U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

Office of Tax Analysis

Working Paper 120

January 2020

Social Welfare Considerations of EITC Qualifying Child 

Noncompliance

Kara Leibel, Emily Y. Lin, and Janet McCubbin

The OTA Working Papers Series presents original research by the staff of the Office of Tax 

Analysis. These papers are intended to generate discussion and critical comment while 

informing and improving the quality of the analysis conducted by the Office. The papers are 

works in progress and subject to revision. Views and opinions expressed are those of the authors 

and do not necessarily represent official Treasury positions or policy. Comments are welcome, 

as are suggestions for improvements, and should be directed to the authors. OTA Working 

Papers may be quoted without additional permission.
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

1

Social Welfare Considerations of EITC Qualifying Child Noncompliance

Kara Leibel, Internal Revenue Service

Emily Y. Lin, U.S. Department of the Treasury

Janet McCubbin, U.S. Department of the Treasury

January 9, 2020

Abstract

We use data from the IRS’s random audits of federal individual income tax returns for tax years 

2006-2011 and other administrative data to examine Earned Income Tax Credit (EITC)

qualifying child errors and explore the welfare implications of such noncompliance. We study

the intensity of the relationship between the child claimed in error and the “wrong” taxpayer 

whose EITC claim was denied by the audit, and investigate why the “right” taxpayer did not 

claim the child. Our results show that the vast majority of children claimed with qualifying child 

errors had an eligible familial relationship with their claimants and a small portion had lived with 

the claimants during part of the year. Furthermore, about 60 percent of the children did not 

appear to have a parent who could be the “right” taxpayer, as stipulated by law, who could file a 

claim. We conclude that a substantial portion of erroneous EITC claims likely helped support 

children in low-income families despite those children being claimed in error. Parents of another 

4 percent of children were found to have filed a duplicate claim with the taxpayer under audit. 

For the remaining 36 percent of children, who had a tax-filing parent not already claiming the 

child, the family members’ filing patterns were consistent with the credit-maximizing motive in 

85 percent of cases. We offer a few explanations, including taxpayer confusion about EITC 

rules or law changes, to account for the claiming pattern of the remaining 15 percent of cases. 

Finally, we estimate that the forgone credit that could have been received by non-claiming 

parents amounted to about 10 percent of the total overclaims attributable to qualifying child 

errors, or 4 percent of all EITC overclaims. Taken together, these results suggest that the official 

improper payment rate overstates the social welfare loss and monetary loss to the government.

---------------------------------------------------------------------------------------------------------------------

The findings and views in this paper are those of the authors and do not necessarily reflect the positions of 

the Internal Revenue Service or the Department of the Treasury.
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

2

1. Introduction

Earned Income Tax Credit (EITC) noncompliance has been the subject of intense 

scrutiny and research since the mid-1990s. Yet despite simplification of the credit, enhanced 

penalties, and additional audit resources devoted to the EITC over the past 25 years, a substantial 

number and dollar amount of EITC errors remain. In 2018, the estimated improper payment rate 

was 25 percent, and an estimated $18.4 billion in EITC claims were paid in error (Department of 

Treasury, 2018). But these figures do not tell us whether EITC overpayments are important in 

terms of social welfare consequences.

1 For example, from the social welfare perspective, 

policymakers might view a case where a child lived with her low-income grandmother for 6 

months of the year differently from a case where an unrelated person claimed a child she did not 

live with at all; but, both cases would be counted equally in computing the EITC error rate.2

Furthermore, the improper payment estimates arguably overstate social welfare loss and 

monetary loss to the government if some incorrect claims for EITC involving children were

offset by forgone claims of other eligible taxpayers. 

To shed light on these social welfare considerations, one needs to have a better 

understanding of the circumstances surrounding the cases where a taxpayer incorrectly claimed a 

child for the EITC. When a taxpayer fails to meet the qualifying child tests for an EITC claim, it 

is generally unknown how closely this taxpayer is related to the child and whether another 

taxpayer could have correctly claimed the child. This knowledge, however, is relevant to the 

 

1 A formal evaluation of social welfare loss associated with particular errors would require constructing a social 

welfare function, which we do not attempt to do in this paper.

2 To claim a child for the EITC, the child must reside together with the taxpayer for more than half the year. 

Technically, residing together for 6 months falls just shy of this requirement.
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

3

welfare implications associated with EITC errors. It is possible for more than one taxpayer to 

have provided some care for the child during the year, but no single taxpayer to be eligible to 

claim the EITC for that child under the law (e.g., the child does not live with any taxpayer for 

more than half the year). In other cases, the erroneous claim may have precluded the actual 

caregiver from claiming the child. 

This paper provides more detail about the nature of EITC noncompliance in order to 

allow a more nuanced consideration of EITC qualifying child errors and the associated social 

welfare implications. Specifically, we analyzed the intensity of the familial relationship between 

the child and the actual claimant as well as the length of the shared residency, providing 

information about whether the claim, despite being erroneous, might nonetheless have supported 

a low-income worker caring for a child. In addition, we studied possible reasons why the 

“wrong” taxpayer may have claimed the child—whether this occurred due to complicated family 

circumstances, intentional credit-maximizing behavior, or other reasons—to better understand 

the causes of EITC noncompliance. Finally, we estimated the credit that could have been 

received by the parent who did not already claim the child and was potentially the actual 

caregiver. This result offers an insight into the extent to which the EITC improper payment 

estimates may overstate not only the social welfare loss but also the monetary loss to the 

government.

In this paper, we use audit data for a stratified random sample of tax returns from the 

IRS’ National Research Program (NRP) for tax years 2006-2011 and other administrative data to 

re-examine the nature of EITC errors, with a focus on errors related to qualifying 

children. Qualifying child errors account for a significant portion of EITC overclaims, and they 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

4

present a tax administration challenge to the IRS because not all of the qualifying child rules can 

be readily verifiable by the IRS without auditing the return. 

Our sample represents an average of 3.4 million children per year who were, determined 

by the audit results in our sample, erroneously claimed for the EITC due to the claim’s violation 

of at least one of the three qualifying child rules that we focus on—the relationship test, the 

residency test, and the tiebreaker test. We analyze the tax return along with detailed information 

about the EITC claim documented in supplemental data collection by the examiner. 

Our analysis suggests an intense relationship between the child and the claiming taxpayer

in most cases. About 87 percent of the children, despite being claimed with qualifying child 

errors, had a valid familial relationship (84 percent) or lived with the taxpayer for more than half 

of the year (7 percent) or both. However, compared to children who met all of the qualifying 

child tests, the children in our sample were much less likely to be the son or daughter of the 

taxpayer, and more likely to have other valid familial relationships (e.g., grandchild or 

nephew/niece) with the taxpayer. 

We then use data provided to the IRS by the Social Security Administration (SSA) to find

parents of the children claimed in error and documented the frequency with which the parents we 

identified did not already claim the credit but were likely eligible. Using the information 

reported on the non-claiming parents’ tax returns, we assessed the reasons why the children were 

erroneously claimed by taxpayers in our audit data but not by the potentially eligible parents.

We find evidence of complicated family circumstances, intentional credit-maximizing 

behavior, and other possible explanations for EITC noncompliance. Of the children we studied, 

39 percent did not have a parent, other than the one audited, whom we could identify from the 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

5

Social Security records. We either could not find the parent’s Social Security number (SSN) or 

the parent we found was the same taxpayer in the audit data. In these cases, it is not obvious if 

any family members would meet all of the EITC rules with respect to taxpayer eligibility and 

qualifying child tests in order to correctly receive the credit. 

In other cases, parents different from those in our audit data were identified, but the 

parents were either not in a position to file a claim or had already received the credit. For 19 

percent of the children we studied, the parents did not appear on a filed tax return for the tax year 

although a small share of these parents were found to have earned income. For another 2 percent 

of the children, the parents were themselves dependents of the taxpayers in the audit data who 

made the qualifying child errors. For another 4 percent, the parents already received the EITC 

claiming the same children, resulting in duplicate claims with the audited returns. 

As a result, we identified at least one non-claiming parent return for 36 percent of the 

children in our sample. We simulated the credit that could have been awarded to these 

taxpayers. In the majority—85 percent—of cases, the taxpayer in our data, whose EITC claim 

was denied by the audit, claimed a larger EITC than the non-claiming parent would have been 

able to claim, suggesting evidence of credit maximization. However, other explanations, such as 

taxpayer confusion, may also account for some of the claiming patterns we documented. Finally, 

the forgone credit, i.e., credit that could have been received by non-claiming parents, is estimated 

to amount to a modest share, about 10 percent, of the total overclaims attributable to qualifying 

child errors, or 4 percent of all EITC overclaims. Our analysis provides the first estimates of the 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

6

extent to which EITC overclaims could be offset by correct claims not made, providing better 

information about the monetary loss to the government.3

2. EITC Rules for Qualifying Children

To provide background for our analysis of qualifying child errors, this section highlights

EITC rules and eligibility criteria that pertain to qualifying children. A more complete 

discussion of how the EITC works is provided in Appendix A-1. 

To qualify for the EITC in 2018, the child must meet four tests: the residency test, the 

relationship test, the age test, and the joint return test. To meet the residency test, the child must 

reside with the taxpayer for over half the year. To meet the relationship test, the child must be 

the taxpayer’s son, daughter, stepchild, foster child, sibling, half-sibling, step-sibling, or a 

descendant of any of these (such as a grandchild or niece). The age test requires that the child is 

either under age 19 at the end of the tax year, a full-time student under age 24, or any age and 

permanently and totally disabled. Beginning in tax year 2009, a non-disabled child must also be 

younger than the taxpayer to qualify the taxpayer for the EITC. Finally, the joint return test 

requires that, in general, the child may not be married filing a joint return. 

It is worth noting that the age test in general and the joint return test depend only on the 

child’s characteristics, whereas the relationship and residency tests depend on the characteristics 

of both the child and the taxpayer claiming the child.4 This means that if the age or joint return 

 

3 Our analysis focuses only on the claims that could have been made by potentially eligible parents we identified on 

behalf of their children claimed in error. We do not conduct a full analysis of non-participation, such as nonparticipation by eligible parents that we could not find in Social Security records or by other eligible relatives.

4 The introduction of the comparative age criterion in 2009 means that the age test now depends on both the 

taxpayer and child.
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

7

test is not met, the child cannot be claimed by any other taxpayer for the EITC, but if the 

relationship and residency tests are not met, there may be another taxpayer for whom the tests 

would be met. It is also possible for a child to meet all four tests with respect to more than one 

taxpayer. When that happens, there are additional considerations—often loosely referred to as 

the “tiebreaker rules”—that determine which taxpayer is the one legally entitled to claim the 

child for the EITC.

Under the current tiebreaker rules, parents who both reside with a child for more than half 

the year but are not filing a joint return may decide between them who will claim the EITC; and, 

a parent may allow another taxpayer with higher AGI who also lives with the child to claim the 

EITC. But non-parents cannot decide among themselves who claims the child, and a parent 

cannot allow another taxpayer with lower AGI to claim her child. If two parents claim the same 

child on different tax returns, then the EITC is awarded to the parent of the child who resides

with the child the longest; or, if the parents reside with the child for the same length of time, to 

the parent with the higher AGI. Finally, a taxpayer who resides with a qualifying child whom 

she cannot claim due to the tiebreaker rule may be able to claim the smaller credit for workers 

without qualifying children. 

These current rules reflect the most recent in a series of changes that have sought to 

ensure that the EITC reaches its intended recipients while preventing abuse of the credit. The 

repeated efforts to modify the tiebreaker rule5and otherwise simplify the definition of a 

qualifying child demonstrate the difficulty in crafting eligibility criteria that are simple and 

 

5 See Appendix A-2 for a detailed legislative history of the tiebreaker rules.
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

8

verifiable but also address varied living arrangements and family circumstances. One 

consequence of the changes in the tax law is that the same behavior may be considered compliant 

in one year but noncompliant in another. If taxpayers are unaware of the changes to the tax law, 

this can translate into changes in the error rate without any change to taxpayer behavior. 

Our analysis focuses on tiebreaker errors and qualifying child errors with respect to the 

relationship and residency tests, for two reasons. First, the intensity of the actual familial 

relationship and the length of shared residency has bearing on whether one views the dollar 

amount of the incorrect claim as an appropriate measure of the social welfare loss. Second, these 

three errors all reflect cases where the EITC error could potentially be partially or fully offset by 

the forgone claim of another taxpayer who could have correctly claimed the child.

3. Previous EITC Compliance Research

Relative to other income and work support programs, the administrative costs of the 

EITC are low and participation rates are high.6 However, self-certification of eligibility in the 

tax system based on some criteria that IRS does not observe results in a high EITC 

noncompliance rate. Estimated EITC overpayments were about $18.4 billion or roughly 25

 

6

In a report by Treasury Inspector General for Tax Administration (2011), the IRS noted that the EITC participation 

rate (defined as the share of eligible taxpayers that receives the credit) was 75 to 80 percent, and the administration 

costs were less than one percent of benefits delivered, compared to other non-tax benefits programs in which 

administrative costs related to determining eligibility ranged as high as 20 percent of program expenditures. More 

recently, the IRS, in cooperation with the Census Bureau, estimated an EITC participation rate of 85 percent of 

eligible dollars in tax year 2014 (Treasury Inspector General for Tax Administration, 2018). In contrast, in 2016, 

only 23 families received the Temporary Assistance for Needy Families (TANF) for every 100 families in poverty 

(https://www.cbpp.org/research/policy-basics-an-introduction-to-tanf). Another income support program for lowincome families, the Supplemental Nutrition Assistance Program (SNAP), saw its participation rate increase from 72 

percent in 2010 to 85 percent in 2016, (https://www.fns.usda.gov/snap/SNAP-participation-rates-FY-2010-2016). It 

was estimated that the SNAP’s administrative costs represented about 7 percent of the total program expenditures in 

fiscal year 2017 (https://www.cbpp.org/research/policy-basics-the-supplemental-nutrition-assistance-program-snap). 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

9

percent of total EITC dollars claimed in fiscal year 2018. Reducing overpayments and 

evaluating the tradeoff between administrative simplicity and accuracy both require an 

understanding of the types and causes of EITC errors. 

IRS (2014) last published a comprehensive study of the nature of EITC compliance 

problems for tax years 2006-2008. Consistent with earlier research,7the 2006-2008 study 

revealed that qualifying child errors accounted for a substantial share of the dollar amount 

claimed in error. The study estimated that qualifying child errors represented between 52 and 54 

percent of total EITC overclaims between 2006 and 2008.8 In most of these cases, the child did 

not live with the taxpayer for the required length of time, or was not related to the taxpayer, or 

both. Failure of the qualifying child residency and relationship tests accounted for 75 and 20 

percent, respectively, of all qualifying children claimed in error. In addition, about 7 percent of 

the qualifying children claimed in error were claimed by taxpayers who failed the tiebreaker 

test.9

The recent IRS study focuses on errors made by taxpayers who claimed the EITC; it does 

not provide detail about the circumstances when those errors were made, nor does it attempt to 

estimate non-participation among eligible taxpayers. More specifically, IRS (2014) does not 

address circumstances such as the length of time the child lived with the taxpayer when the 

 

7 See e.g., McCubbin (2000) and IRS (2002).

8 Some returns contain both qualifying child and non-qualifying-child errors and thus have an “overlapped” 

overclaim amount attributable to either error. IRS (2014) attributed the overlap to qualifying child errors and 

arrived at the estimate of 52 to 54 percent. Another IRS study (Leibel, 2014) also considered attributing the overlap 

to non-qualifying-child errors. Taking into account both approaches, Leibel (2014) estimated that, for tax years 

2006-2008, between 42 and 54 percent of EITC overclaims were attributable to qualifying child errors. 

9 The type of EITC errors cannot be determined for 15 percent of EITC claimants selected for the study because they 

failed to appear for the audit. The error frequencies were computed based on EITC errors among audit participants.
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

10

residency test was failed, the relationship between the taxpayer and child when the relationship 

or residency test was failed, or whether other non-participating taxpayers might have been 

eligible to correctly claim the child, such as those in the same household as sampled taxpayers. 

To our knowledge, only two other studies have explored potential explanations for nonparticipation in EITC with qualifying child. One is the study by Hotz and Scholz (2008). Using 

Wisconsin’s child support data, the authors identify cases where someone other than the child 

support payee claims the EITC for a child of a court-ordered child support recipient. They 

estimate the potential EITC that could have been claimed by the child support payee, assuming 

that the payee is the right taxpayer who meets the qualifying child tests. Upon comparing this 

forgone EITC to the actual claim filed by the potentially wrong taxpayer, the authors find their 

results consistent with the hypothesis that family members are engaged in credit-maximizing 

behavior.

In addition, Jones and O’Hara (2016) find evidence of tax-minimizing (or creditmaximizing) claiming of children residing in multi-family households, using Census data 

matched to tax returns for tax years 2005 to 2010. They further find that this behavior is driven 

by the EITC. Note however, that their paper does not address EITC compliance, as the families 

that they study reside together and, during most of the period that they study, eligible taxpayers 

could decide who among them would claim a child for the EITC. 

4. Data: National Research Program

In order to measure tax reporting compliance, the IRS annually conducts audits on a 

statistical sample of individual income tax returns, including over 2,000 returns claiming the 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

11

EITC. These audits are part of IRS’s National Research Program (NRP). The annual EITC 

sample is designed in part to provide estimates of the improper payment rate with a 95-percent

confidence interval of at most +/- 3 percentage points. Combining several years of data permits 

reliable estimation of various aspects of EITC compliance with greater precision than would be 

possible with single-year analyses. Our analysis is based on data for tax years from 2006 to 

2011. In some cases, we produce separate estimates for tax years 2006-2008 and 2009-2011 in 

consideration of the expansion of the EITC to a third child in 2009.

The NRP individual income tax study includes supplemental data collection beyond what 

is typical in a standard IRS audit.

10

 For the EITC returns, examiners are asked to document 

whether taxpayers meet each of the EITC eligibility criteria described above. For taxpayers who 

claim qualifying children, information about children and their eligibility is documented for each 

return. We analyzed the supplemental data for returns that claimed an EITC qualifying child. 

Based on the audit results in our sample, we estimated that, of the annual average of 31.3 million 

children claimed between 2006 and 2011, about 15 percent, or 4.8 million children each year,

were claimed with at least one qualifying child or tiebreaker error. 

Table 1 shows common types of qualifying child errors made by taxpayers. Of the 4.8 

million children claimed in error per year, the vast majority (79 percent) did not meet the 

residency test, and 14 percent did not meet the relationship test, with respect to the taxpayer. 

About 8 percent of the children were claimed by a taxpayer violating the tiebreaker rule. 

 

10 Although standard IRS audit procedures require examiners to record information in their workpapers regarding 

the issues addressed and errors made by taxpayers, the NRP studies record the information in a standardized format 

that facilitates analysis of the data.
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

12

Because some claims had multiple errors, altogether the three qualifying child errors—residency, 

relationship and tiebreaker—accounted for 85 percent of the children claimed in error. 

Some of the children with residency, relationship, or tiebreaker errors also violated 

qualifying child rules pertaining to the child only, rather than to the child in relation to the 

taxpayer. Violation of these rules, including the age test, the SSN test and the joint return test, 

makes these children ineligible to be claimed by any taxpayer. Removing these disqualified 

children from our initial sample yields a population estimate of 3.4 million children per year, 

who, while being claimed with a residency, relationship or tiebreaker error, did not break any 

other qualifying child rules. These are the children who potentially could be correctly claimed 

by another taxpayer provided that all tests were met.

Table 1 Types of Qualifying Child (QC) Errors 

Average Number of 

Children per Year, 

2006-2011 

(Million)

Percent of Children 

with Qualifying 

Child (QC) Errors 

(%)

Residency error 3.8 79

Relationship error 0.6 14

Tiebreaker error 0.4 8

Any of the above three errors 4.0 85

Any of the above three errors, and no other QC error 3.4 71

Total (any QC error) 4.8 100

4.1 Residency and Relationship Errors in 2006 - 2011

To evaluate the residency test, examiners documented the number of months that each 

child resided with the taxpayer, as reported by the taxpayer to the examiner. Examiners then 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

13

relied on written documentation, oral testimony, or both to substantiate the taxpayer’s report. 

The claim was deemed to have failed the residency test if the time substantiated was 6 months or 

less in the year.11 Table 2 provides information about the audit results for children who failed 

the residency requirement in relation to the taxpayer but could potentially be claimed by another 

taxpayer because the eligibility rules pertaining to the child were met. 

As shown in Table 2, all taxpayers, despite being determined to have violated the 

residency rule, reported that they had lived with the child for more than 6 months. The vast 

majority (90 percent) of these children lacked any substantiated residency with the taxpayers. 

Only 10 percent of the children who failed the residency test were substantiated as living with 

the taxpayers in the U.S. for some months during the year. It is likely that the number of months 

substantiated during audit may have understated the actual months of shared residency. For 

example, once a taxpayer understood that she failed the residency test, she may have no 

incentive to document a few months of residency. Also, some taxpayers may find it difficult to 

substantiate residency especially if the taxpayer or the child moved during the year.12

 

11 The data record the number of months, from 0 to 12, for which a child lives with the taxpayer in the U.S. 

Examiners use this information to determine whether the shared residency is more than half of the year for the 

residency test. In this section, we report the number of months recorded in the file, and use 6 months as the cutoff 

for exposition purposes. 

12 Auditors can accept credible oral testimony, per NRP instructions, but without further study we do not know how 

often this rule is applied during audit in determining shared residency. 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

14

Table 2 Children Claimed with Residency Error

Number of 

months reported 

on the return

Percent of Children with Residency Error (%)

Substantiated residency 

= 0 month

Substantiated residency

= 1- 6 months

Total

0 – 6 0 0 0

7-11 2 1 3

12 88 9 97

Total 90 10 100

Table 3 provides information about a child’s relationship with the taxpayer. We compare 

the results for children failing at least one of the three qualifying child tests—the residency, the 

relationship, and the tiebreaker tests—with children meeting the tests. In addition to the results 

shown in column (3) concerning the children in our study, i.e., those who failed at least one of 

the three qualifying child tests but were eligible to be claimed by other taxpayers, we also 

present results for disqualified children in column (4) for comparison. About 84 percent of the 

children in our study were related to the taxpayer. However, they tended to have less intense 

familial relationships with the taxpayers than children meeting the tests. Only 47 percent of the 

children in our study were the son or daughter of the taxpayer, compared to 93 percent of the 

children meeting the three qualifying child tests. About 37 percent of the children in our study, 

compared to 7 percent who passed the tests, were the grandchild, sibling, niece, nephew or foster 

child of the taxpayer. Finally, as indicated in columns (3) and (4), the relationship patterns were 

similar regardless of whether a child broke other qualifying child rules.
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

15

Table 3 Qualifying Children’s Relationships with Taxpayers

Percent of Total (%)

Relationship as determined 

by examiner

All 

Children 

(1)

Children 

meeting the 

three QC 

tests 

(2)

Children not 

meeting the 

three QC 

tests and no 

other rule QC 

broken

(3)

Children not 

meeting the 

three QC tests 

and at least one 

other QC rule 

broken 

(4)

Son/daughter 86 93 47 55

Grandson/granddaughter 5 4 12 6

Brother/sister 1 1 4 9

Nephew/niece 4 2 20 14

Other eligible relative or foster child 1 0 1 1

Taxpayer doesn't know child 0 0 0 1

Invalid relationship* 2 0 13 7

No information** 1 0 3 7

Total 100 100 100 100

* The most common relationships in this category are child of a girlfriend or boyfriend, child of a friend, and cousin (or child 

of a cousin).

**“No information” means that the examiner did not record a relationship or definitively indicated that the taxpayers and 

child were unrelated, and disallowed the qualifying child claim. We infer that the taxpayer was not related to the child in 

these cases, but it could be that the relationship is simply missing.

Table 4 summarizes the residency and relationship variables documented by the 

examiner, where available, about the 3.4 million children with any of the three qualifying child 

errors who could potentially be claimed by another taxpayer. We found that about 87 percent of 

these children had a valid relationship or lived with the taxpayers for more than half of the year

or both. About 44 percent of the children were the son or daughter of the taxpayers with whom 

they did not live for more than half of the year. Another 36 percent were related to the taxpayers 

in another way and did not meet the residency test. About 3 percent of the children had more 

intense relationships with the taxpayers—they were related to the taxpayers and lived with the 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

16

taxpayers for more than half of the year—but the claims failed the tiebreaker test because 

another taxpayer(s) claimed or could claim the children for child-related tax benefits. About 4 

percent of the children did not have an eligible relationship with the taxpayers but lived with 

them for more than half of the year. 

Put another way, 11 percent of the children who failed one of the three key tests were 

related to the taxpayer and lived with the taxpayer all or part of the year, while 12 percent were 

not related and did not live with the taxpayer at all (or, residency and relationship could not be 

documented). Both of these types of cases are counted exactly the same in calculating the EITC 

error rate, but policymakers might feel quite differently about them.

Table 4 Residency and Relationship of Children Claimed with Residency, Relationship or 

Tiebreaker Error

Percent of Children (%) 

Relationship as 

determined 

by examiner

Substantiated 

residency 

= 0 month

Substantiated 

residency 

= 1-6 months

Substantiated 

residency = 

more than 6 

months

Total

Son/Daughter 39 5 2 47

Related to taxpayer but not son/daughter 33 3 1 37

Invalid or no relationship information 12 1 4 16

Total 83 9 7 100

5. Matching Children Claimed in Error to Non-Claiming Parents 

It is puzzling why so many children are claimed by taxpayers with whom they do not 

meet the relationship or residency test, rather than being claimed by the caregivers with whom 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

17

they do reside. To shed light on this issue, we identified as many parents as possible of the 

children in our sample, using Social Security records. We then searched for tax records of these 

parents and determined whether it appears that they were eligible to claim, or did claim, the 

EITC with children.

Table 5 shows the matching outcomes. For 21 percent of the children claimed with 

relationship, residency or tiebreaker errors and no other qualifying child error, we could not find 

the SSNs for any parent of the child in the Social Security data.13 Several reasons explain why 

this situation may occur. For example, the child’s parent might have been deceased at the time 

the application for the child’s SSN was filed, or there may be other circumstances when an 

individual other than the parent, such as the State foster care agency, might have filed the SSN 

application on behalf of the child. It is also possible that some parents are not eligible for an 

SSN, either because they are not authorized to work or they do not have a valid non-employment 

reason for having an SSN. For these reasons, a parent’s SSN would not be included in the 

database we used to match a child with the parent. 

These scenarios tend to suggest that the child has circumstances such that no single 

taxpayer is eligible to claim the child for EITC. In the cases where the child does not have a 

parent alive or around, the child may have been placed in a living arrangement or multiple 

arrangements throughout the year, and none of the arrangements meet the relationship or 

residency rule, or both, for the EITC. In other cases where the child lives with parents who are 

 

13 The data, provided by the Social Security Administration (SSA) to the IRS for tax administration purposes, link a 

child to his or her parents. The file contains the parents’ name controls (the first four letters of the surname) and 

Social Security numbers where available. The Social Security Administration assigns the majority of U.S. born 

children’s SSNs through the Enumeration of Birth (EAB) process. As part of the EAB process, SSA receives birth 

registration information, including the parents’ names and SSNs, directly from the State’s Bureau of Vital Statistics. 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

18

not legally able to work in the U.S., the family is not eligible to benefit from the EITC. The fact 

that the children in these various circumstances may not be entitled to benefit from the EITC has 

varying implications for how the errors associated with these children are evaluated in terms of 

social welfare costs.

For another 18 percent of the children, the only parent found in the Social Security data 

was the parent who was in the NRP sample and claimed the EITC in error. Most of these parents 

failed the residency test, and it is unclear if the child had lived with any taxpayer for more than 

half the year. Even if another taxpayer did reside with the child, it is unknown if she would have 

met all the tests, e.g., relationship, income, etc., to claim the child for the EITC. For this group, 

the welfare implication again depends on the specific circumstance of the child. 

Combining these first two categories, for a total of 39 percent of the children in our study, 

we did not identify a non-NRP parent in the Social Security data. It is not obvious that an 

eligible taxpayer was available to claim these children for the EITC. 

In 19 percent of cases, non-claiming parents were identified, and the parent(s) did not 

appear on an individual income tax return for the tax year, either by filing a tax return or by 

being claimed as a dependent. On average there were an estimated 0.6 million children in this 

group each year, for whom we identified about 0.7 million parents per year. We used 

information returns such as Forms W-2 to examine the income of these parent non-filers.14 Only 

27 percent of these parents had any earned income found through third-party information reports, 

 

14 The third-party income information reports that were checked include Forms W-2, 1099-MISC, 1099-DIV, 1099-

INT, 1099-R, and 1099-B.
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

19

suggesting that the majority of these parents could not claim the EITC anyway.15 It is likely that, 

due to lack of earned income, these parents allowed another taxpayer, such as an unmarried 

partner or a family member, to claim the child for the EITC. In these cases, the erroneous EITC 

was claimed by a low-income taxpayer with whom the child was somewhat connected but did 

not meet the relationship or residency requirement. 

Table 5 Social Security Data Matching Results

All Children with Residency, Relationship, or 

Tiebreaker Error but No Other Qualifying Child Error

Average 

Number of 

Children per 

Year

(Million)

Percent 

(%)

Parent’s Social Security number not found 0.7 21

Social Security parent(s) same as NRP taxpayer 0.6 18

At least one parent different from NRP taxpayer was found, but 

was not in the tax filing system 0.6 19

At least one parent different from NRP taxpayer was found and 

was in the tax filing system 1.4 42

Total 3.4 100

Next, for 42 percent of children claimed in error, or an average of 1.4 million children per 

year, a parent who was not the same taxpayer in the NRP sample either filed a tax return or 

appeared as a dependent on a tax return. We identified an annual average of 1.36 million tax 

 

15 Of the parents with any income, over three quarters had an earned income below $10,000, but a very small 

number had an earned income above $40,000 (2 percent) or an unearned income above $3,000 (1 percent).
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

20

returns associated with these parents, and present the analysis of the returns’ EITC claims in 

Table 6.16

We examined these parent returns to understand why their children were claimed by an 

ineligible taxpayer. Table 6 shows that a total of 15 percent of these returns already claimed the

children for the EITC in two scenarios. First, about 6 percent of the returns—claiming 0.08 

million or 2 percent of the children in our study—were the NRP tax returns that erroneously 

claimed the child, and the parent identified was a dependent on the same tax return. Like the 

non-NRP parents who were not shown on any tax return, these dependent parents may have 

allowed an unmarried partner or an ineligible family member to claim the child. Cases where a 

parent is herself a dependent also suggest that there are complicated familial situations and living 

arrangements where EITC eligibility may be difficult for taxpayers to self-assess. Second, for 

about 8 percent of the parent returns, the parent was the filer, and already claimed the child for 

the EITC, duplicating the NRP claim. These duplicate cases were found for 0.14 million 

children each year, or about 4 percent of the children in our study, and the associated erroneous 

claims presumably result in social welfare loss as well as monetary loss to the government.

Looking further at the rest of the parent returns, we found that 4 percent claimed the child 

for the dependent exemption but not for the EITC, and 81 percent did not claim the child for 

either the dependent exemption or the EITC. As indicated in Table 6, these two groups together

account for an estimated average of 1.15 million parent returns per year that could be identified 

 

16 The number of returns is close to the number of children in this group, but the parent-child relationship is not one 

to one. A parent return can be linked to more than one child. Furthermore, a child may have more than one return 

identified because two parents were found on different tax returns or a parent appeared on more than one return. 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

21

and linked to an estimated average of 1.21 million unique children per year, representing about 

36 percent of the 3.4 million children in our study.

Table 6 Parent Tax Returns 

Tax Return on Which Parent Appears

Average 

Number of 

Tax Returns 

per Year

(Million)

Percent of 

Tax 

Returns

(%)

Average 

Number of 

Children 

per Year* 

(Million)

Parent appeared on the NRP return as a dependent 0.08 6 0.08

Parent return claimed the child for dependent exemption 

and for EITC 0.11 8 0.14

Parent return claimed the child for dependent exemption 

but not for EITC 0.05 4 0.07

Parent return did not claim the child 1.10 81 1.14

Total 1.36 100 1.43**

*Some children have more than one parent return identified due to more than one parent found or one parent on 

multiple tax returns. In this case, children were assigned only to one category in a way that maximizes the number of 

eligible parent returns without causing duplicates. For example, if one return already claimed the child and the other 

did not, we classified the child in the non-claiming parent category. For a child with multiple non-claiming parent 

returns, the child was assigned to the category of the tiebreaker winner. 

**Shown as 1.4 in Table 5.

6. Evaluating Parent Eligibility and Simulating Forgone EITC

To understand why the parents we identified did not claim their children in the NRP 

sample, we used the information reported on the returns to analyze their EITC eligibility and 

simulate the potential credit. A key piece of unknown information is whether the parents in fact 

resided with these children for more than half the year. However, given that the child was 

claimed incorrectly by the taxpayer in the NRP sample, typically for reasons of residency, it 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

22

appears reasonable to assume that, if anyone did reside with the child for more than half the year, 

the parent was the most likely person. To the extent that this is wrong, our analysis may 

overstate the eligibility of “correct” taxpayers who could claim the child. To the extent that the 

child may have resided with another individual who is not the parent, our analysis may 

understate eligibility of other “correct” taxpayers. 

The sample represents an estimated 1.15 million parent returns per year. Aside from the 

question of residency, which, as mentioned above, is unknown, some of these parents appeared 

to be unable to claim their children for other reasons. Table 7 shows that 23 percent of the 

taxpayers already claimed the EITC for the maximum number of qualifying children,17 and 17 

percent had an income above the maximum level for EITC. About 11 percent of the taxpayers 

indicated on their returns that they were ineligible, or would decline, to claim the EITC. About 

12 percent were ineligible for other reasons.18

Thus, in total, 53 percent of the parent returns—71 percent for 2006-2008 and 38 percent 

for 2009-2011—were not eligible to claim, or would not have benefited from claiming, the EITC 

for the taxpayers’ child(ren) in our NRP data. Due perhaps to ineligibility or lack of financial 

gain, these taxpayers might have allowed another family member to claim their child(ren). It is 

plausible that, under the credit-maximization motive, family members cooperate to intentionally 

overclaim the EITC and possibly share the benefits, anticipating that the chances the error would 

 

17 Prior to 2009, the maximum EITC was available to taxpayers with two qualifying children. The American 

Recovery and Relief Act of 2009 provided a higher credit for taxpayers with three children, which increased the 

maximum number of qualifying children for the EITC to three for 2009 and afterward. 

18 A taxpayer cannot claim EITC if filing the married-filing-separately status. In addition, following a previous 

EITC disallowance, taxpayers may be required to recertify when they claim the EITC again; we have assumed that, 

if the taxpayer had a recertification indicator, she was ineligible to receive the EITC. See the Appendix for detail 

about how the EITC works. 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

23

be detected were low.19 For example, unlike the eligibility rules that can be verified by 

information provided on the Social Security record, the tax return, or third-party information 

reports, the residency requirement, the most common EITC qualifying child error, cannot be 

easily verified by the IRS without an audit. 

The large decrease in the percent of parents who would not have benefited from claiming 

another child, from 71 percent to 38 percent between the two time periods, is driven by the 

expansion of the EITC to a third child in 2009. Prior to the expansion, for 2006-2008, an 

estimated 40 percent of the parent tax returns were already claiming the maximum number of 

children for the EITC (two) and therefore would not have benefited from claiming another child. 

After the 2009 expansion, only 9 percent of the parent tax returns were already claiming the 

maximum number of children (three), and thus more parents would have had a financial gain by 

claiming the NRP children. Given that the marginal increase in the credit for a third child is 

comparatively small relative to the amount for claiming a first or second child, the rising share of

non-claiming parents seen after the EITC expansion does not necessarily undermine the creditmaximizing hypothesis.

20

 In other words, families still might have benefited by allowing a 

parent’s children to be split up and claimed on more than one return, which we test for below. 

As a result, about 47 percent of the taxpayers we identified—29 percent from 2006-2008 

and 62 percent from 2009-2011—appeared to have met the eligibility rules and could have 

received tax benefits had they claimed their child(ren) in our NRP data. As estimated, these

 

19 The number of EITC returns audited in Fiscal Year 2018 was 1.4 percent, computed as a ratio of the EITC returns 

filed in 2017. See the IRS Data Book (2018, Table 9a). 

20 In 2009, the maximum credit amounts were $3,043, $5,028 and $5,657 for one, two, and three children, 

respectively.
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

24

parents could have claimed an annual average of 0.6 million children, representing 18 percent of 

the 3.4 million children claimed with the residency, relationship or tiebreaker error but meeting 

other qualifying child tests. We estimated the total potential forgone EITC for these parents to 

provide a measure of the extent to which EITC overclaims may be offset by correct claims not 

made. In addition, to examine the credit-maximizing hypothesis, we simulated the potential 

forgone EITC for each parent, and then compared the amount to the erroneous claim made by the 

NRP taxpayer on behalf of the same child. 

Table 7 Eligibility of Parent Returns 

Percent of Parent Returns (%)

2006-2008 2009-2011 2006-2011

Already claimed max. number of EITC children 40 9 23

Income over maximum threshold 17 18 17

No earned income 4 3 3

Married filing separately 2 3 3

Self-identified as ineligible 14 9 11

Other indication of ineligibility (investment 

income too high, EITC set to zero due to math 

error, or recertification indicator on account) 5 5 5

Any of the above issues 71 38 53

None of the above issues 29 62 47

Average number of returns per year (million) 1.06 1.25 1.15

To simulate the credit, we first calculated the amount of EITC that would have been 

awarded if the taxpayers claimed their child(ren) in the NRP sample, given the number of 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

25

child(ren) the taxpayers already claimed on the returns. We then subtracted from this simulated 

amount the actual EITC claim made by the taxpayer, if any. The resulting amount is the 

additional EITC the taxpayer could have received from claiming the child(ren) in the NRP data. 

In cases where more than one parent is linked to a child, we applied the tiebreaker rules –

specifically who had the higher AGI – to determine which taxpayer should claim the credit.

Table 8 shows the simulation results. It is estimated that an average of $561 million in 

EITC was forgone each year from 2006 to 2011. The amount was greater in 2009-2011 than in 

2006-2008 because of the availability of the credit for the third qualifying child after 2008. The 

third child benefit resulted in a larger EITC for taxpayers with more than two qualifying children 

after claiming the NRP children. It also increased the number of taxpayers who would benefit 

from claiming the NRP children because, prior to 2009, those who already claimed two 

qualifying children on their returns would not receive an additional benefit. 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

26

Table 8 Simulation Results 

Dollar Amount per Year

($ Million)

2006-2008 2009-2011 2006-2011

Total forgone EITC, (1) 332 790 561

EITC overclaims for the 0.6 million children, (2) 668 2,231 1,449

Ratio of forgone EITC to overclaims, (1)/(2) 50% 35% 39%

EITC overclaims attributed to all returns with the 

relationship, residency, or tiebreaker error but without 

making other QC errors, (3) 4,986 6,665 5,825

Ratio of forgone EITC to overclaims, (1)/(3) 7% 12% 10%

EITC overclaims attributed to all returns (4) 13,123 17,341 15,232

Ratio of forgone EITC to all overclaims, (1)/(4) 3% 5% 4%

To put these estimates in perspective, we calculated the amount of EITC erroneously 

claimed by the NRP taxpayers for the children in the sample representing the 0.6 million 

children, and then compared the parents’ simulated EITC to the NRP overclaims after weighting 

these estimates to the population. Table 8 shows that the erroneous claims for these children 

were an estimated annual average of $1,449 million in EITC. The forgone EITC, therefore, 

represents about 39 percent of the overclaims. That is, 39 percent of the EITC claimed in error 

for these 0.6 million children per year could have been awarded to potentially “correct” 

taxpayers.
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

27

Furthermore, we compared the amount of forgone EITC to the total overclaims that were 

attributable to the three qualifying child errors—residency, relationship, and tiebreaker—for all 

children in our sample.21 This comparison provides another perspective that relates forgone 

EITC to the total erroneous claims associated with the three qualifying child errors, thereby 

offering insight into the extent to which the estimated EITC improper payments are arguably 

overstated as a measure of monetary loss to the government or of social welfare loss. The result 

shows that about 10 percent of the EITC overclaims attributed to the three qualifying child errors 

during the period from 2006 to 2011 could have been claimed by the “correct” taxpayers we 

identified through the Social Security data.22 These represent 4 percent of all EITC overclaims 

in the period from 2006 to 2011. Note that this is neither an upper bound nor a lower bound 

estimate of the share of erroneous claims that are offset by forgone correct claims. This is 

because we do not know for certain that the forgone claims included in our calculation would 

have been correct entirely, and we cannot identify all forgone claims.

Next, we studied the credit-maximizing behavior. Recall that based on our NRP sample, 

we estimated that there was an average of 1.15 million non-claiming parent returns per year who 

could have claimed 1.21 million children otherwise claimed incorrectly. It is possible that some 

families were engaged in credit-maximizing behavior by allowing the family member with the 

 

21 This overclaim was calculated as the difference between the taxpayer’s actual EITC claim and the EITC that 

would be awarded to the taxpayer when we removed from the actual claim the child(ren) with any of the three 

qualifying child errors. We restricted the calculation to children for whom no other qualifying child rules were 

broken, and took all other return information as reported. 

22 We first dropped ineligible parents and then, if applicable, used tiebreaker rules for cases with multiple parents. 

We also estimated the forgone credit in a different way in which we applied the tiebreaker rules before determining 

parent eligibility. The simulated credit is slightly lower, representing 9 percent of the overclaims attributed to the 

three qualifying child errors. 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

28

largest EITC to claim the child(ren). After applying tiebreaker rules to the cases where more 

than one return was linked to a child, we estimated there was a total of 1.04 million non-claiming 

parent returns per year, each uniquely linked to at least one child represented in our data. We 

used the results of the eligibility analysis and credit simulation on these returns to evaluate the 

presence of credit-maximizing strategies.

We found the claiming patterns consistent with the credit-maximizing hypothesis for the 

vast majority of cases. In 85 percent of the cases, claiming the child(ren) resulted in a larger 

EITC for the NRP taxpayer than would have been claimed by the non-claiming parent we 

identified. Since inadvertent errors could occur in some cases when taxpayers misunderstood 

eligibility rules, the mere presence of credit maximization did not necessarily indicate that the 

family knowingly broke rules to overclaim the credit. However, with the wide prevalence of this 

claiming pattern seen among families, for which inadvertent errors were unlikely the dominating 

factor, we consider the result evidence of intentional noncompliance. 

In 5 percent of the cases, the two taxpayers would have received a similar amount of 

EITC by claiming the child(ren). And for the remaining 10 percent, the non-claiming parent was 

predicted to have a larger EITC. For these 15 percent of cases, the claiming patterns are 

inconsistent with the credit-maximizing hypothesis. Several explanations exist for this result. 

While we applied a large number of rules in determining taxpayer eligibility, we did not observe 

living arrangements and thus might have included some ineligible parents in simulation. In 

addition, some eligible parents may have let another taxpayer, e.g., a family member who cared 

for the child, receive the credit for reasons unrelated to credit maximization. In this case, 

cooperation among taxpayers was present, but not for credit maximization. Finally, taxpayers 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

29

may be confused about law change or about how to apply EITC rules, e.g., tiebreakers or credit 

calculation, to their circumstances, thereby failing to maximize the credit unintentionally or 

making errors unrelated to motives of credit maximization. 

The observed change between 2006-2008 and 2009-2011 supports the idea that at least 

some errors are not attributable to credit maximizing. In particular, the later period saw a higher 

share of non-claiming parents who forwent a larger credit than the amount claimed by the NRP 

taxpayer in audit. As indicated in Table 9, upon claiming the children, 14 percent of the nonclaiming parents would have received a larger EITC than the NRP taxpayer in tax years 2009-

2011, compared to only 6 percent in tax years 2006-2008. If credit maximization were the 

motive and the taxpayers did not misunderstand the EITC rules, then it seems reasonable to 

expect that taxpayers would have adjusted their claiming behavior after the expansion to the third 

child and more EITC claims would have been made by non-claiming parents in this later period

to take advantage of the greater EITC.
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

30

Table 9 Analysis of Credit Maximization

Number of Taxpayers per Year

(Million)

2006-2008 2009-2011 2006-2011

NRP taxpayer had a larger EITC .85 .91 .88

No difference (within $100) .05 .05 .05

Non-claiming parent would have had a larger EITC .06 .16 .11

Total 0.96 1.12 1.04

Percent 

(%)

2006-2008 2009-2011 2006-2011

NRP taxpayer had a larger EITC 89 81 85

No difference (within $100) 5 5 5

Non-claiming parent would have had a larger EITC 6 14 10

Total 100 100 100

Note: The number of returns per year, 1.04 million, is the estimated number of returns after applying tiebreaker rules 

when a child is linked to more than one return. 

7. Conclusions

This paper illustrates how an in-depth examination of the nature of EITC qualifying child 

errors can inform questions about the social welfare loss associated with EITC noncompliance. 

We found that the vast majority of children claimed with qualifying child errors had some 

relationship with the taxpayer; they either had a valid familial relationship or met the residency 

test, or both. Only 12 percent of the children in our sample (representing 1 percent of all 

children claimed for EITC) were not related and did not live with the taxpayers at all. Hence, a 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

31

substantial portion of the erroneous EITC claims may have supported low-income workers and 

improved the children’s well-being.

Our results illustrate the difficulty in establishing a set of broadly applicable rules to 

deliver tax benefits to low-income caregivers while balancing other, sometimes conflicting, 

policy objectives, including promoting employment, meeting budget constraints, and preventing 

noncompliance. When investigating why the children were not claimed by the “correct” 

taxpayers who were entitled to the credit, we concluded that, for a variety of reasons, about 60 

percent of the children in our sample did not appear to have a parent who could be the “correct” 

claimant, as stipulated by law. Some parents were not found in our Social Security data, some 

did not file a tax return, some already claimed the children in error, and some were dependents 

themselves. For another 4 percent of the children, their parents already claimed them for the 

EITC, resulting in duplicate claims with the audited returns.

In cases where the actual caregiver is not eligible for the credit or where multiple family 

members appear eligible, EITC claims are susceptible to manipulation under current rules

because the IRS cannot readily determine eligibility across several seemingly qualified family 

members. For the 36 percent of the children who were claimed in error and who had a tax-filing 

parent not already claiming the benefit, the family members’ filing patterns were consistent with 

the credit-maximizing motive in 85 percent of the cases. We estimated that 10 percent of the 

EITC overclaims attributable to the relationship, residency and tiebreaker errors, or 4 percent of 

the total EITC overclaims, could have been awarded to potentially eligible parents. 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

32

References

Department of the Treasury, 2018. Agency Financial Report: Fiscal Year 2018. Available at 

https://home.treasury.gov/about/budget-financial-reporting-planning-and-performance/agencyfinancial-report.

Hotz, V. Joseph and John Karl Scholz, 2008. “Can Administrative Data on Child Support Be 

Used to Improve the EITC? Evidence from Wisconsin,” National Tax Journal Vol. 61 No.2, 

189-204.

IRS, 2002. Compliance Estimates for Earned Income Tax Credit Claimed on 1999 Returns. 

Available at https://www.irs.gov/pub/irs-soi/compeitc.pdf

IRS, 2014. Compliance Estimates for the Earned Income Tax Credit Claimed on 2006-2008 

Returns. Research, Analysis & Statistics Report, Publication 5162 (8-2014). Available at 

https://www.irs.gov/pub/irs-soi/EITCComplianceStudyTY2006-2008.pdf

IRS, 2018. Internal Revenue Service Data Book, 2017. Available at https://www.irs.gov/pub/irssoi/17databk.pdf

Jones, Maggie R. and Amy B. O’Hara, 2016. “Do Doubled-up Families Minimize HouseholdLevel Tax Burden?” National Tax Journal, Vol. 69 No. 3, 613-640.

Leibel, Kara, 2014. Taxpayer Compliance and Sources of Errors for the Earned Income Tax 

Credit Claimed on 2006-2008 Returns. Research, Analysis & Statistics Technical Paper 

Publication 5161 (8-2014). Washington, DC: Internal Revenue Service. Available at 

https://www.irs.gov/pub/irs-soi/15rpeitctaxpayercompliancetechpaper.pdf

McCubbin, Janet, 2000. “EITC Noncompliance: The Determinants of the Misreporting of 

Children.” National Tax Journal Vol. 53 No.4 Part 2, 1135-1164.

Treasury Inspector General for Tax Administration, 2011. Reduction Targets and Strategies 

Have Not Been Established to Reduce the Billions of Dollars in Improper Earned Income Tax 

Credit Payments Each Year. 2011-40-023. Available at 

https://www.treasury.gov/tigta/auditreports/2011reports/201140023fr.pdf

Treasury Inspector General for Tax Administration, 2018. The Internal Revenue Service Should 

Consider Modifying the Form 1040 to Increase Earned Income Tax Credit Participation by 

Eligible Tax Filers. 2018-IE_R004. Available at 

https://www.treasury.gov/tigta/iereports/2018reports/2018IER004fr.pdf
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

33

Appendix

A-1. How the EITC Works

Income criteria. To claim the EITC, all taxpayers must have positive earned income (generally 

wage and salary or self-employment income) and must have adjusted gross income below certain 

thresholds. The credit is initially phased in as earned income increases up to a threshold, then 

remains fixed as income continues to rise, and finally is phased out as income (the greater of 

earnings or AGI) grows further. 

Appendix Table 1 Features of the Earned Income Tax Credit for 2018

Childless

Taxpayers

Taxpayers with Qualifying Children

One Child Two Children Three or More

Phase-in rate 7.65% 34.00% 40.00% 45.00%

Minimum earnings 

for maximum credit $6,780 $10,180 $14,290 $14,290

Maximum credit $519 $3,461 $5,716 $6,431

Phase-out rate 7.65% 15.98% 21.06% 21.06%

Phase-out begins $8,490

($14,170 joint)

$18,660

($24,350 joint)

$18,660

($24,350 joint)

$18,660

($24,350 joint)

Phase-out ends $15,270

($20,950 joint)

$40,320

($46,010 joint)

$45,802

($51,492 joint)

$49,194

($54,884 joint)

Taxpayers with investment income (taxable and tax exempt interest, dividends, capital gains, 

rents, royalties and certain other passive income) exceeding $3,500 in 2018 are not eligible for 

the credit. 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

34

Filing status. Taxpayers who are married as of the end of the tax year must file a joint return to 

receive the credit. Married taxpayers who live apart from their spouses for the last half of the tax 

year and maintain a home for a qualifying child or relative may be treated as unmarried and use 

the head of household filing status, thus enabling them to claim the EITC. Taxpayers who use 

the married filing separately status are not eligible for the credit. Taxpayers who may be claimed 

as a qualifying child for EITC by another taxpayer may not claim the EITC. 

Qualifying child tests. The maximum credit and income limits are much higher for taxpayers 

with qualifying children than those without. To qualify for the EITC, the child must reside with 

the taxpayer for over half the year; must be related to the taxpayer; and, must be under age 19 at 

the end of the tax year, a full-time student under age 24, or any age and permanently and totally 

disabled. Beginning in tax year 2009, a non-disabled child must also be younger than the 

taxpayer to qualify the taxpayer for the EITC. 

A qualifying child may be the taxpayer’s son, daughter, stepchild, foster child, sibling, halfsibling, step-sibling, or a descendant of any of these (such as a grandchild or niece). A foster 

child is a child placed with the taxpayer by an authorized placement agency or by court order. In 

general, the child may not be married filing a joint return.

The home can be any location where the taxpayer and child regularly live, and need not be a 

home owned or rented by the taxpayer. 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

35

A taxpayer who does not reside with a qualifying child must be at least age 25 and under age 65 

to claim the credit, and must not be the dependent of another taxpayer (regardless of whether he 

or she is actually claimed as a dependent on another return).

SSN and related tests. Taxpayers must be a citizen or resident of the U.S. all year to receive the 

EITC, and both the taxpayer and the qualifying child must have a Social Security number (SSN). 

Taxpayers claiming the foreign earned income exclusion may not claim the EITC.

Penalties and other efforts to improve compliance. There are several penalties that may be 

assessed for EITC noncompliance, in addition to general taxpayer penalties. A taxpayer whose 

EITC is disallowed or reduced due to any reason other than a math or clerical error is generally 

required to recertify eligibility, including confirming the qualifying child tests, when she makes 

an EITC claim again. However, if the error is determined to be the result of negligence or 

intentional disregard of the EITC rules, the taxpayer will not be allowed to claim the EITC again 

for two subsequent years. In addition, a taxpayer who is found to have fraudulently claimed the 

EITC may not claim the credit again for ten years. 

A paid preparer who cannot show that he or she was diligent in filing a taxpayer’s EITC claim 

may be assessed a penalty of $500 (indexed) for each tax return with which the preparer fails to 

exercise due diligence in determining taxpayer eligibility for, and the amount of, the EITC. 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

36

Following studies of EITC compliance conducted in the 1990’s, Congress, Treasury and IRS 

took a number of steps to reduce errors, in addition to enacting these special EITC penalties. For 

example, the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 

authorized IRS to deny the EITC during returns processing and without conducting an audit, in 

cases where a taxpayer did not provide an SSN for herself or a child. (This is referred to as 

“math error” authority, because IRS corrects computation errors during the same process.) 

The Taxpayer Relief Act of 1997 required the Social Security Administration to obtain the SSNs 

for parents when they apply for an SSN for a minor child, which allows IRS to evaluate 

compliance with the relationship test. The Act also allowed IRS access to the Federal Case 

Registry of Child Support Orders. This dataset allows IRS to identify some non-custodial 

parents who are unlikely to be eligible for the EITC. To date, there are no comprehensive 

national data that allow IRS to routinely confirm living arrangements, relationships and marital 

status of taxpayers and children. 

In addition, the Act provided for a $100 penalty for each return for which a paid preparer fails to 

exercise due diligence in preparing a claim for EITC. The United States-Korea Free Trade 

Agreement Implementation Act of 2011 increased the penalty to $500 and indexed it for 

inflation. 

Most recently, the Protecting Americans from Tax Hikes (PATH) Act of 2015 includes several 

provisions aimed at improving EITC compliance. Beginning in the 2017 filing season, the IRS 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

37

was required to hold refunds to taxpayers who claimed the EITC and the Additional Child Tax 

Credit until February 15. This change, in conjunction with an earlier filing due date for certain 

third-party information reports on wages and compensation, required under the same Act, allows 

the IRS to have more time and information to verify claim accuracy before releasing a tax 

refund. The PATH Act also intensified civil penalties on erroneous EITC claims filed after 

2015; it eliminated the EITC exemption from the penalty for erroneous refunds and credits, and 

clarified that the accuracy-related penalty applies to the refundable portion of an erroneously 

claimed refundable credit. 
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

38

A-2. Tiebreaker Legislation

The tiebreaker rules have been subject to particular scrutiny and modification over time, 

because in some circumstances they are difficult for taxpayers to understand and for the IRS to 

administer. 

Through tax year 2001, the law provided that if a child was the EITC qualifying child of 

more than one taxpayer, only the taxpayer with the highest modified AGI could claim the credit. 

One rationale for using AGI as the basis of the tiebreaker is that the taxpayer with the highest

income is likely contributing more to the support of the child than other family members, and, 

unlike expenditures in support of a child, AGI is largely observable by IRS. An AGI-based 

tiebreaker test also prevents higher-income households with low-earning members (for example, 

an unmarried couple with one high-earner and one low-earner, or a child residing with her lowearning teenage parent and high-earning grandparents, or a low-earning person claiming her 

sibling even though both live with their higher-income parents) from receiving the credit. 

However, basing the tiebreaker only on income without regard to other factors such as the 

intensity of relationships and length of residency may be undesirable and counterintuitive to 

taxpayers. For example, under the AGI tiebreaker as it existed through 2001, if a child lived 

with her mother and her aunt and the aunt had higher AGI, then only the aunt could claim the 

EITC, even if the mother maintained the home. 

Due to these concerns, the tiebreaker test was modified in the Economic Growth and Tax 

Relief Reconciliation Act of 2001 (EGTRRA), for tax years 2002 and beyond. 23 The 2001 Act 

 

23 Among other changes, EGTRRA also replaced the more expansive modified AGI concept with AGI for purposes 

of the EITC phase-out.
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

39

allowed taxpayers to decide among themselves who would claim the qualifying child, and 

imposed a tiebreaker rule only if two or more eligible taxpayers actually claimed the same child. 

The new tiebreaker rule provided that if two or more taxpayers claimed a child, the child would 

be treated as the qualifying child of the parent, or, if neither taxpayer was the parent, the taxpayer 

with the highest AGI. If two parents claimed the same child on separate returns, then the child 

would be treated as the qualifying child of the parent with whom she resided the longest; if the 

child resided with both parents for the same length of time, then the child would be treated as the 

qualifying child of the parent with the highest AGI. 

The tiebreaker rule was changed again in 2008, effective for tax years 2009 and later, to 

restrict the circumstances under which taxpayers could decide among themselves who would 

claim the EITC and other child-related tax benefits.24 Under current law, if a child is a 

qualifying child of more than one taxpayer, then only the taxpayer who is the parent may claim 

the EITC and other tax benefits. However, an exception provides that if a parent may claim the 

credit but does not, then another eligible taxpayer may claim the credit if that taxpayer has higher 

AGI than the parent. If neither taxpayer is the parent, then only the taxpayer with the highest 

AGI may claim the credit. Unmarried parents who both reside with a child for more than half 

the year may decide between them who will claim the EITC and other child tax benefits. As 

 

24 See the “Fostering Connections to Success and Increasing Adoptions Act of 2008,” Public Law 110-351. In 

addition, the “Working Families Tax Relief Act of 2004,” Public Law 108-311, created a uniform definition of 

qualifying child applicable to the EITC, dependent exemption, and related provisions. The uniform definition 

generally conformed to the EITC age, relationship, residency and tiebreaker tests. Prior to tax year 2005, it was 

possible for one taxpayer to claim the EITC and another taxpayer to claim the dependent exemption and related 

benefits. The uniform definition now allows only one taxpayer to claim a child for the EITC and related provisions. 

However, an exception for divorced or separated parents allows a noncustodial parent to claim the dependent 

exemption and child tax credit, if a decree of divorce or separate maintenance allows it or if the custodial parent 

signs a written declaration that she will not claim a dependent exemption for the child.
U.S. Department of the Treasury 

Office of Tax Analysis 

January 2020

40

under EGTRRA, if two parents claim the same child on different tax returns, then the EITC is 

awarded to the parent of the child who resides with the child the longest; or, if the parents reside

with the child for the same length of time, to the parent with the higher AGI. 

Until tax year 2017, a taxpayer who resided with a qualifying child whom she could not 

claim due to the tiebreaker rule might be able to take the credit using a different qualifying child, 

but she could not claim the smaller EITC for workers without qualifying children. This rule was 

changed by regulation in 2017. Under the proposed regulations, if the taxpayer is otherwise 

eligible, she may claim the EITC for childless workers.