Taxpayers residing abroad are filing returns claiming refundable credits, such as the Additional Child Tax Credit. These taxpayers have often never resided or resided only for a short period of time in the U.S. and some have no plans to return to the U.S. Some of these taxpayers are only filing a U.S. return to get the refundable credits. In a significant number of instances, the taxpayers are not entitled to the credits because the “qualifying” children were not U.S. persons during the years at issue and/or income was misstated.
Who is considered a U.S. Citizen?
A Social Security Card does not establish United States citizenship or residency. The taxpayer(s) must provide a U.S. Birth Certificate, Consular Report of Birth Abroad, Certificate of Citizenship (which is effective from the date of issuance), valid green card or U.S. Passport. Note that a U.S. Passport issued after the year under audit does not necessarily indicate that the individual was a U.S. citizen or lawful permanent resident during the tax year under audit.
Non-U.S. Citizen Spouses
If one spouse is not a U.S. citizen, in order to file a joint return he or she must provide proof that he or she filed a section 6013(g) election with his or her spouse. There are limitations on the credits based on modified adjusted gross income and further limits on the refundable portion of the credit (also known as the Additional Child Tax Credit) based on taxable earned income.There are further limits on the refundable portion of the credit (also known as the Additional Child Tax Credit) based on taxable earned income. The term “earned income” is as defined in IRC § 32(c)(2)and does not include any amount excluded under IRC § 911, I931, or 933.
Misclassified on the tax return
If income was misclassified on the tax return – e.g., unearned income (such as a stipend, scholarship, or income received pursuant to a communal living arrangement) was reported as earned, properly reclassify the income and make the proper adjustments to all affected items, including credits.If the taxpayer(s) failed to provide documentation evidencing the nature, source and amount of income, disallow the claimed credits.