The Internal Revenue Service often includes worksheets along with form 1040 instructions. However, these worksheets and instructions often are ambiguous, leaving the potential for taxpayer error. Such is the case with Schedule EIC, Earned Income Credit.
IRC section 32 generally provides that a taxpayer who has a “qualifying child” is eligible for the earned income credit (EIC). A qualifying child is one who meets relationship, residency and age tests and for whom the taxpayer satisfies an identification requirement. The section 32(c)(3)(D)(i) requirement provides that a qualifying child shall not be considered unless the taxpayer includes the child’s name, age and taxpayer identification number (TIN) on the tax return.
Section 32(m) defines the term TIN for purposes of the EIC as a Social Security number issued by the Social Security Administration ( other than a number issued under clause II or the portion of clause III that relates to clause II of section 205(c)(2)(B)(i) of the Social Security Act). Section 205(c) is codified in 42 USC section 405(c) (2003).
Clause I pertains to aliens lawfully admitted to and entitled to work in the United States. Clause II concerns individuals, including any child on whose behalf another person claims benefits, who apply for or receive benefits fully or partially federally funded. Clause III was not applicable in this case.
In Mamady B. Cisse v. Commissioner, TC summary opinion 2003-143, the court considered whether the Social Security number (SSN) issued to an otherwise qualifying child satisfied the identification requirement of section 32.
In 2000 the taxpayer listed his nephew Mohamed as a qualifying child and claimed the EIC on his federal income tax return. Born in Senegal, Mohamed was a resident alien in the United States with a Social Security card stamped “Not valid for employment.”
Page 43 of the EIC worksheet for 2000 defines a valid SSN—for purposes of taking the EIC—as a number issued by the Social Security Administration to a U.S. citizen or a person who has permission from the Immigration and Naturalization Service to work in the United States. The instructions specifically state: “It does not include an SSN issued only to allow a person to apply for or receive federally funded benefits. If your Social Security card, or your spouse’s if filing a joint return, says ‘Not valid for employment,’ you cannot take the EIC.”
The taxpayer in Cisse had a valid SSN. However, schedule EIC, line 2, addresses the child’s SSN. The child also must have an SSN as defined on page 43 of the instructions for form 1040 or 1040A.
The IRS determined that Mohamed’s Social Security card did not meet the identification number requirement of section 32. Therefore, his uncle did not have a qualifying child and the IRS disallowed the earned income credit. It determined a deficiency of $3,137 on Cisse’s 2000 federal income tax return.
The taxpayer petitioned the Tax Court for relief, but the court ruled that, because the stamp on Mohamed’s Social Security card indicated it was not valid for employment, he was not included in clause I of 42 USC section 405(c)(2)(B)(i). However, he was covered by clause II. As a result Mohamed did not have a TIN as defined in section 32(m) and therefore did not meet the identification requirement in section 32(c)(3)(D). The court held that Mohamed was not a qualifying child and the taxpayer was not entitled to claim the EIC.
Observation. Taxpayers and their CPAs should use caution when reading tax form instructions. The ambiguous language can cause unintentional errors. CPAs should routinely prepare Form 8867, Paid Preparer’s Earned Income Credit Checklist, which specifically asks on line 3 whether the taxpayer (and spouse, if filing jointly) has a valid SSN for EIC purposes and whether the child has a valid number (referring to the instructions for line 3 for what makes a number valid). It is ironic that Mohamed’s Social Security number qualified him for federally funded benefits, yet disqualified him for EIC purposes.
Prepared by Claire Y. Nash, CPA, PhD, associate professor of accounting, Christian Brothers University, Memphis, and Tina Quinn, CPA, PhD, associate professor of accounting, Arkansas State University, Jonesboro.