In Matter of Gin Shu Lin, DTA No. 823823 (N.Y.S. Div. of Tax App., Nov. 1, 2012), a New York State Administrative Law Judge held that, while an individual seeking the earned income tax credit had established that she had two dependents, she failed to establish her wages and therefore had failed to meet her burden of proof. The earned income tax credit (“EITC”) is available to supplement the earnings of individuals who earn less than specified amounts. The State’s EITC became effective in 1994, and is based on a percentage of the federal EITC. The State EITC has varied since its enactment, from 7.5 percent of the federal amount in 1994 to 30 percent for 2003 and later. Tax Law § 606(d)(1). There is also a New York City EITC, which is 5 percent of the federal EITC. While the State and City EITCs are derived from the federal credit, the State, which administers both the State and City personal income tax, can conduct its own independent audit or examination and is not bound to accept the actions of the IRS.

Although the claimant in Lin had provided a Form IT-2 (Summary of W-2 Statements, reflecting wages), a search by the auditor of the Department’s Wage Reporting and Withholding System could find no employer reporting the claimant’s New York wages. Since the EITC is computed as a percentage of earned income, the ALJ held that the claimant’s inability to establish her wages deprived her of a right to any EITC.  

Additional Insights. Substantiation is often an issue with EITC claimants, particularly those who are cash earners and may be either self-employed or lack proper documentation from their employers. In May 2012, after meetings with community organizations and tax professionals, including Morrison & Foerster LLP, the Department of Taxation and Finance issued DTF-215, Earned Income Tax Credit, Recordkeeping Suggestions for Self-employed Persons, in an attempt to educate taxpayers on the kinds of documentation necessary to support a claim.

The Lin case serves as a reminder to EITC claimants and their tax preparers that the Department scrutinizes and confirms the information underlying EITC claims. Claimants and tax return preparers should also be aware that penalties apply if claims are determined to be fraudulent, which could strip claimants of the right to EITC in subsequent years and/or subject them to heightened future audit scrutiny.