" or "No". Question 3 also offers the "N/A" option to indicate there is no secondary taxpayer. If you select "Yes" to question 1 or 3, a follow-up question is enabled regarding the validity of the social security number for EIC. The suggested audit steps in yellow immediately below Questions 1 through 4 offer guidance on answering these questions.

(4) Question 5 ensures that the taxpayer meets the filing status requirement. The taxpayer does not qualify for the EIC if married filing separately.

(5) Question 6 addresses the citizenship status of the taxpayer. The taxpayer – and spouse, if a joint return – must be a U.S. citizen or resident alien for the entire year to qualify for the EIC.

(6) For Question 7, the taxpayer must not have excluded foreign earned income or housing benefits under IRC section 911 on Form 2555 or 2555-EZ to qualify for the EIC.

(7) Question 8 asks whether the taxpayer meets the requirement of having total investment income for the given tax year at or below a certain threshold. Investment income includes taxable and tax exempt interest, dividends, capital gain net income, net passive activity income and net rental and royalty income that is not from a trade or business. Refer to Publication 596 for detailed information about the composition of these items and special rules that apply for EIC. You may want to complete the EITC Disqualified Income Worksheet before answering this question.

(8) In order to qualify for the EIC, the taxpayer must have earned income. In addition, the taxpayer cannot exceed AGI and earned income limits based on the number of qualifying children and filing status. For Question 9, answer whether the taxpayer has earned income, and if so, click the drop down menu to select one of the options. You may want to complete the EITC Earned Income Worksheet before answering this question, although completion of this worksheet is optional.

(9) If the taxpayer, or spouse if a joint return, is the EIC qualifying child of another taxpayer, the EIC cannot be claimed. Answer questions 10 and 11 appropriately. If the tax return was not a joint return, select N/A for question 11.

(10) Question 12 asks whether the taxpayer has a qualifying child Per Exam and will be answered automatically based on information on the QC Summary Worksheet.

(11) Following question 12 on the EIC Lead Sheet tab is a section in yellow that contains links to other worksheets or sections of the EIC Lead Sheet workbook. If your taxpayer has a Schedule E, you may want to click the ‘EIC Disqualified Income WS’ link to compute the taxpayer’s net investment income. Although RGS will try to compute investment income, the examiner should verify that RGS puts the correct amount in the net investment income field on the RGS Return Setup, Schedule EIC tab. This step is only required if your taxpayer has a Schedule E.

(12) If your taxpayer does not have qualifying children per exam, click the link ‘EIC No Qualifying Children’ to address the additional eligibility requirements for taxpayers without qualifying children. This section is further down on the EIC Lead Sheet tab.

(13) If your taxpayer does have qualifying children per return or per exam, you must complete all required entries in the workbook for all the qualifying children eligibility requirements. Use the "QC Summary Worksheet" link to begin this process.

(1) This section addresses the additional eligibility requirement for taxpayers who have no EIC qualifying children per exam. To be eligible for EIC without a qualifying child, the taxpayer, and spouse if filing jointly, must meet three additional criteria:

• Age – Must be at least age 25 but less than age 65 at the end of the year,

  Note: For TY21 only - You do not need to be younger than age 65 to claim the EIC. The minimum age to claim the EIC is generally age 19; however, if you are a specified student (other than a qualified former foster youth or a qualified homeless youth), you need to be at least age 24. If you are a qualified former foster youth or a qualified homeless youth, you need to be at least age 18.

• Dependency – cannot be the dependent of another person, and

• Residency – must have lived in the United States for more than half the year

(2) Answer questions 1 and 2 for the age test. Either the taxpayer or spouse (if filing jointly) must be at least age 25 and less than age 65 on December 31 of the given tax year to qualify for EIC. Select "N/A" for question 2 if there is no secondary taxpayer. The lead sheet will indicate if the taxpayer does not meet the age test. If one of the spouses meets the test, an exception prompt appears and the appropriate conclusion is entered at the top of the lead sheet.

(3) To qualify for EIC, neither the primary nor secondary taxpayer can be the dependent of another person. Select "N/A" for question 4 if there is no secondary taxpayer.

(4) If the main home for the taxpayer is outside the United States for more than half of the tax year, the taxpayer does not meet the residency test for EIC. If married filing jointly, question 5 applies to both spouses.

(5) The Summary of No Qualifying Children rules section indicates whether the taxpayer has met the questions related solely to the No Qualifying Children portion of the lead sheet. Remember to review the top of the lead sheet to determine if the taxpayer met the overall EIC eligibility rules. If your taxpayer does not have qualifying children, you have completed all required portions of the EIC Lead Sheet.

(1) In order to claim EIC for a qualifying child, the child must meet each of the following tests: Valid SSN, Relationship, Age, Residency, Joint Return, and if applicable, the Tie-breaker. The EIC Lead Sheet workbook was designed to determine when these tests are met. If the relationship, age, residency and joint return tests are met, the individual has a qualifying child for EIC purposes. However, they must meet the additional two tests, valid SSN and tie-breaker, to claim EIC.

(2) Use the QC Summary worksheet to determine the EIC eligibility of children claimed on the return or added during the exam. The blue fields are auto-populated from the taxpayer’s return. If the information displayed in these fields is incorrect, modify it to reflect the correct name and SSN. Enter the SSN without dashes.

(3) If the taxpayer did not claim qualifying children or if one or more of the qualifying children claimed do not meet all of the eligibility requirements, additional fields are available to enter information for children allowed per the examination. If more than one child needs to be added, you may have to download an additional workbook, using the link provided.

(4) There are separate worksheets that must be completed to determine whether the children meet the eligibility tests. As you complete the eligibility worksheets for each qualifying child, the results flow through to the QC Summary worksheet which displays an "X" if the test was met. The last column reflects whether each child qualifies to be claimed by the taxpayer for EIC.

(5) To access the additional worksheets, click on the links in the QC Summary Worksheet. Once you complete a worksheet, click the "Back to Summary Worksheet"link to return to the QC Summary Worksheet. Use the same process to access and complete the remaining worksheets.

(6) Within each of these separate worksheets, audit steps in yellow provide information to assist you in determining whether the children meet the requirements for each test. You may be advised to review the case building information provided or to request additional documentation from the taxpayer if it is needed to make a determination.

(7) Each separate worksheet has a conclusion section that reflects whether the children meet the requirements for that worksheet’s test. The determinations are a result of answers given on the worksheet, and the conclusion information flows to the QC Summary Worksheet.

(8) The Workpaper Reference section indicates which worksheets have been completed and which need completion. If the indicated worksheet needs completion, the Workpaper Reference will read "no child entered." When the Valid SSN Worksheet is completed, the QC Summary Worksheet displays a Workpaper Reference of 410-3. The Workpaper References for the remaining worksheets are 410-4, 410-5, 410-6, and 410-7 for the QC-Relationship and Joint Return Tests, QC-Age Test, QC-Residency Test, and QC-Tie Breaker Test, respectively.

(9) The summary grid at the top of the QC Summary worksheet lists the children to whom the eligibility tests were applied. The Allowed (Per Exam) column reflects whether the child listed can be claimed as a qualifying child for EIC purposes.

(1) Use the Valid SSN worksheet to determine if the children meet the SSN requirements for EIC purposes. Qualifying children must have a Social Security Number (SSN) issued by the Social Security Administration. The child’s SSN must also be valid for EIC purposes in order to meet this test. However, children who were born in the given tax year but died the same year are not required to have Social Security numbers.

(2) The first question identifies whether the child was born and died in the same year and populates based on the entries made on the QC Age Test Worksheet. Complete the green fields for the next two Y/N questions to determine whether the child meets the Valid SSN test.

(3) If you respond to a question in a manner that is not consistent with previous entries, a warning message appears. For example, you will receive a warning if you enter a SSN that is either an ITIN or ATIN, since these are not valid SSNs for EITC. Once you correct your response, the warning message disappears.

(1) To satisfy the relationship test, the child must be the taxpayer’s:

• Son, daughter, stepchild,

• Legally adopted son or daughter or a child lawfully placed with the taxpayer for legal adoption,

• Brother, sister, stepbrother, stepsister, half-brother, half-sister,

• Eligible foster child, or

• Descendent of any of the above (e.g. grandchild, niece, or nephew)

(2) A qualifying child for EIC does not have to be the taxpayer’s dependent, as defined in IRC §152, unless they are married.

(3) Click in the field that describes the taxpayer’s relationship to the child and select "X" from the drop down list. Make one selection per child. If "Other Valid Relationship" is selected, enter a description of the child’s relationship to the taxpayer in the field provided. Make sure it meets one of the relationships identified above. If the taxpayer’s relationship to the child does not meet one of the relationships above, check "Invalid Relationship for EITC" and enter a description of the relationship in the field below. If the taxpayer does not know the child and/or did not realize that the child was claimed on the return, enter an "X" in the appropriate box.

(4) Question 2 asks if the child was married at the end of the given tax year. Typically, married children are not qualifying children for EIC purposes unless the taxpayer claims an exemption for the child on their tax return for the same year or could have claimed an exemption but gave that right to the other parent via Form 8332, a similar written statement, decree of divorce, etc. If either of these situations applies, select "Yes" for question 3.

(5) To satisfy the joint return test, the child must not have filed a joint return unless the return was filed only to claim a refund. Answer Questions 4 and 5, if applicable, to determine if the child meets the joint return test.

(6) For question 6, select the type of information used to make your determination as to whether the child met the relationship and joint return tests.

(1) In order to meet the age test, the child must be:

• Under age 19 at the end of the year and younger than the TP or the TP’s spouse,

• Under age 24 at the end of the year and a full-time student and younger than the TP or the TP’s spouse, or

• Any age and permanently and totally disabled

(2) The child’s date of birth and date of death fields for qualifying children Claimed Per Return are auto-populated from the tax return. If the data displayed are incorrect, make the necessary modifications.

(3) Enter birth and death information for qualifying children added during the examination. This information can be obtained from the case building materials or from the initial interview. Help boxes are highlighted and provide help based on the information entered in the date of birth and date of death fields.

(4) Questions 3 and 4 are shaded pink, indicating that this information (if applicable) should be obtained during the initial interview. If the qualifying child is under age 19, select "N/A."

(5) For question 5, select the type of information used to determine whether the qualifying child met the age test.

(1) To meet the residency test, the child must live with the taxpayer in the United States for more than one-half of the year. Use the Residency Test worksheet to gather information on the child’s residency during the year under examination.

(2) Question 1 applies ONLY to children claimed on the tax return. Enter the number of months the taxpayer said the child lived with them in the United States during the tax year. Determine this number from your interview. If it is different than what was reported on the Schedule EIC, use the number from the interview.

(3) For question 2, enter the substantiated number of months the child lived with the taxpayer in the United States during the tax year. This substantiation can be relevant written documentation—either IRS case-building information or taxpayer provided materials—or acceptable oral testimony. Use whole months and round up. If less than 7 months but more than half the year, enter 7 months because 6 months is considered less than half the year.

(4) Questions 3 and 4 address the two exceptions to the requirement that the qualifying child must live with the taxpayer in the United States for more than one-half of the tax year. A child who was born or died during the tax year and lived with the taxpayer the entire time the child was alive can be a qualifying child for EIC. There are also special rules for kidnapped children. If the child met the special residency rules for a kidnapped child, they also meet this requirement. If these situations do not apply to your taxpayer, select N/A from the drop down list.

(5) For question 5, select the type of substantiation used to determine whether the child met the residency test from the drop down list.

(1) It is possible for a person to be the qualifying child of multiple taxpayers; however, only one person may claim EIC using the child. In general, the tax benefits related to a qualifying child can not be split, although there are exceptions for children of divorced or separated parents. If more than one taxpayer claims the qualifying child for EIC, the "tie-breaker" rule is applied to determine who is entitled to the related tax benefits. The tie-breaker rule must also be considered if a non-parent claims the child and the child is the qualifying child of more than one person, even if no other taxpayer actually claims the child. This is due to a change in the tax law for TY 2009, which requires that a non-parent can only treat a child as a qualifying child for EIC and other tax benefits if the non-parent has a higher AGI than all other individuals who could claim the child as a qualifying child.

(2) The tie-breaker is the final test to determine if the child can be claimed as a qualifying child for EIC purposes. This worksheet helps determine (a) if the tie-breaker test needs to be applied for each child and (b) if so, who wins the tie-breaker test – whether it is the NRP taxpayer or another individual. These determinations are made separately for each qualifying child, listed by column.

(3) The first question asks if the NRP taxpayer is the qualifying child’s parent. The answer to this should be auto-populated from the QC-Relationship & Joint Return Tests Worksheet. Beginning with the TY2019 NRP EIC lead sheet, the Tiebreaker tab was reorganized. Depending on whether the NRP TP was the parent of the QC, examiners are directed to either Part A or Part B.  For any TY19 or later key cases, go to 4.22.8.5.3.10(7) for additional information about completing the Tiebreaker tab.

(4) In tax years 2018 and earlier, for Question 2, select "Yes" if at least one other taxpayer filed a return for the same tax period claiming the child for certain tax benefits; these include the dependency exemption, the Child Tax Credit (including the Additional Child Tax Credit), Head of Household filing status, the Credit for Child or Dependent Care Expenses, and the income exclusion for dependent care benefits.

(5) In tax years 2018 and earlier, Question 3 captures summary information from applying the tie-breaker test when the NRP taxpayer is the parent of the qualifying child in question. Information can be captured for tie-breaker tests applied to up to 4 other taxpayers for each child. When the NRP taxpayer is the parent, tie-breakers must only be applied when the child is actually claimed by other taxpayers for EIC or other related tax benefits. Use the hyperlinks to complete the tie-breaker test for each of the other taxpayers who claimed the child in each column. For the first two links (Taxpayer #1 and Taxpayer #2), the hyperlink will take you to "Page 2", which is farther down on the worksheet on the same tab. For the second two links (Taxpayer #3 and Taxpayer #4), the hyperlink will take you to "Page 4", which again is farther down on the same worksheet.

(6) In tax years 2018 and earlier, Question 4 captures summary information from applying the tie-breaker test when the NRP taxpayer is NOT the parent of the qualifying child in question. Again, information can be captured for tie-breaker tests applied to up to 4 other taxpayers for each child. When the NRP taxpayer is not the parent, tie-breaker tests must be applied, not only for other taxpayers who did claim the child, but also all other individuals who could have claimed the child. Use the hyperlinks to complete the tie-breaker test for each of the other taxpayers who did claim or could have claimed the child in each column. For the first two links (Taxpayer #1 and Taxpayer #2), the hyperlink will take you to "Page 3", which is farther down on the worksheet on the same tab. For the second two links (Taxpayer #3 and Taxpayer #4), the hyperlink will take you to "Page 5", which again is farther down on the same worksheet.

(7) Beginning with tax year 2019 key cases, when the NRP taxpayer IS the parent of the QC, Part A captures information about whether the NRP taxpayer, or another parent of the QC, can claim the child for EITC. 

(8) Beginning with tax year 2019 key cases, when the NRP taxpayer IS NOT the parent of the QC, Part B captures information about whether the NRP taxpayer, the parent of the QC, or another individual can claim the child for EITC. 

(1) For EIC purposes, earned income generally includes taxable employee pay and net earnings from self-employment. The EIC Earned Income worksheet is optional and may be used to compute the taxpayer’s earned income. It is an Excel version of the worksheets contained in the Form 1040 instructions for the EIC line item.

(1) To receive the EITC, the taxpayer’s investment income must be below a certain threshold. The EITC Disqualified Income Worksheet can be used to determine the amount of investment income to be used for this comparison. It is an Excel version of Publication 596, Worksheet 1.

(2) Upon completion of the EIC Disqualified Income worksheet, compare the total amount of disqualified (investment) income from this worksheet with the net investment income field on the RGS Return Setup, Sch EIC tab. Although RGS will attempt to compute the amount of investment income, the examiner must verify the amount to ensure that EITC is calculated properly.