Taxpayers who claim deductions typically understand that they have to be able to prove that they qualify for the deduction. For example, you know if you claim business expenses, charity gifts, or other costs for deduction, that you’ll need to supply documents such as receipts, cancelled checks, or bank statements in the event of an audit. This is pretty standard knowledge among most taxpayers who file for deductions.

However, a recent court case required a taxpayer to prove that she earned the amount she reported when filing a return, in which she used Head of Household status, and claimed three children and herself for exemptions. When asked to provide receipts or documentation, she stated that she used cash for all transactions, and did not keep any paper trail or written log of any expenses or sales of clothing. As a result, the IRS stated that the woman failed to prove the amount of earned income she was claiming, and recalculated her return.

The EITC

The Earned Income Tax Credit uses a percentage of a taxpayer’s earned income. Earned income includes wages and earnings from self-employment work. This credit is fully refundable, which means eligible taxpayers can get money back from the EITC even if they weren’t required to pay taxes.

The Child Tax Credit

The child tax credit is only refundable if the taxpayer’s earned income is greater than $3,000, and they owe less income tax than the amount of the credit. When the credit is refundable, it’s known as the Additional Child Tax credit, which is equal to either:

• The leftover amount of the child tax credit leftover after the tax amount is zero
• 15% of earned income greater than $3,000

The Additional Child Tax Credit chooses the smallest of the two above options.

Both credits require the taxpayer to have earned income, which means one may need to prove the amount you report on your return. You will have to show that the income amounts you claim actually do exist.

In the aforementioned court case, in which the taxpayer couldn’t provide enough support for her earned income, the IRS suspected the taxpayer was grossing up the amount of her business income in an effort to maximize the amount of refundable credits she was entitled to.

Remember, when filing your tax return, especially if you are claiming refundable credits, that expenses and deductions aren’t the only items you may need to prove.