Earned Income Tax Credit (EITC) Audit
The Earned Income Tax Credit (EITC) is valuable credit used by many families across America. However, this popular tax credit is also one of the top triggers for IRS audits. Somewhat unfairly, the IRS audits EITC low-income families at a higher rate than most other groups of taxpayers. Due in part to pressure from Congressional Republicans under the guise of preventing low-income tax fraud, and a declining enforcement budget (again, thanks to Congressional Republicans), the IRS has targeted EITC taxpayers for audit. Simply put, low-grade examiners can effectively perform EITC audits whereas these same examiners cannot be shifted to more complex audits of higher-income taxpayers. Accordingly, EITC taxpayers face a degree of potential tax liability that may require assistance from a tax resolution attorney.
If you are facing an EITC audit, call the Law Office of Jin Kim at (916) 299-9913 for a free consultation.
What is the Earned Income Tax Credit?
An Earned Income Tax Credit (EITC) is a form of benefit given to working families with qualifying children. If you’re qualified for an EITC, it could potentially save you thousands in tax savings.
The EITC is a form of support extended to working parents who have qualified children. The EITC is determined as a percentage of the worker’s earnings up to a certain limit. In order to be eligible for an EITC, the child or children must meet the qualifications such as relationship, residency, and age. Additionally, if the child in question has already filed a joint return with another person such as a spouse, then this will disqualify the parent from claiming the EITC.
EITC Letter vs. Audit Notice
Sometimes an EITC letter doesn’t mean that you’re being audited. Some taxpayers may not be aware that they qualify for the earned income tax credit, which is why the IRS will send a letter to inform them of this. The IRS usually sends this letter as Notice CP09 or CP27 when it notes that the taxpayer qualifies for the EITC, but has not claimed the credit on their tax return. Accordingly, there’s no need to panic if you receive an EITC letter; it could just be the IRS trying to help you claim the Earned Income Tax Credit.
When the IRS audits a taxpayer who claimed the Earned Income Tax Credit, they often do so for one of 2 reasons: (1) the income reported on the tax return is inconsistent with IRS records or doesn’t meet the EITC income requirements under IRC § 32; or (2) the child doesn’t meet the age, residency, or relationship requirements under IRC § 32 to be considered a “qualifying child.”
The IRS notifies the taxpayer of an EITC audit by sending Notice CP 75 or CP 75A by certified mail. As the majority of EITC audits are correspondence audits, the notice often states that the IRS is auditing the taxpayer for a certain tax year, and instructs the taxpayer to mail supporting documentation. Furthermore, the notice refers the taxpayer to Form 886-H-EIC (Documents You Need To Send to Claim the Earned Income Credit on the Basis of a Qualifying Child or Children for Tax Year 2021).
It is the taxpayer’s responsibility to respond to the audit and mail supporting documentation. If the taxpayer does not respond to the audit the IRS may disallow the EITC and close the audit.
Verifying Your Credit
If you’ve already claimed an EITC on your tax returns, you may receive a notice from the IRS requiring you to send information to verify your credit. When this happens, the IRS wants to make sure that you’re qualified for the credit you’re claiming and in the meantime, they’re holding your refund. If you’ve received this kind of notice, you should act on it as soon as possible. This is actually an IRS audit of your tax return and can result in additional tax liability.
There are two kinds of notices you may receive when the IRS wants to verify your credit. Each notice is distinguished by the notice number found on the top right of the notice.
- Notice No. CP75 – If you’ve received this notice it means that the IRS needs to verify information regarding your Earned Income Credit (EIC), Additional Child Tax Credit (ACTC), or Premium Tax Credit.
- Notice No. CP75A – This means that the IRS needs you to provide documentation related to your Earned Income Credit (EIC), filing status or dependents claimed.
In both notices, the best course of action is the same. You should read the notice carefully and send the documentation requested by the IRS. You should also complete the response form included in the notice.
The IRS also has a toll-free telephone number listed in your notice in case you need assistance. It’s also a good idea to seek the help of a tax professional; a tax lawyer will be able to advise you on your child’s eligibility to claim an EITC as well as the necessary documentation to prove your eligibility.
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