Tax credits are an extremely valuable way to reduce your tax bill or get a refund, but what if the IRS denies your credit? Every year, the IRS rejects many tax credits and adjusts returns accordingly. That increases taxpayers’ liabilities, subjects them to penalties, and potentially prevents them from claiming those credits in the future.
Credit denials can apply to both individuals and businesses, and there are several reasons each may happen. Find out about common tax credits, why they’re usually denied, IRS notices to watch for, and next steps once you’ve been denied. To get help now, talk to a tax expert at Wiggam Law when you have questions about tax credits and IRS denials.
Key Takeaways:
- Tax credits can significantly reduce tax liability. But each has strict eligibility requirements, including income thresholds, qualifying dependents, and specific business criteria.
- The IRS may deny tax credits due to incorrect income reporting, ineligible dependents, improper education expenses, filing errors, or missing documentation.
- A denied credit can lead to IRS audits, delayed refunds, potential credit bans (two years for reckless claims, ten years for fraudulent claims), and even tax penalties.
- Taxpayers should carefully review IRS denial notices like Notice CP79A to understand the reason for denial. They may need to provide additional documentation, file Form 8862 for reinstatement, or appeal the decision if they believe it was made in error.
- To avoid credit denials, verify eligibility, maintain proper documentation, and ensure accurate filing.
Common IRS Tax Credits That May Be Denied
The IRS offers a range of tax credits that offset your tax liability, lowering the amount you have to pay. Credits can significantly impact your taxes if you qualify and claim them properly. Here are some common credits that the IRS may deny:
Child Tax Credit (CTC)
The child tax credit (CTC) is one of the most common and can provide a sizable tax break if you qualify. You can get up to $2,000 per child in 2024 and 2025, and up to $1,700 may be refundable through the additional child tax credit. To qualify, your modified adjusted gross income must be under $200,000 for individual filers and $400,000 for joint filers, and the credit is reduced in increments if your income exceeds the threshold.
Your dependents must also meet these qualifications:
- Under age 17 at the end of the applicable tax year
- U.S. citizen, national, or resident alien
- Your child, stepchild, foster child, sibling, half sibling, step sibling, or these family members’ descendants
- Cannot file a joint tax return on their own
- Lives with you for at least half the year
- Receives at least half of their support from you for the year
Earned Income Tax Credit (EITC)
Another IRS credit is the earned income tax credit (EITC), which helps taxpayers with low to moderate income. They must be actively working, and working parents can receive more than workers without children.
The IRS outlines income thresholds based on your filing status and number of children. If you have zero children, the maximum income for single taxpayers or heads of household is $18,591, and the maximum credit is $632. Compare that to having three or more children with a max credit of $7,830 and a maximum income of $59,899 for single filers or heads of household.
For tax year 2024, investment income has to be $11,600 or less, rising to $11,950 for 2025. If you don’t meet these criteria, the IRS may deny your EITC claim – returns with EITCs often get audited at higher rates than other returns.
American Opportunity Tax Credit (AOTC)
The American Opportunity Tax Credit (AOTC) applies to expenses you pay for your family’s education. You may be able to get a credit of up to $2500 per student, but expenses must be related to tuition, books, and similar costs. Eligible students must be pursuing a degree or credential, be enrolled at least part-time, not have claimed the credit for more than four years, and not have a felony drug conviction when the tax year ends.
Employee Retention Credit (ERC)
The employee retention credit (ERC) was implemented to help employers impacted by the COVID-19 pandemic that kept workers on the payroll, so it no longer applies to taxes after January 1, 2022. However, you may be able to claim the credit retroactively, or you could be dealing with a denial. Employers can claim this credit based on qualified wages paid after March 12, 2020, and before January 1, 2022.
Your business must meet at least one of these requirements or meet other criteria:
- Operations were suspended in 2020 or the first three quarters of 2021 due to a government order related to the pandemic.
- You saw a decline in gross receipts of over 50% in 2020 or 20% during the first three quarters of 2021.
- Your business was a recovery startup business, in one of the last two quarters of 2021.
The IRS found that many ERC claims are ineligible or even fraudulent, so ensuring you qualify before trying to take this credit is key. Additionally, if the IRS denies your claim, it’s important that you understand the rules so you can argue that you were entitled to claim it.
Possible Reasons for Tax Credit Denials:
So, maybe you’ve determined that you qualify for a credit and made your claim on your tax return. Why did the IRS deny your claim? These are common reasons:
- Your dependent doesn’t meet eligibility requirements, such as their relationship to you. For instance, you cannot claim the child tax credit on your boyfriend or girlfriend’s child, even if you pay for all of their support.
- You don’t meet income thresholds to claim a credit. For example, as of 2025, your income must be under $80,000 ($160,000 for married filing jointly) if you claim the AOTC.
- Your business doesn’t meet all eligibility requirements. For example, the ERC has strict requirements for businesses, some of which were tied to your number of employees and/or declines in revenue.
- You provided an incorrect tax identification number (Social Security number, ITIN). For example, you claimed the credit for other dependents but put in the wrong tax ID number for the dependent.
- You didn’t meet other qualification requirements. For example, you tried to claim an AOTC, and it was already claimed for that taxpayer four times.
- You filed your tax return incorrectly or under an incorrect filing status.
If none of these reasons apply to you but you still were denied, you may need to appeal that decision or talk to a tax professional about the issue. Also, keep in mind that the IRS makes mistakes. If you think the denial was issued in error, contact the IRS or reach out to a tax professional for help.
Impact of Credit Denials on Future Tax Filings
Unfortunately, credit denials can have future consequences for your taxes. Here are some potential impacts:
Greater IRS Scrutiny
If you claim a credit one year and it’s denied because of a mistake you made, the IRS could look for the same thing in future tax returns. This means you could be under greater scrutiny moving forward. An inaccurate credit claim could also lead to an IRS audit.
Credit Bans
You could also face a ban on claiming credits. If the IRS finds that you showed reckless or intentional disregard for tax rules and regulations, whether taking the EITC, CTC, or AOTC, it can ban you from claiming the same credit for two years. If you’re found to have claimed it fraudulently, the IRS can ban you for 10 years.
Delayed Refunds
You may have to wait longer to get your tax refund if your credit is under review or if you had a denied credit claim in the past. If you dispute the denial, the IRS will need to review everything again, meaning your refund will hang in the balance until the matter is resolved.
Tax Penalties
If you claim a tax credit improperly and are denied, you may have to deal with IRS tax penalties for underreporting your income and/or underpaying what you owe in taxes. Tax penalties can add up quickly, so you want to avoid them. There is also an erroneous claim for refund or credit penalty that the IRS could apply, which is 20% of the amount of the claim that exceeds the allowable amount or the excessive amount claimed.
Impacts on Personal Tax Liability
An important note to remember is that even if you’re a business owner, you could still face personal tax liabilities if your business tax credit is denied. The IRS could take another look at your personal taxes if they believe credits were used to lower your taxable business income.
IRS Notices Related to Credit Denials
After you claim a credit on your tax return, how will you know if it’s denied? Here are the notices you may receive regarding the denial:
CP79 Notice: We Denied One or More Credits Claimed on Your Tax Return
This initial notice will inform you that the IRS has denied a tax credit you claimed. This is a common notice for the EITC, CTC, and AOTC. You usually don’t have to do anything with this notice to respond if the information provided is correct. The notice may also state that next time you claim the same credit or credits listed, you must submit Form 8862 with your tax return, showing your eligibility.
CP79A Notice: We Denied One or More of the Credits Claimed on Your Tax Return and Applied a Two-Year Ban
If the IRS finds that you acted recklessly or disregarded the tax rules, you may get this notice stating you cannot claim the same credit for two years. After those two years, you will have to submit Form 8862 with your tax return to be eligible again. You usually don’t have to do anything right away to respond to a CP29A Notice.
Notice of Deficiency (Letter 3219)
If you dispute the credit denial, the IRS could then send you Letter 3219, Notice of Deficiency, notifying you of how much you owe and making a final determination that your credit has been denied. This letter is also known as the 90-day letter since you have 90 days from the notice date to file an appeal.
How to Respond to a Tax Credit Denial
Even if you don’t have to respond to the IRS’s notice of a tax credit denial, you should still take steps to ensure you have everything covered. Here’s what to do when a tax credit is rejected:
Pay Attention to the Details
Read your notice thoroughly so you understand the reason your credit was denied. If you don’t, you could make the same mistake in the future, or you could miss something important. The IRS could also ask you for additional documentation to confirm your eligibility.
Make a Payment If Required
If you have already received a tax refund and the IRS is now denying your claim, you likely need to repay the applicable amount if the IRS’s determination is correct. You could also owe penalties and interest. If you can’t afford your new balance, consider setting up a payment plan or contacting the IRS about other relief options.
File Form 8862
If you had a denied credit and are trying to claim that same credit once again, you’ll often need to submit Form 8862 with your next tax return. This helps you show your eligibility for claiming the credit. However, you don’t have to file this form if:
- You filed Form 8862 already, and the IRS accepted the credit. The IRS didn’t reduce or deny your credit again for any reason other than a math error.
- You are claiming the EITC without a child, and when the IRS denied your EITC previously, the denial was related to an issue with a child.
- You received a CP74 notice saying that you were recertified to claim that credit.
Follow the Instructions for Banned Credits
Your notice may include information about being banned from claiming credits for the next two years, which happens when the IRS determines your claim was reckless or showed intentional disregard for the law. If fraud was involved, your ban could be longer. Read this section carefully so you stay compliant in the future.
How to Avoid Tax Credit Denials
No one wants to have a tax credit denied. What can you do to avoid this from happening again? Here are a few best practices:
- Verify eligibility before claiming the credit and submitting your tax return.
- Use the IRS’s online tools that help you figure out if you qualify or not.
- Keep records that will help you show eligibility to the IRS if an issue arises, such as information about education-related expenses or income verification documents.
- Maintain detailed employment and payroll records for your business if applicable.
If you’re not sure what you need to do to avoid credit denials, consult with a tax professional, especially when you’re dealing with larger credits that the IRS is known to deny. An expert will help you reduce risk and provide all necessary documentation.
How Wiggam Law Helps with Tax Credit Denials
Filing your tax return requires careful attention to detail and ensuring all tax credit claims are accurate. If you make even a small mistake, you could face an IRS denial or ban, not to mention expensive penalties.
Work with a tax attorney at Wiggam Law if your credit was denied or you want to prevent denials. Experts will help ensure you stay compliant with all tax laws and that you’re eligible for the tax breaks you’re claiming.
Contact Wiggam Law today to find out more about our tax services. We can be reached by calling (404) 233-9800 or through our online consultation form.
