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What is The EITC and Why is it a Common Cause of Tax Debt?

February 27, 2015  |   Last modified on July 9, 2021

The Earned Income Tax Credit (ETIC), also known as the Earned Income Credit (EIC) is a refundable tax credit that provides benefits to working individuals with moderate income. As with every other credit, the EITC reduces the total tax liability of the taxpayer. Even if the taxpayer does not owe taxes, they can get a refund if they file a tax return and claim the EITC.

Qualifying Requirements

To qualify for the EITC, you need to fulfill certain criteria. It should be noted that the EITC is one of the most incorrectly claimed tax credits and often leads to tax debt. Therefore, before claiming it on your tax return, you should know all the qualifying factors.

You need to meet all the following requirements to claim the EITC:

  • The filer(s) must have a Social Security number that is valid for employment
  • You should have earned income (wages, self-employment, etc.)
  • You should be a U.S. citizen, a resident alien for the entire year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return
  • When claiming dependents, they must not be claimed on another person’s tax return
  • You cannot file Form 2555 or Form 2555 EZ
  • You need to meet the earned income, AGI, and investment income limits
  • You must be over 25 years of age and below 65 (for 2021 only, you may be 19 or older), live in the U.S. for more than half of the year, and not be dependent on another person’s return

Thanks to the American Rescue Plan Act (ARPA), you may be able to claim the EITC on a married-filing-separate return or on a head-of-household return, if a qualifying child lives with you for more than six months during the year and you either: (1) lived separately from your spouse for the last six months of the year or (2) were formally separated (a court decree or agreement other than an actual divorce decree) and do not live in the same household.

EITC and Tax Debt

If the basic requirements are not met and the EITC is claimed on a return, the IRS will disallow the credit. That will increase the taxpayer’s liability. If the balance is not paid before the filing deadline, then the IRS will treat it as a tax debt, and begin to charge penalties and interest on it.

When the IRS discovers that the filer does not meet the requirements to claim this tax credit, they send a notice to inform the filer that they are ineligible to claim the EITC. In some cases, the IRS may perform an audit and ask for additional documentation.

In the case of a miscalculation, the IRS sends Notice CP11A to inform the filer that they made changes to the return, and as a result, the taxpayer may owe. To avoid facing tax debt, taxpayers should immediately pay their balance before the filing deadline.