Published: March 29, 2021 | Last Updated: April 15, 2022
NTA Blog: Erroneously claiming certain refundable tax credits could lead to being banned from claiming the credits
Did you know the IRS has the authority to ban a taxpayer from claiming the Earned Income Tax Credit (EITC), the Child Tax Credit (CTC), the American Opportunity Tax Credit (AOTC) and the credit for other dependents (ODC) for two years if the IRS determines that the taxpayer improperly claimed the credit “due to reckless or intentional disregard of rules and regulations”? The ban can last for ten years if the credit was claimed fraudulently. The IRS determines whether to propose a ban as part of its audit of the taxpayer’s tax return. The Internal Revenue Manual (IRM) procedures for imposing bans include IRM 18.104.22.168.1, (12-11-2019), 2/10 Year Ban – Correspondence Guidelines for Examination Technicians (CET).
The rules for claiming these refundable credits are similar – but not the same – and the complexity of the rules causes taxpayers to erroneously claim the credits. Here are a few rules:
Got it? The IRS has several publications, webpages, tools, and checklists to help taxpayers navigate this. We do know that when taxpayers erroneously claim the EITC regarding children who are not their qualifying children, the most common error is that the residency requirement is not met. (See the discussion in the National Taxpayer Advocate’s 2018 Annual Report to Congress for more detail.) The IRS has a list of documents that taxpayers can submit to prove residency if they are audited. Taxpayers should familiarize themselves with the necessary support for residency.
If a taxpayer claims the EITC, CTC, AOTC or ODC on a 2020 return, one or more of these credits is disallowed in an audit, and the IRS proposes a ban, the IRM requires the IRS to:
Taxpayers have four options:
If the IRS audited a return a taxpayer filed for a tax year prior to 2020 and imposed a ban, and the taxpayer claims the banned credit on a 2020 return, the IRS will use its math error authority to summarily assess additional tax (which includes reducing the refund due) that arises from disallowing the credit. If a taxpayer responds to the math error notice within 60 days by requesting abatement of the tax, the IRS will reverse the summary adjustment and issue a notice of deficiency. This notice of deficiency, like the notice of deficiency the IRS issued when it imposed the ban, may also assert an accuracy-related penalty due to “negligence or disregard of rules or regulations.” A taxpayer then has the option of petitioning the Tax Court for a redetermination of the tax for that year, but the Tax Court’s jurisdiction to decide whether the ban should have been imposed is unclear. If the taxpayer requests audit reconsideration of the 2020 assessment, the IRS will consider whether the ban was properly imposed in 2019.
In a 2019 Annual Report to Congress Research Study, we described characteristics of two-year EITC bans imposed on taxpayers as a result of an audit of their 2016 tax return (3,831 taxpayers were subjected to these bans). One finding was that in 19 percent of the cases, the taxpayer did not participate in the audit, or mail sent to the taxpayer was returned as undeliverable. Because imposing the ban requires the IRS to first ascertain the taxpayer’s state of mind, it seems unlikely, where there was no contact with the taxpayer, that the IRS can accurately determine the erroneous claim is due to “reckless or intentional disregard of rules and regulations.” We then considered a representative sample of the 3,831 taxpayers (meaning that our findings can be projected to the population) and found that:
We also found that taxpayers rarely sought audit reconsideration. For almost a third of the taxpayers who did seek reconsideration, however, their persistence resulted in allowance of the banned credits in full or in part. Still, the IRS almost never removed the ban from the taxpayer account, even when the banned credit was allowed in full. So even though taxpayers potentially get relief using this avenue, they should follow up to ensure that if the claimed credit is allowed the ban is removed.
I urge the IRS to ensure that two-year bans are imposed only when the statutory requirements have been met, i.e., after determining that the taxpayer claimed the credit due to reckless or intentional disregard of rules and regulations. I also urge the IRS to ensure that the bans are imposed consistently in accordance with IRM procedures, such as securing managerial approval before imposing a ban and adequately explaining why the ban is being imposed. IRM procedures should require the IRS to speak with the taxpayer in every case before imposing a ban and the IRS should ensure this requirement is followed (unlike the current practice of not speaking to the taxpayer even in first-time audits, even though the IRM requires it). In addition, I recommend the IRS continue reaching out to communities with high refundable credit audit rates to ensure that taxpayers and tax practitioners are aware of the manifold rules associated with these credits claiming the total credits taxpayers are eligible to receive.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.