Part IV. Items of General Interest

Notice of Proposed Rulemak- ing by Cross-Reference to Temporary Regulations

Disclosure of Return Information to the Department of Agriculture

REG–103809–03

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations.

SUMMARY: The IRS is issuing regulations to incorporate and clarify the phrase “return information reflected on returns” in conformance with the terms of section 6103(j)(5) of the Internal Revenue Code (Code). These temporary regulations also remove certain items of return information that the IRS currently discloses, but the Department of Agriculture no longer needs, for conducting the census of agriculture. The text of the temporary regulations (T.D. 9060) published in this issue of the Bulletin serves as the text of the proposed regulations.

DATES: Written and electronic comments and requests for a public hearing must be received by September 8, 2003.

ADDRESSES: Send submissions to: CC:PA:RU (REG–103809–03), room 5226, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered between the hours of 8 a.m. and 4 p.m. to CC:PA:RU (REG–103809–03), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the IRS Internet site at www.irs.gov/regs .

FOR FURTHER INFORMATION CONTACT: Christine Irwin at (202) 622–4570 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Temporary regulations in this issue of the Bulletin amend the Procedure and Admin

istration Regulations (26 CFR Part 301) relating to Code section 6103(j)(5). The temporary regulations contain rules relating to the disclosure of return information reflected on returns to officers and employees of the Department of Agriculture for conducting the census of agriculture.

The text of the temporary regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations and these proposed regulations.

Special Analyses

It has been determined this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, the IRS will submit this notice of proposed rulemaking to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for Public Hearing

Before adoption of these proposed regulations as final regulations, the IRS will consider any written (a signed original and eight (8) copies) or electronic comments that the IRS timely receives. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. All comments will be available for public inspection and copying. The IRS may schedule a public hearing if any person who timely submits written comments requests such a hearing in writing. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register .

Drafting Information

The principal author of these regulations is Christine Irwin, Office of the Associate Chief Counsel, Procedure & Ad

ministration (Disclosure & Privacy Law Division).

* * * * *

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301— PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read in part as follows:

Authority: 26 U.S.C. 7805 - - Par. 2. Section 301.6103(j)(5)–1 is added to read as follows:

§301.6103(j)(5)–1 Disclosures of return information reflected on returns to officers and employees of the Department of Agriculture for conducting the census of agriculture.

[The text of this proposed section is the same as the text of §301.6103(j)(5)–1T published elsewhere in this issue of the Bulletin.]

David A. Mader, Assistant Deputy Commissioner of

Internal Revenue.

(Filed by the Office of the Federal Register on June 5, 2003, 8:45 a.m., and published in the issue of the Federal Register for June 6, 2003, 68 F.R. 33887)

Administration of the Earned Income Credit

Announcement 2003–40

I. Purpose

This announcement describes changes the Internal Revenue Service (IRS) is testing in determining qualifying child eligibility under the earned income credit (EIC) under I.R.C. section 32. This announcement also solicits public comment on those changes.

II. Background

The EIC plays a vital role in rewarding work and lifting working families out of poverty. Historically, the EIC program

2003–26 I.R.B. 1132 June 30, 2003

tion, the IRS will be conducting focus groups of taxpayers, practitioners and third parties (who are asked to help establish residency) prior to the test of the certification program.

As part of the certification program, the IRS and Treasury Department previously considered requiring certain taxpayers whose relationship with a claimed child could not be systematically checked by the IRS through existing databases ( e.g., social security records) to establish a qualifying relationship with the child before their EIC claim is accepted. The certification test will not include a relationship certification requirement and will be limited to residency certification.

III. Request for Comments

Based on preliminary discussions and initial drafts of the residency certification form, stakeholders have expressed concerns about various aspects of the certification program. The IRS and Treasury Department are committed to continuing this dialogue with stakeholders and are issuing this announcement to help facilitate comments. Concerns expressed by stakeholders prior to and in response to this announcement will be carefully considered by the IRS and Treasury Department in developing the certification program.

The IRS has revised Form 8836, which is attached to this announcement and will be posted on the IRS’ website at http:// www.irs.gov/taxpros/lists/0,,id=97784,00 .html .

The IRS and Treasury Department welcome all comments and suggestions and are particularly interested in comments on the following matters:

1. Under Form 8836, taxpayers will have the option to provide different types of information or documentation to establish residency. Are there other sources or types of information that should be added to the form (as another option) that would still give the IRS reasonable assurances that the taxpayer satisfies the residency requirement? What information or documentation could the IRS request that taxpayers currently possess or could reasonably obtain to verify that the taxpayer resides with a child? What information or documentation currently requested on the forms is difficult or burdensome for the taxpayer or a third party to provide, and why?

has experienced a relatively high participation rate. The IRS received claims totaling over $32 billion from 19 million claimants for tax year 2002. Studies indicate that between 75 and 86 percent of eligible taxpayers participate in the EIC program. In 2001, the EIC lifted 3.9 million people out of poverty.

Although the EIC program has been successful in reaching and assisting low income working families, the EIC program also suffers from high noncompliance. The most recent compliance study, Compli- ance Estimates For Earned Income Tax Credit Claimed on 1999 Returns (the 1999 study), released in February 2002, estimates that out of the $31.3 billion of EIC claims made by taxpayers for tax year 1999, between $8.5 and $9.9 billion - or between 27.0 and 31.7 percent of total EIC claims — were erroneous unrecovered overclaims. The largest amount of EIC overclaims (for which errors were known) was associated with taxpayers claiming children who were not the taxpayers’ qualifying children. The most common qualifying child error was claiming a child who did not live with the taxpayer for over half the taxable year and therefore did not satisfy the residency requirement of the EIC. Another common qualifying child error was claiming a child who did not bear an appropriate relationship to the taxpayer. Most taxpayers who did not meet the relationship requirement also did not meet the residency requirement.

EIC noncompliance is high in part because it is difficult for the IRS to verify whether a child claimed by a taxpayer meets the residency and relationship tests of the EIC prior to paying out a refund. The IRS employs extensive outreach and educational programs to inform taxpayers and tax return preparers of the requirements of the EIC. These programs encourage eligible taxpayers to participate in the EIC program and discourage ineligible taxpayers from making erroneous EIC claims. In addition, the IRS conducts examinations to verify the eligibility of individuals with questionable claims. Despite these and other efforts, the IRS has been unable to significantly reduce the noncompliance rate over the years.

To prevent qualifying child errors, the IRS and Treasury Department plan to implement a certification program under which certain taxpayers will be required to demonstrate that they meet the residency re

quirement with respect to a child before their EIC claims are accepted. The taxpayers required to demonstrate residency will be those who, based on IRS research, are more likely to claim children who do not satisfy the residency requirement (such as caregivers other than the child’s parents and fathers who do not file joint returns).

Under the certification program, a taxpayer will be encouraged to fill out a form and provide certain documentation that establishes that the taxpayer meets the residency requirement with respect to a child in advance of the filing season. If such taxpayers choose not to pre-certify, they will be required to send in the same forms and documentation with their tax returns. Taxpayers who pre-certify will receive their EIC refunds faster than taxpayers who send information with their tax returns. Taxpayers who do not pre-certify or send in the required information with their tax returns will be given an additional opportunity to certify residency, after which time, they will be denied the EIC with respect to a claimed child, subject to normal appeals rights and the ability to contest the denial in Tax Court.

The goal of the certification program is to evaluate high-risk EITC claims before they are paid, using a process that is less burdensome to taxpayers and less costly to the IRS than an audit. In addition, the certification program will enable eligible, but high-risk, taxpayers to receive their refunds faster than if they were subsequently challenged by the IRS. By helping to ensure that certain high-risk taxpayers receive the right amount of the credit before refunds are paid, the program will also reduce the burden that is imposed when taxpayers must repay erroneous refunds.

The IRS and the Treasury Department want to implement this program in a manner that will continue the goals of the EIC program, will not be overly burdensome for taxpayers (and other parties) and will not adversely affect participation. Accordingly, the IRS will test the certification program with a limited number of taxpayers (approximately 45,000) and will carefully study the results from this group to determine the effect of certification on compliance and participation. In addition, the IRS and Treasury Department are continuing to evaluate the proposed form and instructions, the types of documentation that will be required, and the IRS’ communication and outreach strategy. As part of this evalua

June 30, 2003 1133 2003–26 I.R.B.

submitted on or before December 31, 2003. Comments about certification taking place during the filing season should be submitted on or before April 15, 2004.

Taxpayers may submit electronic comments on Form 8836 at http://www.irs.gov/ taxpros/lists/0,,id=97784,00.html and on the pre-certification and certification processes to notice.comments@irscounsel.treas.gov . Alternatively, comments may be sent to: CC:PA:RU (Announcement 2003–40), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:RU (Announcement 2003–40), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC.

2. How can Form 8836 be simplified or clarified? For example, would it be easier for taxpayers to certify one child per form or two children per form? How could the instructions to Form 8836 be simplified or clarified?

3. What can the IRS do to reach out to taxpayers and encourage them to pre-certify, rather than wait until the filing season? What is the message the IRS needs to convey and what are the best means through which to convey that message? Who should be the primary deliverer of particular messages - the IRS or outside stakeholders? Are there other incentives the IRS can provide to taxpayers to encourage them to precertify?

4. How can the certification program be used to reach out to taxpayers who are eligible for the EIC, but not currently claim

ing the credit? Should the messages associated with the certification program be coupled with messages designed to educate taxpayers about their eligibility to claim the EIC and to increase participation? Alternatively, would combining these messages cause confusion, in which case, what separate measures should the IRS take to reach out to eligible taxpayers who are not claiming the credit?

5. What factors should the IRS take into account in designing the study of the initial group of taxpayers who are asked to certify and in evaluating the results of that study?

Comments about the draft Form 8836 or the certification pilot must be submitted on or before July 14, 2003, in order to be considered for the pilot. Otherwise, comments about the precertification process should be

2003–26 I.R.B. 1134 June 30, 2003

OMB No. 1545-1829

For Privacy Act and Paperwork Reduction Act Notice, see page 4. Cat. No. 14955C Form 8836 (2003)

June 30, 2003 1135 2003–26 I.R.B.

Form 8836 (2003) Page 2

Instructions

Purpose of Form

Use Form 8836 if the IRS sent this form to you and you have a qualifying child for the earned income credit (EIC). We need this form to show that you and your child met the residency test (defined on this page) for 2003.

Who Must File

File this form only if:

• You are claiming or expect to claim the EIC with a qualifying child for 2003 and

• The IRS sent this form to you with a letter directing you to file it.

If you do not file Form 8836, the IRS will not allow the EIC with a qualifying child for 2003.

For details on the EIC eligibility rules, including the definition of qualifying child, see Pub. 596, Earned Income Credit (EIC). You can order Pub. 596 by calling 1-800-TAX-FORM (1-800-829-3676) or you can download it from the IRS website at www.irs.gov.

Pre-recorded information about the EIC is also available by phone 24 hours a day, 7 days a week. Call 1-800-829-4477 and select TeleTax Topic No. 601. Have paper and a pen or pencil handy to take notes.

When To File

There are two different time periods for filing Form 8836 for 2003. You may file Form 8836 either:

• Before January 1, 2004. If you file the form during this period, you may be able to avoid a delay in receiving the EIC part of your tax refund for 2003.

• With your 2003 tax return. Under this option, the EIC part of your refund will be delayed while we review the information you submitted.

Where To File

Send the form to:

Internal Revenue Service Stop 4300, Annex R2 Kansas City, MO 64999-0065

Note. If you file this form after December 31, 2003, you may either file it at the above address or attach it to your tax return. If you file it with your return, be sure to send it to the Internal Revenue Service address shown in the instructions for your tax return.

Residency Test

Your child must have lived with you in the United States for more than half of 2003. Include the time that you or your child are temporarily apart due to a special circumstance, such as military service, school attendance, or juvenile detention. It does not matter where you lived with your child. For example, you may live with your child in a homeless shelter. For more details on the residency test, see Pub. 596.

Special Rule For a Child Who Was Born or Died in 2003. A child is considered to have lived with you for more than half of 2003 if the child was born or died in 2003 and your home was the child’s home for the entire time he or she was alive in 2003.

What We Will Do After We Receive This Form

We will review the information you send us. We will let you know if you have met the residency test needed to get your EIC. If we need more information, we will contact you.

If you do not meet the residency test for a child, we will let you know. The IRS will not allow the EIC based on that child.

How To Get Help

Call 1-800-294-2723 if you need assistance completing this form or you are having difficulty obtaining the documentation you are required to provide with this form. Assistance is available Monday through Friday from 8:00 a.m. to 8:00 p.m. Eastern time.

You may also visit any IRS Taxpayer Assistance Center. To find out the location and hours of the nearest center, call 1-800-829-1040 or visit the IRS website at www.irs.gov/localcontacts. You also can contact the Taxpayer Advocate Service at 1-877-777-4778 or the local Taxpayer Advocate office in your area.