II

104TH CONGRESS

1ST SESSION S. 899

To amend the Internal Revenue Code of 1986 to prevent fraud and abuse

involving the earned income tax credit, and for other purposes.

IN THE SENATE OF THE UNITED STATES

JUNE 8 (legislative day, JUNE 5), 1995

Mr. ROTH (for himself, Mr. NICKLES, and Mr. PRESSLER) introduced the

following bill; which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to prevent

fraud and abuse involving the earned income tax credit,

and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE; AMENDMENT OF 1986.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Earned Income Tax Credit Fraud Prevention Act’’.

6 (b) AMENDMENT OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment

9 to, or repeal of, a section or other provision, the reference
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1 shall be considered to be made to a section or other provi2 sion of the Internal Revenue Code of 1986.

3 SEC. 2. EARNED INCOME CREDIT DENIED TO INDIVIDUALS

4 NOT AUTHORIZED TO BE EMPLOYED IN THE

5 UNITED STATES.

6 (a) IN GENERAL.—Section 32(c)(1) (relating to indi7 viduals eligible to claim the earned income tax credit) is

8 amended by adding at the end the following new subpara9 graph:

10 ‘‘(F) IDENTIFICATION NUMBER REQUIRE11 MENT.—The term ‘eligible individual’ does not

12 include any individual who does not include on

13 the return of tax for the taxable year—

14 ‘‘(i) such individual’s taxpayer identi15 fication number, and

16 ‘‘(ii) if the individual is married (with17 in the meaning of section 7703), the tax18 payer identification number of such indi19 vidual’s spouse.’’.

20 (b) SPECIAL IDENTIFICATION NUMBER.—Section 32

21 is amended by adding at the end the following new sub22 section:

23 ‘‘(l) IDENTIFICATION NUMBERS.—Solely for pur24 poses of paragraphs (1)(F) and (3)(D) of subsection (c),

25 a taxpayer identification number means a social security
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1 number issued to an individual by the Social Security Ad2 ministration (other than a social security number issued

3 pursuant to clause (II) (or that portion of clause (III) that

4 relates to clause (II)) of section 205(c)(2)(B)(i) of the So5 cial Security Act).’’.

6 (c) EXTENSION OF PROCEDURES APPLICABLE TO

7 MATHEMATICAL OR CLERICAL ERRORS.—Section

8 6213(g)(2) (relating to the definition of mathematical or

9 clerical errors) is amended by striking ‘‘and’ at the end

10 of subparagraph (D), by striking the period at the end

11 of subparagraph (E) and inserting ‘‘, and’’, and by insert12 ing after subparagraph (E) the following new subpara13 graph:

14 ‘‘(F) an omission of a correct taxpayer

15 identification number required under section 23

16 (relating to credit for families with younger

17 children) or section 32 (relating to the earned

18 income tax credit) to be included on a return.’’.

19 (d) EFFECTIVE DATE.—The amendments made by

20 this section shall apply to taxable years beginning after

21 December 31, 1995.
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1 SEC. 3. REPEAL OF EARNED INCOME CREDIT FOR INDIVID2 UALS WITHOUT CHILDREN.

3 (a) IN GENERAL.—Subparagraph (A) of section

4 32(c)(1) (defining eligible individual) is amended to read

5 as follows:

6 ‘‘(A) IN GENERAL.—The term ‘eligible in7 dividual’ means any individual who has a quali8 fying child for the taxable year.’’.

9 (b) CONFORMING AMENDMENTS.—Each of the tables

10 contained in paragraphs (1) and (2) of section 32(b) are

11 amended by striking the items relating to no qualifying

12 children.

13 (c) EFFECTIVE DATE.—The amendments made by

14 this section shall apply to taxable years beginning after

15 December 31, 1995.

16 SEC. 4. DECREASE IN EARNED INCOME CREDIT AMOUNTS

17 AND PHASEOUT RANGES.

18 (a) DECREASE IN CREDIT RATE.—

19 (1) IN GENERAL.—Subsection (b) of section 32,

20 as amended by section 3(b), is amended to read as

21 follows:

22 ‘‘(b) PERCENTAGES.—

23 ‘‘(1) IN GENERAL.—The credit percentage and

24 the phaseout percentage shall be determined as

25 follows:
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‘‘In the case of an eligible individual with:The credit percentage

is:

The phaseout percentage

is:

1 qualifying child .................... 34 ............................. 15.98

2 or more qualifying children .. 36 ............................. 20.22

1 In the case of taxable years beginning in 1996, the

2 credit percentage for eligible individuals with 2 or

3 more qualifying children shall be 35 percent.

4 ‘‘(2) AMOUNTS.—The earned income amount

5 and the phaseout amount shall be determined as

6 follows:

‘‘In the case of an eligible individual with:The earned income

amount is: The phaseout amount is:

1 qualifying child .................... $6,000 ...................... $11,000

2 or more qualifying children .. $8,425 ...................... $11,000.’’.

7 (2) CONFORMING AMENDMENT.—Paragraph (1)

8 of section 32(i) is amended by striking ‘‘subsection

9 (b)(2)(A)’’ and inserting ‘‘subsection (b)(2)’’.

10 (b) INFLATION ADJUSTMENTS TERMINATED.—Sec11 tion 32(j) (relating to inflation adjustments) is amended

12 by adding at the end the following new paragraph:

13 ‘‘(3) TERMINATION.—This subsection shall not

14 apply to any taxable year beginning after December

15 31, 1995.’’.

16 (c) EFFECTIVE DATE.—The amendments made by

17 this section shall apply to taxable years beginning after

18 December 31, 1995.
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1 SEC. 5. RULES RELATING TO DENIAL OF EARNED INCOME

2 CREDIT ON BASIS OF DISQUALIFIED INCOME.

3 (a) DEFINITION OF DISQUALIFIED INCOME.—Para4 graph (2) of section 32(i) (defining disqualified income)

5 is amended by striking ‘‘and’’ at the end of subparagraph

6 (B), by striking the period at the end of subparagraph

7 (C) and inserting ‘‘, and’’ and by adding at the end the

8 following new subparagraphs:

9 ‘‘(D) capital gain net income,

10 ‘‘(E) the excess (if any) of—

11 ‘‘(i) the aggregate income from all

12 passive activities for the taxable year (de13 termined without regard to any amount de14 scribed in a preceding subparagraph), over

15 ‘‘(ii) the aggregate losses from all pas16 sive activities for the taxable year (as so

17 determined), and

18 ‘‘(F) amounts includible in gross income

19 under section 652 or 662 for the taxable year

20 to the extent not taken into account under any

21 preceding subparagraph.

22 For purposes of subparagraph (E), the term ‘passive

23 activity’ has the meaning given such term by section

24 469.’’.

25 (b) DECREASE IN AMOUNT OF DISQUALIFIED IN26 COME ALLOWED.—Paragraph (1) of section 32(i) (relat-
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1 ing to denial of credit) is amended by striking ‘‘$2,350’’

2 and inserting ‘‘$1,000’’.

3 (c) EFFECTIVE DATE.—The amendments made by

4 this section shall apply to taxable years beginning after

5 December 31, 1995.

6 SEC. 6. MODIFICATION OF ADJUSTED GROSS INCOME DEFI7 NITION FOR EARNED INCOME CREDIT.

8 (a) IN GENERAL.—Subparagraph (B) of section

9 32(a)(2) (relating to limitation) is amended by striking

10 ‘‘adjusted gross income’’ and inserting ‘‘modified adjusted

11 gross income’’.

12 (b) MODIFIED ADJUSTED GROSS INCOME DE13 FINED.—Section 32(c) (relating to definitions and special

14 rules) is amended by adding at the end the following new

15 paragraph:

16 ‘‘(5) MODIFIED ADJUSTED GROSS INCOME.—

17 The term ‘modified adjusted gross income’ means

18 adjusted gross income, increased by the sum of—

19 ‘‘(A) social security benefits (as defined in

20 section 86(d)) received to the extent not includ21 ible in gross income,

22 ‘‘(B) amounts received by (or on behalf of)

23 a spouse pursuant to a divorce or separation in24 strument (as defined in section 71(b)(2)) which,

25 under the terms of the instrument, are fixed as
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1 payable for the support of the children of the

2 payor spouse (as determined under section

3 71(c)),

4 ‘‘(C) interest received or accrued during

5 the taxable year which is exempt from tax im6 posed by this chapter, and

7 ‘‘(D) any amount received by a participant

8 or beneficiary under a qualified retirement plan

9 (as defined in section 4974(c)) to the extent not

10 includible in gross income.

11 Subparagraph (D) shall not apply to any amount re12 ceived if the recipient transfers such amount in a

13 rollover contribution described in section 402(c),

14 403(a)(4), 403(b)(8), or 408(d)(3).’’

15 (c) STUDY.—The Secretary of the Treasury shall

16 conduct a study of the Federal tax treatment of child sup17 port payments to determine whether or not changes in

18 such treatment are necessary. The Secretary shall report

19 to the Committee on Finance of the Senate and the Com20 mittee on Ways and Means of the House of Representa21 tives the results of the study, including recommendations

22 (if any) which the Secretary determines appropriate to en23 courage payment of child support liabilities by parents and

24 to make both parents more responsible for a child’s eco25 nomic well-being.
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1 (d) EFFECTIVE DATE.—The amendments made by

2 this section shall apply to taxable years beginning after

3 December 31, 1995.

4 SEC. 7. EARNED INCOME CREDIT NOT ALLOWED UNTIL RE5 CEIPT OF EMPLOYER’S WITHHOLDING STATE6 MENT.

7 (a) IN GENERAL.—Section 6401(b) (relating to ex8 cessive credits treated as overpayments) is amended by

9 adding at the end the following new paragraph:

10 ‘‘(3) SPECIAL RULE FOR EARNED INCOME

11 CREDIT.—For purposes of paragraph (1), the earned

12 income credit allowed under section 32 shall not be

13 treated as a credit allowable under subpart C of part

14 IV of subchapter A of chapter 1 unless the Secretary

15 is able to verify the amount of such credit by com16 paring it with—

17 ‘‘(A) information returns filed with the

18 Secretary under section 6051(d) by employees

19 of the individual claiming the credit,

20 ‘‘(B) self-employment tax returns filed

21 with the Secretary under section 6017, or

22 ‘‘(C) both.

23 The preceding sentence shall apply to any advanced

24 payment of the earned income credit under section

25 3507.’’
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1 (b) EFFECTIVE DATE; STUDY.—

2 (1) IN GENERAL.—The amendment made by

3 this section shall apply to taxable years beginning

4 after December 31, 1996.

5 (2) STUDY.—The Secretary of the Treasury

6 shall conduct a study to determine the delays (if

7 any) which would result in the processing of Federal

8 income tax returns by reason of the amendment

9 made by this section. Not later than 1 year after the

10 date of the enactment of this Act, the Secretary

11 shall report the results of the study to the Commit12 tee on Finance of the Senate and the Committee on

13 Ways and Means of the House of Representatives,

14 including recommendations (if any) on ways to

15 shorten any delay.

16 SEC. 8. PREVENTION OF FRAUD IN ELECTRONIC RETURNS.

17 (a) IN GENERAL.—The Secretary of the Treasury

18 shall provide that any person applying to be an electronic

19 return originator on or after the date of the enactment

20 of this Act shall not be approved unless the applicant pro21 vides fingerprints and credit information to the satisfac22 tion of the Secretary.

23 (b) PAST APPLICANTS.—The Secretary of the Treas24 ury shall apply the requirements described in subsection

25 (a) to electronic return originators whose applications
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1 were approved before the date of the enactment of this

2 Act without fingerprints and credit check information

3 being provided.

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