[Federal Register Volume 63, Number 122 (Thursday, June 25, 1998)]
[Rules and Regulations]
[Pages 34594-34596]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-16840]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8773]
RIN 1545-AV62


EIC Eligibility Requirements

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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

SUMMARY: This document contains temporary regulations that provide 
guidance to taxpayers who have been denied the earned income credit 
(EIC) as a result of the deficiency procedures and wish to claim the 
EIC in a subsequent year. The temporary regulations apply to taxpayers 
claiming the EIC for taxable years beginning after December 31, 1997, 
where the taxpayer's EIC claim was denied for a taxable year beginning 
after December 31, 1996. The text of these temporary regulations also 
serves as the text of proposed regulations set forth in the notice of 
proposed rulemaking on this subject in the Proposed Rules section of 
this issue of the Federal Register.

DATES: Effective date: June 25, 1998.
    Applicability dates: For dates of applicability, see Sec. 1.32-
3T(f) of these regulations.

FOR FURTHER INFORMATION CONTACT: Karin Loverud at 202-622-6060 (not a 
toll-free number).


[[Page 34595]]


SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These regulations are being issued without prior notice and public 
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553). 
For this reason, the collection of information contained in these 
regulations has been reviewed and, pending receipt and evaluation of 
public comments, approved by the Office of Management and Budget under 
control number 1545-1575. Responses to this collection of information 
are mandatory. An agency may not conduct or sponsor, and a person is 
not required to respond to, a collection of information unless it 
displays a valid control number assigned by the Office of Management 
and Budget.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing this 
burden, please refer to the preamble to the cross-referencing notice of 
proposed rulemaking published in the Proposed Rules section of this 
issue of the Federal Register.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) providing guidance relating to the requirement that 
taxpayers who are denied the EIC for a taxable year demonstrate their 
eligibility to claim the EIC in a subsequent taxable year. This 
requirement is described in section 32(k)(2), which was added by 
section 1085(a)(1) of the Taxpayer Relief Act of 1997 (Public Law 105-
34, 111 Stat. 788).
    Section 32(k)(2) pertains to taxpayers who are denied the EIC as a 
result of the deficiency procedures under subchapter B of chapter 63 
(the deficiency procedures). A taxpayer who has been denied the EIC for 
any taxable year as a result of the deficiency procedures is ineligible 
to claim the EIC for a subsequent taxable year unless the taxpayer 
provides information required by the Secretary demonstrating 
eligibility for the EIC. If the taxpayer demonstrates eligibility for 
the EIC, the taxpayer is not required to provide this information in 
the future unless the IRS again denies the EIC as a result of the 
deficiency procedures.
    If the taxpayer fails to provide the required information or the 
information provided does not demonstrate eligibility for the EIC, the 
requirements of section 32(k)(2) are not satisfied. In such 
circumstances, the IRS can treat the failure to meet these requirements 
as a mathematical or clerical error.
    In the case of deficiencies attributable to certain mathematical 
and clerical errors, enumerated in section 6213(g), the IRS is 
authorized to make a summary assessment, without following the normal 
deficiency procedures. In the case of EIC claims, mathematical and 
clerical errors can include both errors that apply generally to all 
returns and certain errors specific to the EIC. For example, 
mathematical and clerical errors include situations in which (1) a 
taxpayer fails to provide a correct taxpayer identification number 
required under section 32, or (2) a taxpayer who claims the EIC with 
respect to net earnings from self-employment fails to pay the proper 
amount of self-employment tax on the net earnings. As noted above, the 
IRS is now authorized to treat failure to meet the requirements of 
section 32(k)(2) as a mathematical or clerical error.
    Ineligibility for the EIC under these new rules is subject to 
review by the courts.
    The new provision applies to taxpayers who are denied the EIC on 
their return for any taxable year beginning after 1996.

Explanation of Provisions

    A taxpayer who has been denied the EIC, in whole or in part, as a 
result of deficiency procedures is ineligible to file a return claiming 
the EIC subsequent to the denial until the taxpayer provides evidence 
of eligibility for the EIC. Deficiency procedures include 
administrative procedures (other than procedures related to 
mathematical or clerical errors) that result in an assessment of a 
deficiency in tax, whether or not a notice of deficiency is issued. To 
demonstrate current eligibility, the regulations require the taxpayer 
to complete Form 8862, Information To Claim Earned Income Credit After 
Disallowance. Form 8862 contains a series of questions designed to 
assist the IRS in determining whether the taxpayer is eligible to claim 
the EIC under section 32 for the subsequent taxable year. A taxpayer 
fails to demonstrate eligibility if, for example, the form is 
incomplete or any item of information on the form is incorrect or 
inconsistent with any item on the return. If the taxpayer properly 
demonstrates eligibility for the EIC, the taxpayer is not required to 
submit Form 8862 in the future unless the IRS again denies the EIC as a 
result of the deficiency procedures.
    The regulations require the taxpayer to attach Form 8862 to the 
first income tax return on which the taxpayer claims the EIC after the 
EIC has been denied as a result of the deficiency procedures. The EIC 
is denied as a result of the deficiency procedures when an assessment 
of a deficiency is made (other than as a mathematical or clerical error 
under section 6213(b)(1)).
    The Treasury Department and the IRS anticipate that the 
Commissioner of Internal Revenue may require taxpayers to provide 
documentary evidence in addition to Form 8862. Whether or not the 
Commissioner requires taxpayers to provide documentary evidence in 
addition to Form 8862, the Commissioner may choose to examine any 
return claiming the EIC for which Form 8862 is required.
    The regulations provide that if the taxpayer fails to properly 
complete Form 8862 or does not demonstrate eligibility for the EIC, the 
provisions of section 32(k)(2) are not satisfied. In such 
circumstances, the IRS can deny the EIC as a mathematical or clerical 
error under section 6213(g)(2)(J) [(K)] (relating to the omission of 
information required by section 32(k)(2)). If a taxpayer's claim for 
the EIC is denied under section 6213(g)(2)(J) [(K)], the taxpayer must 
attach Form 8862 to the next return for which the EIC is claimed.
    The regulations provide that if two individuals marry after one has 
been denied the EIC as a result of the deficiency procedures, the 
eligibility requirements apply when they file a joint return and claim 
the EIC. For example, two unmarried taxpayers have qualifying children 
and claim the EIC. The taxpayers subsequently marry. For a taxable year 
preceding the marriage, one of the taxpayers was denied the EIC under 
the deficiency procedures and has not established eligibility for a 
subsequent year. In this situation, if they claim the EIC for the 
taxable year in which they marry, the demonstration of eligibility 
rules will apply.

Special Analyses

    It has been determined that these regulations are not a significant 
regulatory action as defined in Executive Order 12866. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations.

[[Page 34596]]

    It is hereby certified that these regulations will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based upon the fact that the underlying statute 
applies only to individuals. Therefore, a Regulatory Flexibility 
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is 
not required.
    Pursuant to section 7805(f), these temporary regulations will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Drafting Information

    The principal author of these regulations is Karin Loverud of the 
Office of the Associate Chief Counsel (Employee Benefits and Exempt 
Organizations), IRS. However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.32-3T is added to read as follows:


Sec. 1.32-3T  Eligibility requirements (temporary).

    (a) In general. A taxpayer who has been denied the earned income 
credit (EIC), in whole or in part, as a result of the deficiency 
procedures under subchapter B of chapter 63 (deficiency procedures) is 
ineligible to file a return claiming the EIC subsequent to the denial 
until the taxpayer demonstrates eligibility for the EIC in accordance 
with paragraph (c) of this section. If a taxpayer demonstrates 
eligibility for a taxable year in accordance with paragraph (c) of this 
section, the taxpayer need not comply with those requirements for any 
subsequent taxable year unless the Service again denies the EIC as a 
result of the deficiency procedures.
    (b) Denial of the EIC as a result of the deficiency procedures. For 
purposes of this section, denial of the EIC as a result of the 
deficiency procedures occurs when a tax on account of the EIC is 
assessed as a deficiency (other than as a mathematical or clerical 
error under section 6213(b)(1)).
    (c) Demonstration of eligibility. In the case of a taxpayer to whom 
paragraph (a) of this section applies, and except as otherwise provided 
by the Commissioner, no claim for the EIC filed subsequent to the 
denial is allowed unless the taxpayer properly completes Form 8862, 
Information To Claim Earned Income Credit After Disallowance, 
demonstrating eligibility for the EIC, and otherwise is eligible for 
the EIC. If any item of information on Form 8862 is incorrect or 
inconsistent with any item on the return, the taxpayer will be treated 
as not demonstrating eligibility for the EIC. The taxpayer must attach 
Form 8862 to the taxpayer's first income tax return on which the 
taxpayer claims the EIC after the EIC has been denied as a result of 
the deficiency procedures.
    (d) Failure to demonstrate eligibility. If a taxpayer to whom 
paragraph (a) of this section applies fails to satisfy the requirements 
of paragraph (c) of this section with respect to a particular taxable 
year, the IRS can deny the EIC as a mathematical or clerical error 
under section 6213(g)(2)(J) [(K)].
    (e) Special rule where one spouse denied EIC. The eligibility 
requirements set forth in this section apply to taxpayers filing a 
joint return where one spouse was denied the EIC for a taxable year 
prior to marriage and has not established eligibility as either an 
unmarried or married taxpayer for a subsequent taxable year.
    (f) Effective date. This section applies to returns claiming the 
EIC for taxable years beginning after December 31, 1997, where the EIC 
was denied for a taxable year beginning after December 31, 1996.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 3. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 4. In Sec. 602.101, paragraph (c) is amended by adding an 
entry to the table in numerical order to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (c) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
                                                                        
                  *        *        *        *        *                 
1.32-3T....................................................    1545-1575
                                                                        
                  *        *        *        *        *                 
------------------------------------------------------------------------

Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
    Approved: May 18, 1998.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 98-16840 Filed 6-24-98; 8:45 am]
BILLING CODE 4830-01-U