IRS Disallowed Credit: What to do if your claim for EITC is denied

The Earned Income Tax Credit (EITC) can put thousands of dollars in taxpayers’ pockets that qualify to claim it. The credit is aimed at low-income workers and their families possibly worth almost $7,000. However, the credit comes with strict rules on who is eligible and the amounts that they can claim.

The Internal Revenue Service warns taxpayers that they are responsible for making sure that everything on their tax return is correct, even if someone else prepares it for you. Mistakes could result in your refund being delayed, an audit or the tax agency denying some or all of a credit claimed.

In the event that the IRS finds that you sent an erroneous tax declaration, the agency will send you a letter to inform you. You will need to pay a penalty and any money, along with interest, that you may owe the IRS if reasonable cause does not apply.

Additionally, the following year you will need to submit a Form 8862 with your tax return if you are eligible to claim the credit in question and do so. Here’s a look at what happens when the IRS disallows a credit and what you need to do…

What to do if your claim for EITC is denied

Making a mistake when claiming the EITC may carry with it a penalty on top of paying the amount of the credit that you weren’t eligible to claim, plus interest. This also applies to the Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), Credit for Other Dependents (ODC) and American Opportunity Tax Credit (AOTC).

Depending on the circumstances you may also be banned from claiming the EITC for 2 to 10 years (this does not apply to the other credits). The IRS will send you a letter if you are denied some or all of the credit or credits that you claimed. You can dispute the penalty by calling the IRS at the number in the upper right corner of the letter you receive or you can write to the agency.

However, if you are not banned from claiming the credit and meet all the requirements to do so the following year, you will be required to fill out a Form 8862, “Information to Claim Certain Refundable Credits After Disallowance”, and submit it with your tax return. That is unless the IRS automatically recertifies you, the agency will send you a CP74 or other letter to inform you that filing a Form 8862 with your tax return will not be necessary to receive the credit.

Most common errors when claiming the EITC

Taxpayers will be banned from claiming the EITC for two years if the final decision was based on reckless or intentional disregard of the rules on the part of the filer claiming the EITC. In the case of fraud when claiming the EITC, the ban is ten years.

However, there are some common errors that filers make when claiming the EITC, be they in the math, clerical or miscommunication. The IRS lists five of them:

The federal tax agency provides tips on how to avoid making a slip-up when preparing your tax return so that you can avoid any problems when it comes to accurately filing your tax declaration.