How the Earned Income Tax Credit (EITC) Works and What Raises Audit Risk

The Earned Income Tax Credit (EITC) is one of the most powerful refundable credits in the U.S. tax code. It lowers taxes owed and can generate a refund for eligible low- and moderate-income workers and their families. Because the EITC is refundable, it can provide a cash boost that helps pay bills, reduce debt, or start a savings buffer. (IRS, Earned Income Tax Credit; see Publication 596 for full rules.)

This article explains the EITC in plain language, highlights common eligibility traps, lists the audit triggers the IRS watches for, and provides a practical documentation checklist to reduce risk if the IRS asks questions.

Sources and further reading: IRS, “Earned Income Tax Credit (EITC)” and Publication 596 (see https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit and https://www.irs.gov/pub/irs-pdf/p596.pdf).

Who can qualify for EITC?

At a high level, to qualify for EITC you must:

  • Have earned income from work (wages, salaries, tips, or net earnings from self-employment).
  • Have a valid Social Security number for you, your spouse (if filing jointly), and any qualifying child claimed for the credit.
  • Meet income limits and investment income limits for the tax year.
  • For those claiming qualifying children: meet relationship, age, residency, and joint-filing tests for each child.
  • For childless filers: meet age, residency, and other rules that apply to filers without qualifying children.

Exact dollar limits and maximum credit amounts are adjusted annually for inflation. For example, for tax year 2023 the maximum credit for taxpayers with three or more qualifying children was $7,430; limits and amounts differ by filing status and number of qualifying children. Always check the current year guidance on the IRS EITC page and Publication 596 before filing.

How the credit is calculated (in simple terms)

The EITC calculation has three phases:

  1. Credit increases (phase-in): As earned income rises from zero, the credit grows at a set rate.
  2. Plateau (maximum credit): Once you reach the income level for the maximum credit, the credit stays at that top amount for a range of income.
  3. Phase-out: Above a specified income level, the credit is reduced until it phases out completely.

The result depends on three main inputs: earned income, filing status, and number of qualifying children. Self-employed workers use net earnings from self-employment as their “earned income.” (IRS Pub. 596.)

Common taxpayer mistakes that increase audit risk

The IRS uses automated checks and filters to flag EITC claims that look inconsistent with information it already has (W-2s, 1099s, SSA records). The most common issues include:

  • Misstating qualifying-child facts: mistakes on relationship, residency or age tests are frequent. The IRS checks residency and relationship carefully.
  • Incorrect filing status: claiming head of household or married filing jointly when another status applies can trigger review.
  • Multiple returns claiming the same child: custody and tie-breaker rules determine which return is valid; duplicate claims get flagged.
  • Mismatched Social Security numbers or missing SSNs for dependents.
  • Underreporting or inconsistent income: differences between reported wages/1099 income and information returns submitted by employers/clients.
  • Claiming EITC while improperly excluding household members who lived with you (residency test problems).
  • Errors when self-employed: failing to report net self-employment income correctly or not having records (invoices, bank deposits, expenses) to support earnings.
  • Rounding or math errors and missing forms: simple calculation errors and omitted schedules can prompt a correspondence audit.

Because EITC is refundable and targeted at lower-income workers, it has historically been a focus of IRS compliance activity. That means honest mistakes can still lead to documentation requests.

How the IRS typically communicates when it has questions

Most EITC-related reviews begin with a correspondence notice asking for documentation. The communication will explain what the IRS needs and how long you have to respond. In some cases, the IRS may propose an adjustment and explain the proposed change and appeals rights. If you receive any IRS notice about your EITC claim, respond promptly and follow the instructions carefully.

What documentation you should keep (essential checklist)

Retain the following records for at least three years after filing (and longer if you suspect the IRS might question the return):

  • Proof of earned income: W-2s, 1099-NEC, 1099-MISC, Schedule C summaries, pay stubs, and bank deposit records that show payment for work.
  • Proof of net self-employment income: invoices, receipts, business bank statements, bookkeeping reports, and copies of Schedule C.
  • Child proof: birth certificates or adoption records, school records, medical or childcare records, and official mail showing child’s name and address to confirm residency.
  • Social Security cards or official SSA printouts showing valid SSNs for each person claimed.
  • Proof of relationship: custody agreements, court records, or signed statements if applicable.
  • Proof of residency: dated school, medical, or government mail; lease agreements; or other documents showing the qualifying child lived with you during the applicable time.
  • State and local records: where applicable, documents that corroborate living arrangements, child care payments, or other items used to claim the credit.

If audited, organize the records by tax year and by item so they’re easy to send or present.

(IRS guidance on recordkeeping recommends keeping records for at least three years in most situations; see IRS “Recordkeeping” topics.)

Practical steps to reduce audit risk before filing

  • Double-check qualifying-child rules: relationship, age, residency, and joint-filing tests. Don’t assume a dependent automatically qualifies.
  • Reconcile the income on your return with W-2s and 1099s. If an employer or payer supplied an incorrect form, request a corrected form promptly.
  • If self-employed, keep contemporaneous records (invoices, mileage logs, receipts) and use accounting software or a spreadsheet that shows gross receipts and deductions.
  • Use reputable tax software or work with a qualified preparer who understands EITC rules. If you use a paid preparer, ensure they sign the return and provide a preparer tax ID (PTIN).
  • Attach any required forms. For instance, if you claim self-employment income, include a Schedule C or a clear summary of earnings.
  • Consider conservative interpretation when facts are borderline. If an eligibility point is unclear, document your reasoning in a short memo and keep it with your files.

If the IRS questions your claim: how to respond

  1. Read the notice carefully. It will list the documents the IRS needs and deadlines. Missing the deadline can make resolving the issue harder.
  2. Gather the exact documents requested. Include a cover letter that lists what you’re sending and why it supports the claim.
  3. Keep copies of everything you send and use certified mail or secure electronic methods when possible.
  4. If you disagree with the IRS finding, appeal using the procedures explained in the notice. You have rights to explanation and administrative review.
  5. If the issue is complex (disputed custody, self-employment calculations, or multiple claimants), consult a CPA, EA, tax attorney, or a Low Income Taxpayer Clinic (LITC). LITCs offer free or low‑cost help to qualifying taxpayers in many areas.

Realistic examples (illustrative)

  • Example 1 — Misunderstood residency: A taxpayer claims her teenage niece as a qualifying child. The niece spent summers and some school months at the taxpayer’s home but was resident primarily with a parent. Without documents showing the child lived with the taxpayer more than half the year, the IRS rejects the EITC claim.

  • Example 2 — Self-employment record gap: A rideshare driver reports net earnings on Schedule C but can’t produce trip logs, bank deposits, or receipts when the IRS requests proof. The auditor extrapolates income from third‑party records and reduces the credit.

These examples show why contemporaneous records and a clear paper trail matter.

When to get professional help

  • You receive an IRS notice asking for EITC documentation.
  • The IRS proposes disallowing the EITC or another large adjustment.
  • There are custody or residency disputes with another parent or taxpayer.
  • You need to amend prior returns to correct EITC claims.

A qualified practitioner can prepare a professional representation package, respond to the IRS, and advise whether to pursue appeals. See our guidance on preparing an audit packet and representing yourself to the IRS: “Preparing an Audit Packet: What to Send to an IRS Auditor” and “Preparing for an IRS Income Tax Audit: Documents to Gather.” (Internal resources linked below.)

Related internal resources

Final professional tips

  • Err on the side of documentation. Most EITC questions are resolved by showing contemporaneous proof that matches the facts on the return.
  • Keep simple, dated notes explaining judgment calls (custody agreements, temporary living situations, or informal support arrangements).
  • Review EITC rules annually. Small life changes (marriage, separation, a new job, or changes in custody) frequently affect eligibility.

Disclaimer

This article is educational and does not replace personalized tax advice. Rules change, and eligibility depends on facts specific to your situation. For tailored guidance, consult a qualified tax professional or the IRS (Publication 596 and the main EITC web page).

Authoritative sources

(Last reviewed: 2025. Always verify current-year limits and forms on the IRS website.)