[Federal Register Volume 66, Number 122 (Monday, June 25, 2001)]
[Rules and Regulations]
[Pages 33636-33637]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-15907]



[[Page 33636]]

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

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8953]
RIN 1545-AV61


Eligibility Requirements After Denial of the Earned Income Credit

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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

SUMMARY: This document contains final 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.

DATES: Effective date: These regulations are effective June 25, 2001.
    Applicability dates: For dates of applicability, see Sec. 1.32-3(f) 
of these regulations.

FOR FURTHER INFORMATION CONTACT: Karin Loverud at 202-622-6080 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) 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 the collection of 
information displays a valid control number assigned by the Office of 
Management and Budget.
    The burden is reflected in the burden of Form 8862.
    Comments and suggestions for reducing the burden imposed by this 
regulation should be sent to the Internal Revenue Service, Attn: IRS 
Reports Clearance Officer, W:CAR:MP:FP, Washington, DC 20224, and to 
the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503.
    Books or records relating to this 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

    Section 32(k) was added by the Taxpayer Relief Act of 1997. Section 
32(k)(2) provides that, in the case of a taxpayer who is denied the EIC 
as a result of the deficiency procedures, no EIC is allowed for any 
subsequent taxable year unless the taxpayer provides such information 
as the Secretary may require to demonstrate eligibility for the credit. 
On June 25, 1998, temporary regulations (TD 8773) relating to earned 
income credit eligibility requirements under section 32(k)(2) were 
published in the Federal Register (63 FR 34594). A notice of proposed 
rulemaking (REG-116608-97) cross-referencing the temporary regulations 
was published in the Federal Register for the same day (63 FR 34615).
    No written comments responding to the notice of proposed rulemaking 
were received. No public hearing was requested or held.
    As part of an audit pertaining to the IRS's management of the EIC 
eligibility program, the Treasury Inspector General for Tax 
Administration recommended that the Treasury and the IRS reconsider (1) 
the time at which the taxpayer should be required to establish 
eligibility to claim the EIC, and (2) whether the eligibility 
requirement should pertain to the reason the EIC was denied. For 
example, under the temporary regulations, a taxpayer who is denied the 
credit on the basis of a child who is determined not to be a qualifying 
child must establish eligibility the next time the taxpayer claims the 
EIC, regardless of whether the taxpayer is claiming the credit on the 
basis of one or more qualifying children or on the basis of no 
qualifying children. Treasury and the IRS believe that the purpose of 
the eligibility requirement (to prevent erroneous claims) is better 
effectuated if the taxpayer establishes eligibility the next time the 
taxpayer claims the credit with one or more qualifying children, rather 
than the next time the taxpayer claims the credit.
    The IRS is currently exploring whether, and to what extent, its 
system is capable of undertaking such a change. If a change is made, it 
would not affect the method of establishing eligibility, that is, the 
taxpayer would continue to be required to attach a completed Form 8862 
to his or her tax return. The Treasury and the IRS do not expect any 
change will affect returns for tax year 2001.
    If a change is made, the IRS expects to inform taxpayers of the 
change in two specific ways. First, the IRS would revise Letter 3094, 
which informs the taxpayer of the eligibility requirements. Second, the 
IRS would revise the instructions for Form 8862 to clarify the return 
to which it must be attached. In addition, the IRS would include 
information regarding the change in all IRS taxpayer publications that 
deal with the EIC eligibility requirements.
    The proposed regulations under section 32(k)(2) are adopted as 
revised by this Treasury decision. The revisions are discussed below.

Explanation of Revisions

    To permit the IRS to make changes to the EIC eligibility program as 
indicated above, Sec. 1.32-3(c) is revised to state that the Form 8862 
instructions will instruct the taxpayer when to file Form 8862. A new 
sentence is added to Sec. 1.32-3(c) to the effect that, if the taxpayer 
attaches Form 8862 to an incorrect return, the taxpayer will 
nevertheless be required to attach Form 8862 to the correct return.
    The IRS and Treasury will consider written comments pertaining to 
these revisions. Submissions should be sent to: CC:ITA:RU (TD8953), 
room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:ITA:RU (TD 8953), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically via the Internet by selecting the ``Tax Regs'' option on 
the IRS Home Page, or by submitting comments directly to the IRS 
Internet site at http://www.irs.gov/tax_regs/regslist.html.

Special Analyses

    It has been determined that these final 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.
    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

[[Page 33637]]

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) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

    The principal author of these regulations is Karin Loverud, Office 
of Division Counsel/Associate Chief Counsel (Tax Exempt and Government 
Entities). However, other personnel from the IRS and the 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 parts 1 and 602 are 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 1.32-3 is added to read as follows:


Sec. 1.32-3  Eligibility requirements after denial of the earned income 
credit.

    (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 in the instructions for Form 8862, ``Information To 
Claim Earned Income Credit After Disallowance,'' no claim for the EIC 
filed subsequent to the denial is allowed unless the taxpayer properly 
completes Form 8862, 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 follow the instructions for Form 8862 to determine 
the income tax return to which Form 8862 must be attached. If the 
taxpayer attaches Form 8862 to an incorrect tax return, the taxpayer 
will not be relieved of the requirement that the taxpayer attach Form 
8862 to the correct tax return and will, therefore, not be treated as 
meeting the taxpayer's obligation under paragraph (a) of this section.
    (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)(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.


Sec. 1.32-3T  [Removed]

    Par. 3. Section 1.32-3T is removed.

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

    Par. 4. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 5. In Sec. 602.101, paragraph (b) is amended by:
    1. Removing the entry for 1.32-3T from the table.
    2. Adding an entry for 1.32-3 to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

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


    Approved: June 20, 2001.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Mark A. Weinberger,
Assistant Secretary of the Treasury.
[FR Doc. 01-15907 Filed 6-22-01; 8:45 am]
BILLING CODE 4830-01-P