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Does the earned income tax credit increase audit risk?

Taxpayers who claim the Earned Income Tax Credit (EITC) are at an increased risk of an audit compared to those who do not. The reason: it is a tax credit often claimed in error. Last year alone the Internal Revenue Service (IRS) audited 381,000 taxpayers that claimed the EITC. This translates to over one-third of all audits conducted by the agency.

Case in point: Taxpayer audited by IRS for claiming EITC

A young woman provides a recent example. The woman, a wife and mother of a toddler with a second on the way, filed her taxes with the expectation of a refund. Instead of a refund, the taxpayer received a letter from the IRS stating it was “conducting a thorough review.” Four months later, the taxpayer received additional correspondence from the IRS. In this letter, the agency stated it was conducting an audit and required additional documentation to support claims made on her returns. In particular, the agency needed information to support claims her child resided within the family home and other claims made to support the EITC election.

Over one year after the process began, she still awaits a decision.

Lessons from the case: 2 take-aways

The case provides lessons that are applicable to all taxpayers, including:

  • File carefully. The IRS acknowledges the problem is often not intentional fraud. Instead, many taxpayers claim the credit in error — without fully understanding what is needed to qualify for the credit.
  • Keep records. It is important to keep copies of all relevant documents needed to support claims on your tax filings. Hang on to these forms for at least seven years.

It is also important to take action if contacted by the IRS. An attorney experienced in IRS tax audits can review the correspondence and help provide guidance during the process.

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