[Congressional Bills 104th Congress]
[From the U.S. Government Publishing Office]
[S. 899 Introduced in Senate (IS)]

  1st Session
                                 S. 899

 To amend the Internal Revenue Code of 1986 to prevent fraud and abuse 
    involving the earned income tax credit, and for other purposes.


_______________________________________________________________________


                   IN THE SENATE OF THE UNITED STATES

                 June 8 (legislative day, June 5), 1995

 Mr. Roth (for himself, Mr. Nickles, and Mr. Pressler) introduced the 
 following bill; which was read twice and referred to the Committee on 
                                Finance

_______________________________________________________________________

                                 A BILL


 
 To amend the Internal Revenue Code of 1986 to prevent fraud and abuse 
    involving the earned income tax credit, and for other purposes.
    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; AMENDMENT OF 1986.

    (a) Short Title.--This Act may be cited as the ``Earned Income Tax 
Credit Fraud Prevention Act''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.

SEC. 2. EARNED INCOME CREDIT DENIED TO INDIVIDUALS NOT AUTHORIZED TO BE 
              EMPLOYED IN THE UNITED STATES.

    (a) In General.--Section 32(c)(1) (relating to individuals eligible 
to claim the earned income tax credit) is amended by adding at the end 
the following new subparagraph:
                    ``(F) Identification number requirement.--The term 
                `eligible individual' does not include any individual 
                who does not include on the return of tax for the 
                taxable year--
                            ``(i) such individual's taxpayer 
                        identification number, and
                            ``(ii) if the individual is married (within 
                        the meaning of section 7703), the taxpayer 
                        identification number of such individual's 
                        spouse.''.
    (b) Special Identification Number.--Section 32 is amended by adding 
at the end the following new subsection:
    ``(l) Identification Numbers.--Solely for purposes of paragraphs 
(1)(F) and (3)(D) of subsection (c), a taxpayer identification number 
means a social security number issued to an individual by the Social 
Security Administration (other than a social security number issued 
pursuant to clause (II) (or that portion of clause (III) that relates 
to clause (II)) of section 205(c)(2)(B)(i) of the Social Security 
Act).''.
    (c) Extension of Procedures Applicable to Mathematical or Clerical 
Errors.--Section 6213(g)(2) (relating to the definition of mathematical 
or clerical errors) is amended by striking ``and' at the end of 
subparagraph (D), by striking the period at the end of subparagraph (E) 
and inserting ``, and'', and by inserting after subparagraph (E) the 
following new subparagraph:
                    ``(F) an omission of a correct taxpayer 
                identification number required under section 23 
                (relating to credit for families with younger children) 
                or section 32 (relating to the earned income tax 
                credit) to be included on a return.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

SEC. 3. REPEAL OF EARNED INCOME CREDIT FOR INDIVIDUALS WITHOUT 
              CHILDREN.

    (a) In General.--Subparagraph (A) of section 32(c)(1) (defining 
eligible individual) is amended to read as follows:
                    ``(A) In general.--The term `eligible individual' 
                means any individual who has a qualifying child for the 
                taxable year.''.
    (b) Conforming Amendments.--Each of the tables contained in 
paragraphs (1) and (2) of section 32(b) are amended by striking the 
items relating to no qualifying children.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

SEC. 4. DECREASE IN EARNED INCOME CREDIT AMOUNTS AND PHASEOUT RANGES.

    (a) Decrease in Credit Rate.--
            (1) In general.--Subsection (b) of section 32, as amended 
        by section 3(b), is amended to read as follows:
    ``(b) Percentages.--
            ``(1) In general.--The credit percentage and the phaseout 
        percentage shall be determined as follows:


                                                                                                                
 ``In the case of an eligible individual with:      The credit percentage is:      The phaseout percentage is:  
                                                                                                                
1 qualifying child.............................  34............................               15.98             
2 or more qualifying children..................  36............................               20.22             
                                                                                                                

      
        In the case of taxable years beginning in 1996, the credit 
        percentage for eligible individuals with 2 or more qualifying 
        children shall be 35 percent.
            ``(2) Amounts.--The earned income amount and the phaseout 
        amount shall be determined as follows:


                                                                                                                
 ``In the case of an eligible individual with:    The earned income amount is:       The phaseout amount is:    
                                                                                                                
1 qualifying child.............................  $6,000........................             $11,000           
2 or more qualifying children..................  $8,425........................            $11,000.''.          
                                                                                                                

      
            (2) Conforming amendment.--Paragraph (1) of section 32(i) 
        is amended by striking ``subsection (b)(2)(A)'' and inserting 
        ``subsection (b)(2)''.
    (b) Inflation Adjustments Terminated.--Section 32(j) (relating to 
inflation adjustments) is amended by adding at the end the following 
new paragraph:
            ``(3) Termination.--This subsection shall not apply to any 
        taxable year beginning after December 31, 1995.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.
SEC. 5. RULES RELATING TO DENIAL OF EARNED INCOME CREDIT ON BASIS OF 
              DISQUALIFIED INCOME.

    (a) Definition of Disqualified Income.--Paragraph (2) of section 
32(i) (defining disqualified income) is amended by striking ``and'' at 
the end of subparagraph (B), by striking the period at the end of 
subparagraph (C) and inserting ``, and'' and by adding at the end the 
following new subparagraphs:
                    ``(D) capital gain net income,
                    ``(E) the excess (if any) of--
                            ``(i) the aggregate income from all passive 
                        activities for the taxable year (determined 
                        without regard to any amount described in a 
                        preceding subparagraph), over
                            ``(ii) the aggregate losses from all 
                        passive activities for the taxable year (as so 
                        determined), and
                    ``(F) amounts includible in gross income under 
                section 652 or 662 for the taxable year to the extent 
                not taken into account under any preceding 
                subparagraph.
        For purposes of subparagraph (E), the term `passive activity' 
        has the meaning given such term by section 469.''.
    (b) Decrease in Amount of Disqualified Income Allowed.--Paragraph 
(1) of section 32(i) (relating to denial of credit) is amended by 
striking ``$2,350'' and inserting ``$1,000''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

SEC. 6. MODIFICATION OF ADJUSTED GROSS INCOME DEFINITION FOR EARNED 
              INCOME CREDIT.

    (a) In General.--Subparagraph (B) of section 32(a)(2) (relating to 
limitation) is amended by striking ``adjusted gross income'' and 
inserting ``modified adjusted gross income''.
    (b) Modified Adjusted Gross Income Defined.--Section 32(c) 
(relating to definitions and special rules) is amended by adding at the 
end the following new paragraph:
            ``(5) Modified adjusted gross income.--The term `modified 
        adjusted gross income' means adjusted gross income, increased 
        by the sum of--
                    ``(A) social security benefits (as defined in 
                section 86(d)) received to the extent not includible in 
                gross income,
                    ``(B) amounts received by (or on behalf of) a 
                spouse pursuant to a divorce or separation instrument 
                (as defined in section 71(b)(2)) which, under the terms 
                of the instrument, are fixed as payable for the support 
                of the children of the payor spouse (as determined 
                under section 71(c)),
                    ``(C) interest received or accrued during the 
                taxable year which is exempt from tax imposed by this 
                chapter, and
                    ``(D) any amount received by a participant or 
                beneficiary under a qualified retirement plan (as 
                defined in section 4974(c)) to the extent not 
                includible in gross income.
        Subparagraph (D) shall not apply to any amount received if the 
        recipient transfers such amount in a rollover contribution 
        described in section 402(c), 403(a)(4), 403(b)(8), or 
        408(d)(3).''
    (c) Study.--The Secretary of the Treasury shall conduct a study of 
the Federal tax treatment of child support payments to determine 
whether or not changes in such treatment are necessary. The Secretary 
shall report to the Committee on Finance of the Senate and the 
Committee on Ways and Means of the House of Representatives the results 
of the study, including recommendations (if any) which the Secretary 
determines appropriate to encourage payment of child support 
liabilities by parents and to make both parents more responsible for a 
child's economic well-being.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 1995.

SEC. 7. EARNED INCOME CREDIT NOT ALLOWED UNTIL RECEIPT OF EMPLOYER'S 
              WITHHOLDING STATEMENT.

    (a) In General.--Section 6401(b) (relating to excessive credits 
treated as overpayments) is amended by adding at the end the following 
new paragraph:
            ``(3) Special rule for earned income credit.--For purposes 
        of paragraph (1), the earned income credit allowed under 
        section 32 shall not be treated as a credit allowable under 
        subpart C of part IV of subchapter A of chapter 1 unless the 
        Secretary is able to verify the amount of such credit by 
        comparing it with--
                    ``(A) information returns filed with the Secretary 
                under section 6051(d) by employees of the individual 
                claiming the credit,
                    ``(B) self-employment tax returns filed with the 
                Secretary under section 6017, or
                    ``(C) both.
        The preceding sentence shall apply to any advanced payment of 
        the earned income credit under section 3507.''
    (b) Effective Date; Study.--
            (1) In general.--The amendment made by this section shall 
        apply to taxable years beginning after December 31, 1996.
            (2) Study.--The Secretary of the Treasury shall conduct a 
        study to determine the delays (if any) which would result in 
        the processing of Federal income tax returns by reason of the 
        amendment made by this section. Not later than 1 year after the 
        date of the enactment of this Act, the Secretary shall report 
        the results of the study to the Committee on Finance of the 
        Senate and the Committee on Ways and Means of the House of 
        Representatives, including recommendations (if any) on ways to 
        shorten any delay.

SEC. 8. PREVENTION OF FRAUD IN ELECTRONIC RETURNS.

    (a) In General.--The Secretary of the Treasury shall provide that 
any person applying to be an electronic return originator on or after 
the date of the enactment of this Act shall not be approved unless the 
applicant provides fingerprints and credit information to the 
satisfaction of the Secretary.
    (b) Past Applicants.--The Secretary of the Treasury shall apply the 
requirements described in subsection (a) to electronic return 
originators whose applications were approved before the date of the 
enactment of this Act without fingerprints and credit check information 
being provided.
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