IRS Notice CP75 — EITC Examination: Complete Practitioner Guide to Responding to Earned Income Tax Credit Audits, Documenting Qualifying Children, and Avoiding the 2-Year EITC Ban
IRS Notice CP75 is the initial contact letter in an EITC examination — a correspondence audit focused specifically on verifying the taxpayer’s eligibility for the Earned Income Tax Credit. The IRS audits EITC claims at a significantly higher rate than most other tax items because the credit has a high improper payment rate. For practitioners, CP75 requires a systematic documentation response that proves the qualifying child’s relationship, age, and residency — the three eligibility tests that the IRS most commonly challenges. The stakes are high: if the IRS disallows the EITC due to fraud or reckless disregard, the taxpayer is banned from claiming the EITC for 10 years (2 years for reckless disregard). Practitioners who prepare EITC returns also face due diligence penalties of $600 per failure under IRC §6695(g).
The Four EITC Qualifying Child Tests: What the IRS Is Auditing
The CP75 examination focuses on verifying that the taxpayer’s claimed qualifying child meets all four tests under IRC §32(c)(3). The IRS will request documentation for each test:
| Test | Requirement | Documentation the IRS Accepts |
|---|---|---|
| Relationship Test | The child must be the taxpayer’s son, daughter, stepchild, foster child, sibling, step-sibling, or a descendant of any of these | Birth certificate, adoption papers, foster care placement documents, court orders establishing legal guardianship |
| Age Test | The child must be under age 19 at the end of the tax year (under 24 if a full-time student; any age if permanently and totally disabled) | Birth certificate; school enrollment records (for student exception); disability determination letter (for disability exception) |
| Residency Test | The child must have lived with the taxpayer in the United States for more than half the tax year | School records showing child’s address; medical records; landlord statement; utility bills; government assistance records showing child at taxpayer’s address; daycare records |
| Joint Return Test | The child cannot file a joint return with a spouse for the tax year (unless the joint return is filed only to claim a refund of withheld taxes) | Copy of child’s tax return (if any) showing no joint return was filed |
The residency test is the most commonly challenged test in CP75 examinations. The IRS looks for contemporaneous records that show the child’s address during the tax year — records created at the time, not after the fact. School enrollment records are the strongest evidence because they are created by a third party and are difficult to fabricate. Medical records, daycare records, and government assistance records (Medicaid, SNAP, CHIP) are also strong evidence. Utility bills and lease agreements in the taxpayer’s name are supporting evidence but are not sufficient on their own.
Practitioner Due Diligence Requirements: Form 8867 and the $600 Penalty
Tax practitioners who prepare returns claiming the EITC are subject to due diligence requirements under IRC §6695(g) and Treas. Reg. §1.6695-2. The due diligence requirements consist of four components:
- Complete Form 8867 (Paid Preparer’s Due Diligence Checklist). Form 8867 must be completed for every return claiming the EITC, Child Tax Credit, American Opportunity Credit, or Head of Household filing status. The form asks specific questions about the qualifying child’s relationship, age, and residency, and requires the preparer to certify that they asked the client about each item.
- Apply the knowledge standard. The preparer must not know or have reason to know that any information provided by the client is incorrect, inconsistent, or incomplete. If the client provides information that seems implausible (e.g., a client who lives in a studio apartment claims to have 4 qualifying children living with them), the preparer must make additional inquiries and document the client’s responses.
- Ask all required questions. The preparer must ask the client all questions on Form 8867 and document the client’s responses. The documentation must be retained for 3 years after the return due date.
- Retain documentation. The preparer must retain a copy of Form 8867, the client’s responses to due diligence questions, and any additional documentation obtained from the client for 3 years after the return due date (or the date the return was filed, if later).
The penalty for failure to meet any of the four due diligence requirements is $600 per credit per return (indexed for inflation). A single return claiming EITC, Child Tax Credit, and American Opportunity Credit with due diligence failures on all three credits could result in a $1,800 penalty for that one return.
Frequently Asked Questions
Whether the client can claim the EITC in future years depends on the reason the IRS disallowed the credit. If the IRS disallowed the EITC because the client did not provide sufficient documentation to prove eligibility (but the client was actually eligible), the client can claim the EITC in future years by filing Form 8862 (Information to Claim Certain Credits After Disallowance) with their next return. Form 8862 is required for the first year the client claims the EITC after a disallowance. If the IRS disallowed the EITC due to reckless or intentional disregard of the EITC rules, the client is banned from claiming the EITC for 2 years. If the IRS disallowed the EITC due to fraud, the client is banned for 10 years. The ban is determined by the IRS’s finding in the examination — it is not self-assessed by the taxpayer. The practitioner should review the IRS’s disallowance letter to determine the stated reason for the disallowance and advise the client accordingly. If the client believes the IRS’s fraud or reckless disregard finding is incorrect, they can appeal the finding through the IRS Appeals process or challenge it in Tax Court.
No — this is one of the most important EITC rules that practitioners must understand. The EITC qualifying child rules are based on residency, not on who claims the dependency exemption. A non-custodial parent who is allowed to claim the child as a dependent under a divorce decree (using Form 8332) cannot claim the EITC for that child, because the child did not live with the non-custodial parent for more than half the year. The custodial parent (the parent with whom the child lived for more than half the year) is the only parent who can claim the EITC, regardless of what the divorce decree says about the dependency exemption. This is a common source of confusion because the divorce decree may allow the non-custodial parent to claim the child as a dependent and the Child Tax Credit (which can be released to the non-custodial parent via Form 8332), but the EITC cannot be released — it belongs to the custodial parent based on the residency test. Practitioners should advise divorced clients with children about this distinction and ensure that the EITC is only claimed by the parent who meets the residency test.
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Learn How to Implement ThisFrequently Asked Questions
Verify the notice is legitimate by checking the notice number and comparing it to your filed return. Do not ignore it — most IRS notices have strict response deadlines. Pull your IRS account transcript online at IRS.gov to confirm the assessment matches what the IRS shows on file.
Most IRS notices require a response within 30 days from the date printed on the notice. Some notices, like statutory notices of deficiency, give you 90 days. Missing the deadline can result in default assessments, loss of appeal rights, or escalation to collection action including liens and levies.
Yes. First-time penalty abatement (FTA) is available if you have a clean three-year compliance history — meaning you filed all required returns on time and paid all taxes due for the prior three years. You can request FTA by calling the IRS at 1-800-829-4933 or by submitting a written request.
You have the right to dispute any IRS assessment. File a written protest within the response window explaining why you disagree, attach supporting documentation, and request a conference with IRS Appeals. If the amount is under $25,000, you can use the simplified Collection Due Process (CDP) hearing request.
Yes. The IRS offers installment agreements for taxpayers who cannot pay in full. For balances under $50,000, you can apply online at IRS.gov/OPA. For larger balances, you will need to submit Form 9465 along with Form 433-A (Collection Information Statement) documenting your income and expenses.
An IRS notice alone does not affect your credit score. However, if the balance remains unpaid and the IRS files a federal tax lien (Notice of Federal Tax Lien), that lien becomes a public record and can significantly damage your credit. Paying or resolving the balance before lien filing protects your credit.
For simple issues like verifying a payment or correcting a minor discrepancy, calling 1-800-829-4933 is faster. For complex disputes, penalty abatement requests, or anything involving legal arguments, always respond in writing via certified mail with return receipt so you have proof of timely response.
Yes. Your CPA, EA, or tax attorney can represent you before the IRS using Form 2848 (Power of Attorney). Once filed, the IRS will communicate directly with your representative. This is strongly recommended for notices involving audits, large balances, or potential criminal referrals.
Yes. The IRS generally has 10 years from the date of assessment to collect a tax debt (the Collection Statute Expiration Date or CSED). After 10 years, the debt expires and the IRS can no longer collect. However, certain actions — like filing an Offer in Compromise or requesting a CDP hearing — can toll (pause) the statute.
Penalties can be abated through FTA, reasonable cause, or statutory exception. Interest, however, is almost never abated — the IRS is required by law to charge interest on unpaid tax from the due date until the date of payment. The only way to stop interest from accruing is to pay the underlying tax balance.
When responding to a CP75 notice, start by thoroughly reviewing the IRS's allegations against the client's EITC claim, focusing on the specific income or dependency issues cited. Assemble all relevant documentation, such as wage statements, school records, and residency proofs. Establish a clear timeline for response, typically within 30 days of the notice date, to avoid automatic disallowance under §6402(f). Utilize secure channels to communicate with the IRS and document all correspondence meticulously for audit defense.
First, verify the taxpayer’s records against the IRS's claims to identify discrepancies in earned income or qualifying child criteria per §32. Next, gather substantiating evidence such as Forms W-2, 1099, and custody agreements. Third, prepare a detailed written response addressing each IRS point, referencing applicable IRC provisions and IRS guidance. Lastly, submit the response within the specified period to prevent default disallowance and consider requesting an appeal if appropriate.
Clients should retain contemporaneous documentation validating earned income, such as W-2s, pay stubs, and 1099 forms, consistent with §32 requirements. Proof of residency and relationship to qualifying children, including school records, medical records, or custody agreements, is critical. Additionally, maintaining a calendar or log of the child's residency and taxpayer’s presence can substantiate claims. These documents collectively form the evidentiary basis necessary to rebut IRS assertions in a CP75 examination.
CP75 notices are commonly triggered when IRS data-matching algorithms detect inconsistencies between reported income and third-party information returns or when qualifying child criteria under §32(b) appear unmet. Clients with complex family arrangements, multiple state residences, or fluctuating income streams present higher audit risks. Practitioners should monitor for missing or inconsistent Forms W-2 or 1099, overlapping claims for dependents, and prior history of EITC adjustments, as these factors heighten scrutiny.
Advise the client that while the CP75 focuses exclusively on EITC eligibility issues under §32, the CP2000 addresses broader income mismatch concerns. The responses should be coordinated but distinct; provide comprehensive income verification and dependency documentation for the CP75 and reconcile income figures for the CP2000. Timely responding to both notices, ideally with cross-referenced documentation, mitigates compounded penalties and supports the client's position on both fronts.
While it is possible to consolidate responses to multiple IRS notices to improve efficiency, CP75 examinations require focused documentation specific to EITC eligibility under §32, which may differ from issues raised in other notices like CP2000. Combining responses should only be done when the factual issues overlap substantially and the supporting evidence sufficiently addresses each notice's concerns. Practitioners must ensure that each notice’s procedural deadlines and requirements are met independently to avoid procedural dismissals.
Inquire about the client's income sources and whether all W-2s and 1099s have been received and reported accurately, consistent with §32. Ask about the residency and relationship status of claimed qualifying children during the tax year, including any custody arrangements or separations. Determine if the client has documentation supporting these claims, such as school or medical records. Finally, confirm if the client has previously been audited for EITC to anticipate potential IRS positions.
The information on this page is intended for licensed tax professionals (CPAs, EAs, and tax attorneys) and is provided for educational and research purposes only. Tax law is complex and fact-specific — all strategies discussed are subject to limitations, phase-outs, and conditions that may not apply to every client situation. Practitioners should independently verify all information against current IRS guidance, Treasury Regulations, and applicable state law before advising clients. This content does not constitute legal or tax advice.