The Earned Income Tax Credit

Dear Bonnie,

I have been audited five years in a row through letters in the mail. They keep my refund every time. I claim my three children as dependents. I don’t know what to expect this year. Please give me some insight. Last year they needed school letters as proof that my three children live with me, also receipts which I sent so I could get the Earned Income Credit. I finally was sent a check for $160, which was less than what I was expecting. But every year the letter says the same thing. Can they do it again this season after 5 years in a row?

Monique

Hi Monique, thanks for writing. They are questioning your eligibility to take the Earned Income Tax Credit and head of household status. This year ask your tax preparer to complete and submit IRS Form 8867. This is a due diligence form which will answer many of the questions the IRS has and should help keep them off your back. Please read on to ensure that you actually qualify to take the credit.

The Earned Income Tax Credit (EITC) is designed for low income workers, especially those with children. The amount of credit one can receive is on a sliding scale dependent on the amount of earned income received and the number of children the taxpayer claims as dependents. But the IRS wants proof of your ability to take the credit and will sometimes send letters asking for proof.

For 2012 the maximum credit is as follows: $5,891 with three or more qualifying children; $5,236 with two qualifying children; $3,169 with one qualifying child; and $475 with no qualifying children

The nice thing about the EITC is that it’s refundable. This means that if your tax liability is only $30 and the credit you are allowed is $5,030, you may receive a refund check for $5,000. It’s because of this refund system that many politicians have named the EITC a “Reverse Welfare System.”

According to the IRS, in order to qualify for the credit, you must meet the following requirements:

Have a valid Social Security Number

Have earned income from employment, self-employment, farming, some disability plans, or another source.

Dividend, interest, and capital gain income or other income from investments does not qualify as earned income and must be less than $3,200 for the year.

Cannot use the married, filing separate filing status

Must be a U.S. citizen or resident alien all year or a nonresident alien married to a U.S. citizen or resident alien and choose to file a joint return and be treated as a resident alien

Cannot be the qualifying child of another person

Cannot file Form 2555 or 2555-EZ (related to foreign earned income)

Your Adjusted Gross Income and earned income must meet the limits shown on the Income Limits, Maximum Credit Amounts and Tax Law Updates Page.

Your earned income and adjusted gross income for the 2012 year must be less than: $45,060 ($50,270 married filing jointly) with three or more qualifying children, $41,952 ($47,162 married filing jointly), with two qualifying children, $36,920 ($42,130 married filing jointly) with one qualifying child, $13,980 ($19,190 married filing jointly) with no qualifying children.

Qualifying children are those who have valid social security numbers, must be under age 19 at year end, must be your child, stepchild, adopted child, grandchild, brother, sister, or other blood relation as described in the IRS code. They have to have lived with you for more than half the year and if married, can’t have filed a joint return except to claim a refund without having a filing requirement.

For more detailed information, check out Qualifying Child Rules on the IRS website.

Because there has been so much fraud and abuse associated with the EITC, the IRS is requiring tax preparers to submit Form 8867 – a due diligence questionnaire – along with the taxpayer’s income tax return. If you self-prepare your income taxes, include this form with your tax return even though it was designed for paid preparers. Otherwise you will likely be audited or simply disallowed all or part of the credit.

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma and the author of “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn’t Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.