Improper Credit Claims and Credit Bans

Refundable credits are among the largest items on many returns, which is why the IRS checks them closely. If the IRS disallows a credit, you may lose more than that year's refund. You may need to file an extra form to claim the credit again, and in serious cases you can be barred from the credit for a set number of years. This page explains the process, the two bans, the penalties that can come with them and how to challenge a ban.

Which credits are covered

Form 8862 is required after a disallowance for these credits:

These are the rules in the December 2025 revision of the Form 8862 instructions, which cover 2025 returns. The instructions also note that a separate refundable child tax credit applied only to tax year 2021. Our guides on the earned income credit, the child tax credit and education credits explain how each credit works.

When Form 8862 is required

You must file Form 8862 with your next return if you want to claim the credit again after a disallowance and you now meet all the requirements. You do not need to file it if the credit was disallowed in an earlier year, you then filed Form 8862 or other documents and it was allowed, and it has not been reduced again for a reason other than a math or clerical error. There is also a narrow exception for the EIC without a qualifying child, where the only reason for the reduction was that a child listed on Schedule EIC was not a qualifying child.

Leaving the form off when it is required can delay the refund or lead to the credit being denied, so check your prior-year notices before filing.

The two bans

Example (hypothetical). The IRS makes a final determination that your 2024 earned income credit was claimed with reckless disregard of the rules. You cannot claim the EIC for 2025 or 2026. For 2027 you may be able to claim it again, if you qualify and attach Form 8862. A fraud finding would have kept the credit out of reach for ten years. The IRS manual also says a fraud finding on these credits can carry the 10-year ban even when the civil fraud penalty itself is not applied.

A ban is not triggered by every disallowance. An ordinary mistake, such as claiming a child who did not meet the residency test because the facts were misunderstood, leads to the Form 8862 requirement but not necessarily a ban.

Penalties that can come with a disallowance

• Accuracy-related penalty. If a disallowance leaves a tax underpayment due to negligence or a substantial understatement, the 20% penalty can apply. See accuracy-related penalty.
• Erroneous claim for refund or credit. This is 20% of the excessive amount claimed and does not apply to any portion already carrying an accuracy-related or fraud penalty. See the page on the erroneous refund claim penalty.
• Civil fraud. In the most serious cases, 75% of the portion of the underpayment due to fraud. See civil fraud penalty.
• Interest. Interest runs on any tax that results.

Challenging a ban

The instructions describe two routes. First, you can ask the IRS to reconsider by sending documents that show you were entitled to the credit, or that the claim was not due to reckless disregard or fraud. Second, you can contest the ban in the U.S. Tax Court, but only after you file a return for a later year in the ban period on which you would otherwise qualify for the credit. You attach Form 8862 and mail the return, because e-filed returns that claim a credit during a ban are rejected. The instructions give the example that a ban based on a 2024 return would be contested by claiming the credit with Form 8862 on a 2025 return.

This path is technical and has strict timing. See our page on IRS audit representation and the guide to responding to an audit letter.

How to avoid problems

• Claim only credits you can prove. Keep proof of residency, relationship, school enrollment and income in case the IRS asks for it.
• Make sure only one person claims a child. If another person may claim the same child, confirm who qualifies first.
• Ask your preparer what records support each credit. Paid preparers have their own due diligence duties for these credits.
• If you receive a letter, answer by the stated date. An unanswered letter can end with the credit being disallowed.

How we can help

We can review a disallowance notice, gather the documents the IRS accepts as proof, prepare Form 8862 correctly and respond to an audit letter on your behalf with a power of attorney. If a ban has been imposed, we can discuss whether reconsideration or the Tax Court route fits your facts. We cannot promise the IRS will reverse a decision, and a ban can be a legal question that requires an attorney.

See our individual tax preparation service or contact us.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.