Handling the most common errors and due diligence situations

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In 1975, Congress created the EITC to offset the burden of Social Security taxes and provide a work incentive for low-income taxpayers. Participation in the program is high, but the program experiences a high rate of claims paid out in error—estimated to be around 27.3 percent of the claims. Additional information can be found in Department of the Treasury, Agency Final Report, FY 2024 PDF, page 232.

As you prepare EITC returns, avoid the three most common EITC errors which count for more than 60% of erroneous claims.

The IRS assesses more than 90 percent of all due diligence penalties for failure to comply with the knowledge requirement of IRC § 6695 (g). These examples show how asking the right questions can help you get all the facts and avoid the most common due diligence situations.

Remember to document any additional questions you ask your client and the answers your client gives at the time of the interview either in the client file or within your software.

1. Claiming a child who is not a qualifying child for the EITC – This error occurs when taxpayers claim a child who does not meet all four tests for a qualifying child.

These examples and scenarios show examples of questions you might ask to get all the facts and have different outcomes based on the questions asked and the answers received. They are not all inclusive, you should ask additional questions and documents as warranted.

Twenty-two-year-old with two sons PDF: Your 22-year-old client tells you he has two sons and wants to claim EITC. Can the sons pass the relationship tests? It depends! See our example showing different outcomes depending on the questions asked and the answers given.

Additional qualifying child PDF: Last year your client claimed single and had one qualifying child for EITC. She returns this year and has an additional child. What questions do you ask?

Tiebreaker rule - Adjusted gross income: Is an example of a relative other than a parent claiming a child and deals with the adjusted gross income of the parents.

Tiebreaker rule - Age PDF: Gives an example of a relative other than a parent claiming another relative. It deals with age, disability, and a qualifying child of more than one relative.

To be considered a qualifying child, the child must meet all four requirements: relationship, residency, age, and joint return tests. Many meet one or two of these requirements, but they must meet all to be a qualifying child for the EITC. If two people, filing separate tax returns, claim the same child, tie-breaker rules determine which person has the valid claim.

​​​​​​​2. Married taxpayers claiming the EITC without filing a joint return or meeting additional rules for separated spouses

Separated spouse PDF: Your client and her husband are separated. She wants to claim EITC for her 7-year-old child who lives with her. What filing status should your client use? The outcomes change depending on the questions you ask and the answers she gives.

Note the special rule for married taxpayers

Starting with tax year 2021, married taxpayers who can file a joint return but file as either head of household or married filing separately can claim EITC only if they had a qualifying child who lived with them for more than half of the year and either of the following apply:

  • They lived apart from their spouse for the last 6 months of the year, or
  • They were legally separated according to their state law under a written separation agreement or a decree of separate maintenance and did not live in the same household as their spouse at the end of the year.

3. Income-reporting errors – Taxpayers sometimes over-report or under-report income to qualify for or maximize the amount of EITC.

Self-employed house cleaner PDF: Your client tells you she earned $12,000 cleaning houses, had no expenses, wants to claim head of household and EITC. Would you accept that, or would you ask more questions? Explore this scenario to answer that question.

4. Other common situations

An eighteen-year-old daughter lives with her parents PDF: Your 18-year-old client tells you she lives with her parents, has a two-year-old daughter and wants to claim EITC. Is she eligible? View the three different outcomes based on the questions you ask and the answers she gives.

Social Security card scenario PDF: This is a scenario with an examples of an identification cards that can be used to claim EITC.

For more examples and scenarios, view the due diligence videos.

Due diligence tip!

As a paid return preparer, you have additional due diligence requirements. The “knowledge” requirement states that you must apply a reasonableness standard to the information you receive from your client.

If the information provided by the client appears to be incorrect, incomplete, or inconsistent, then you must make additional inquiries of the client until you are satisfied that you have the correct and complete information to prepare the return. Always keep a copy of the inquires and client responses in a client file or within your software.

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Page Last Reviewed or Updated: 11-Jan-2025