New Proposed IRS Rules Would Restrict Who Qualifies for Child and Earned Income Credits: What to Do If You Get a Notice
The IRS and Treasury Department published proposed regulations on August 20, 2026, that could change who is allowed to receive the refundable portions of four federal tax credits, including the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC). If you claimed either of those credits in a recent tax year, or plan to claim them in the future, this development is worth your attention, especially as the IRS moves toward making these rules final.
What the Proposed Rule Actually Says
The proposal is formally known as REG-119882-25. It was published in the Federal Register on August 20, 2026, and it applies the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, commonly called PRWORA, to the refundable portions of four specific credits.
The rules would apply the eligibility requirements under PRWORA to the refundable portions of the adoption tax credit, child tax credit, American opportunity tax credit, and earned income tax credit. That last point matters because the EITC and CTC are the two credits that tens of millions of low and moderate income families claim every year.
PRWORA generally limits eligibility for certain federal public benefits to U.S. citizens, U.S. nationals, and qualified aliens. The proposed regulations clarify that the refunded portions of certain refundable individual income tax credits are federal public benefits subject to these eligibility restrictions.
In plain terms: the proposal would add an immigration status test on top of the tax rules that already govern these credits. The proposal would apply PRWORA to the refunded portion of the four credits and would add a separate immigration-status test to each credit’s existing tax rules.
Why the IRS Considers This a Priority Right Now
The 2026-2027 Priority Guidance Plan, released by the IRS and Treasury, lists final regulations under sections 23, 24, 25A, and 32 applying the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 as a priority item, with proposed regulations published on August 20, 2026.
The joint Treasury and IRS Initial 2026-2027 Priority Guidance Plan was released on September 29, 2026. The Plan contains 121 guidance projects that are priorities for allocating Treasury Department and IRS resources during the 12-month period from October 1, 2026, through September 30, 2027. The fact that these regulations appear on that list means the government intends to push them toward a final rule within that window.
The public comment period on REG-119882-25 closed on October 5, 2026. The formal comment period closed on October 5, 2026, and the October 14 public hearing was cancelled because no one asked to testify. The rulemaking record is now closed, and the IRS can move toward issuing final regulations.
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Which Credits Are Affected and What the Numbers Look Like
Understanding exactly which part of the credit is at stake helps put the real risk in perspective.
Child Tax Credit and Additional Child Tax Credit
The proposal affects the refunded layer, the Additional Child Tax Credit, not the nonrefundable Child Tax Credit. For tax year 2026, the Child Tax Credit can be up to $2,200 per qualifying child, with up to $1,700 potentially refundable.
Earned Income Tax Credit
The EITC is fully refundable, meaning families can receive the entire credit as a refund even if they owe no federal income tax. Lower-income households and households with children would be affected more heavily, because the CTC and EITC phase in with earned income and are already unavailable to those with no earned income.
American Opportunity Tax Credit and Adoption Tax Credit
These regulations would affect taxpayers claiming the adoption tax credit, the American opportunity tax credit, the child tax credit, and the earned income credit. However, the EITC and CTC are where most everyday families feel the impact.
Who Needs to Pay Attention
The proposed rule targets eligibility based on immigration status, but that does not mean it only affects people who are foreign-born. There are several groups who should read this carefully.
Mixed-status families. To receive the refunded portion of an affected credit, a taxpayer must declare on the tax return that the taxpayer is eligible to receive the refunded portion of the credit, and the taxpayer must be a U.S. citizen, U.S. national, or qualified alien on the date the taxpayer files the federal income tax return first claiming the affected credit. On a joint return, only one spouse must be a U.S. citizen, U.S. national, or qualified alien.
Families in states with their own EITC. Of the 33 jurisdictions that offer state earned income credits, 30 base them on a percentage of the federal EITC, meaning the rule could reduce state credits for affected filers as well.
Everyone who claimed these credits in prior years. If the rule is finalized and the IRS identifies prior-year returns where someone may not have met the new eligibility standard, it could trigger notices or examinations of those returns. That is where a CP2000 notice becomes a real concern for families.
It is also worth noting: proposed regulations REG-119882-25 are not final and do not change current law. They would apply to tax years ending on or after the date final regulations are published. So nothing has changed yet, but the direction of travel is clear.
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What a CP2000 Notice Means and Why You Should Not Ignore It
As the IRS tightens credit eligibility rules, more families may find an unfamiliar envelope in the mail. The most common notice in this situation is the CP2000.
Notice CP2000 is not an IRS audit or a bill. It is sent to notify you that one or more items on your return do not match what was reported to the IRS by third parties, such as employers or financial institutions. It is a proposed adjustment, and you have the right to respond.
Responses are generally due within 30 days of the notice date, or 60 days if the taxpayer is outside the United States. That deadline is not flexible. You have 30 days to respond, and silence is treated as an agreement.
If you do not respond, the IRS will proceed with its proposed changes. If they do not hear from you by the response date on the notice, they will send a Statutory Notice of Deficiency. That arrives as notice CP3219A, which starts a hard legal clock. At that point, your options become significantly more limited.
Other notices that may accompany a credit eligibility question include CP75, which the IRS uses specifically to hold refunds while it verifies EITC eligibility. These audits announce themselves with notice CP75, and its bite is the refund hold, freezing the EIC, the Additional Child Tax Credit, and related refund amounts. If you receive any of these letters, the date printed on the front of the notice is the deadline that matters most.
What to Do If You Receive a Notice or Have Concerns About Past Returns
Whether you have a letter in hand right now or you are simply worried about what the final rule might mean for a credit you claimed last year, here is how to approach the situation.
- Read every notice carefully and note the response deadline. The date printed on the notice controls your timeline. Do not assume you have more time than it states.
- Gather your documentation. Collect the tax return for the year in question, your Social Security cards or ITIN documentation, any proof of residency for qualifying children, and all wage or income records. The IRS will want to see evidence, not just an explanation.
- Do not simply agree with the IRS proposal without reviewing it. The IRS is proposing to correct your return by adjusting the items listed in the notice unless you provide the IRS with information that shows why the amounts on your return are correct. You have the right to dispute a proposed adjustment.
- Understand that owing a balance does not mean you are without options. If a credit is disallowed and the IRS says you owe tax you cannot pay in full right now, payment plans, offers in compromise, and currently-not-collectible status are all tools that may be available to you, depending on your circumstances.
- Consider getting professional representation before you respond. A response to a CP2000 or CP75 that is poorly worded or incomplete can make your situation harder to resolve. A tax resolution professional can review the notice, verify whether the IRS’s position is correct, and communicate with the IRS on your behalf.
The rules around these credits are growing more complicated, not less. The proposed regulations would apply to tax years ending on or after the date the regulations are published as final regulations, which means the clock is already running toward a rule change that could affect next year’s filing season and, potentially, how the IRS reviews prior-year returns.
If you have already received a notice, or if you claimed the EITC or Child Tax Credit in recent years and are unsure whether your eligibility could be questioned under the new rules, the best move is to get a professional review before the IRS contacts you first. The team at Clear Start Tax works with individuals and families navigating exactly these kinds of situations. A free consultation can help you understand where you stand and what, if anything, you need to do next.
