The issue of the reach of the ban on claiming the earned income tax credit when a taxpayer knowingly claims a dependent he/she is not allowed to claim is discussed in an emailed chief counsel advice (CCA 201931008).
IRC §32(k)(1) provides:
(k) Restrictions on taxpayers who improperly claimed credit in prior year
(1) Taxpayers making prior fraudulent or reckless claims
(A) In general
No credit shall be allowed under this section for any taxable year in the disallowance period.
(B) Disallowance period
For purposes of paragraph (1), the disallowance period is—
(i) the period of 10 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit under this section was due to fraud, and
(ii) the period of 2 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit under this section was due to reckless or intentional disregard of rules and regulations (but not due to fraud).
In the situation being addressed in the email, a taxpayer had claimed 3 children on his/her return. It was determined that one of the children was improperly claimed as a dependent, resulting in a downward adjustment of the earned income tax credit. Even though the taxpayer knows he/she is not eligible to claim the child as a dependent, the taxpayer continues to claim the child on subsequent returns. The taxpayer is otherwise entitled to a lesser earned income tax credit each based on the other two children.
The question posed was whether the taxpayer was subject to the two year ban on the entire credit even though they would be properly allowed a credit with regard to the other two children? The memorandum holds that they are faced with a two-year ban on claiming any earned income tax credit, including the amounts available on the two children they had properly claimed on the tax return.
The memorandum finds that claiming the child when the taxpayer was aware this was improper amounts to “reckless or intentional disregard of rules and regulations” with regard to the credit. The memorandum concludes the full ban is appropriate, noting:
Section 32(k)(1)(B)(ii), regarding the 2-year ban for reckless or intentional disregard of rules and regulations, does not prohibit imposition of the ban for partial disallowances. Accordingly, if any taxpayer's claim for the EIC is partially disallowed because of reckless or intentional disregard of rules and regulations, the IRS may asset the 2-year ban under § 32(k)(1)(B)(ii) on the taxpayer claiming any EIC during the 2 years.