For Tax Professionals  
T.D. 8773 June 29, 1998

EIC Eligibility Requirements

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 TD 8773 RIN 1545-
AV62

TITLE: EIC Eligibility Requirements

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary 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. The text of these temporary regulations also
serves as the text of proposed regulations set forth in the notice
of proposed rulemaking on this subject in the Proposed Rules section
of this issue of the Federal Register.

DATES: Effective date: June 25, 1998.

Applicability dates: For dates of applicability, see 1.32-3T(f) of
these regulations.

FOR FURTHER INFORMATION CONTACT: Karin Loverud at 202-622- 6060 (not
a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These regulations are being issued without prior notice and public
procedure pursuant to the Administrative Procedure Act (5 U.S.C.
553). For this reason, the collection of information contained in
these regulations has been reviewed and, pending receipt and
evaluation of public comments, approved by the Office of Management
and Budget 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 it displays a valid control number assigned by
the Office of Management and Budget.

For further information concerning this collection of information,
and where to submit comments on the collection of information and
the accuracy of the estimated burden, and suggestions for reducing
this burden, please refer to the preamble to the cross-referencing
notice of proposed rulemaking published in the Proposed Rules
section of this issue of the Federal Register.

Books or records relating to a 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

This document contains amendments to the Income Tax Regulations (26
CFR part 1) providing guidance relating to the requirement that
taxpayers who are denied the EIC for a taxable year demonstrate
their eligibility to claim the EIC in a subsequent taxable year.
This requirement is described in section 32(k)(2), which was added
by section 1085(a)(1) of the Taxpayer Relief Act of 1997 (Public Law
105-34, 111 Stat. 788).

Section 32(k)(2) pertains to taxpayers who are denied the EIC as a
result of the deficiency procedures under subchapter B of chapter 63
(the deficiency procedures). A taxpayer who has been denied the EIC
for any taxable year as a result of the deficiency procedures is
ineligible to claim the EIC for a subsequent taxable year unless the
taxpayer provides information required by the Secretary
demonstrating eligibility for the EIC. If the taxpayer demonstrates
eligibility for the EIC, the taxpayer is not required to provide
this information in the future unless the IRS again denies the EIC
as a result of the deficiency procedures.

If the taxpayer fails to provide the required information or the
information provided does not demonstrate eligibility for the EIC,
the requirements of section 32(k)(2) are not satisfied. In such
circumstances, the IRS can treat the failure to meet these
requirements as a mathematical or clerical error.

In the case of deficiencies attributable to certain mathematical and
clerical errors, enumerated in section 6213(g), the IRS is
authorized to make a summary assessment, without following the
normal deficiency procedures. In the case of EIC claims,
mathematical and clerical errors can include both errors that apply
generally to all returns and certain errors specific to the EIC. For
example, mathematical and clerical errors include situations in
which (1) a taxpayer fails to provide a correct taxpayer
identification number required under section 32, or (2) a taxpayer
who claims the EIC with respect to net earnings from self-employment
fails to pay the proper amount of self-employment tax on the net
earnings. As noted above, the IRS is now authorized to treat failure
to meet the requirements of section 32(k)(2) as a mathematical or
clerical error.

Ineligibility for the EIC under these new rules is subject to review
by the courts.

The new provision applies to taxpayers who are denied the EIC on
their return for any taxable year beginning after 1996.

Explanation of Provisions

A taxpayer who has been denied the EIC, in whole or in part, as a
result of deficiency procedures is ineligible to file a return
claiming the EIC subsequent to the denial until the taxpayer
provides evidence of eligibility for the EIC. Deficiency procedures
include administrative procedures (other than procedures related to
mathematical or clerical errors) that result in an assessment of a
deficiency in tax, whether or not a notice of deficiency is issued.
To demonstrate current eligibility, the regulations require the
taxpayer to complete Form 8862, Information To Claim Earned Income
Credit After Disallowance. Form 8862 contains a series of questions
designed to assist the IRS in determining whether the taxpayer is
eligible to claim the EIC under section 32 for the subsequent
taxable year. A taxpayer fails to demonstrate eligibility if, for
example, the form is incomplete or any item of information on the
form is incorrect or inconsistent with any item on the return. If
the taxpayer properly demonstrates eligibility for the EIC, the
taxpayer is not required to submit Form 8862 in the future unless
the IRS again denies the EIC as a result of the deficiency
procedures.

The regulations require the taxpayer to attach Form 8862 to the
first income tax return on which the taxpayer claims the EIC after
the EIC has been denied as a result of the deficiency procedures.
The EIC is denied as a result of the deficiency procedures when an
assessment of a deficiency is made (other than as a mathematical or
clerical error under section 6213(b)(1)).

The Treasury Department and the IRS anticipate that the Commissioner
of Internal Revenue may require taxpayers to provide documentary
evidence in addition to Form 8862.

Whether or not the Commissioner requires taxpayers to provide
documentary evidence in addition to Form 8862, the Commissioner may
choose to examine any return claiming the EIC for which Form 8862 is
required.

The regulations provide that if the taxpayer fails to properly
complete Form 8862 or does not demonstrate eligibility for the EIC,
the provisions of section 32(k)(2) are not satisfied. In such
circumstances, the IRS can deny the EIC as a mathematical or
clerical error under section 6213(g)(2)(J) [(K)] (relating to the
omission of information required by section 32(k)(2)). If a
taxpayer's claim for the EIC is denied under section 6213(g)(2)(J)
[(K)], the taxpayer must attach Form 8862 to the next return for
which the EIC is claimed.

The regulations provide that if two individuals marry after one has
been denied the EIC as a result of the deficiency procedures, the
eligibility requirements apply when they file a joint return and
claim the EIC. For example, two unmarried taxpayers have qualifying
children and claim the EIC. The taxpayers subsequently marry. For a
taxable year preceding the marriage, one of the taxpayers was denied
the EIC under the deficiency procedures and has not established
eligibility for a subsequent year. In this situation, if they claim
the EIC for the taxable year in which they marry, the demonstration
of eligibility rules will apply.

Special Analyses

It has been determined that these 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), these temporary regulations will be
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.

Drafting Information

The principal author of these regulations is Karin Loverud of the
Office of the Associate Chief Counsel (Employee Benefits and Exempt
Organizations), IRS. However, other personnel from the IRS and
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 part 1
is 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 1.32-3T is added to read as follows:

1.32-3T Eligibility Requirements (temporary).

(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, no claim for the EIC filed subsequent
to the denial is allowed unless the taxpayer properly completes Form
8862, Information To Claim Earned Income Credit After Disallowance,
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 attach Form 8862 to the taxpayer's first income tax return on
which the taxpayer claims the EIC after the EIC has been denied as a
result of the deficiency procedures.

(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)(J) [(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.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 3. The authority citation for part 602 continues to read as
follows:

Authority: 26 U.S.C. 7805.

Par. 4. In 602.101, paragraph (c) is amended by adding an entry in
numerical order to read as follows:

602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where Current OMB identified and described
control No.

* * * * *

1.32-3T........................................1545-1575

* * * * *

Deputy Commissioner of Internal Revenue
Approved: May 18, 1998
Assistant Secretary of the Treasury


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