IMPROVED ENFORCEMENT OF THE APPLICATION OF THE EARNED INCOME CREDIT.

SEC. 1085. IMPROVED ENFORCEMENT OF THE APPLICATION OF THE EARNED INCOME CREDIT. (a) Restrictions on Availability of Earned Income Credit for Taxpayers who Improperly Claimed Credit in Prior Year.— (1) In general.—Section 32 is amended by redesignating subsections (k) and (1) as subsections (1) and (m), respectively, and by inserting after subsection (j) the following new subsection: “(k) Restrictions on Taxpayers Who Improperly Claimed Credit in Prior Year.— “(1) Taxpayers making prior fraudulent or reckless claims.— “(A) In general.—No credit shall be allowed under this section for any taxable year in the disallowance period. “(B) Disallowance period.—For purposes of paragraph (1), the disallowance period is— “(i) the period of 10 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit under this section was due to fraud, and111 STAT. 956 “(ii) the period of 2 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit under this section was due to reckless or intentional disregard of rules and regulations (but not due to fraud). “(2) Taxpayers making improper prior claims.—In the case of a taxpayer who is denied credit under this section for any taxable year as a result of the deficiency procedures under subchapter B of chapter 63, no credit shall be allowed under this section for any subsequent taxable year unless the taxpayer provides such information as the Secretary may require to demonstrate eligibility for such credit.”. (2) Due diligence requirement on income tax return preparers.—Section 6695 is amended by adding at the end the following new subsection: “(g) Failure To Be Diligent in Determining Eligibility for Earned Income Credit.—Any person who is an income tax return preparer with respect to any return or claim for refund who fails to comply with due diligence requirements imposed by the Secretary by regulations with respect to determining eligibility for, or the amount of, the credit allowable by section 32 shall pay a penalty of $100 for each such failure.”. (3) Extension procedures applicable to mathematical or clerical errors.—Paragraph (2) of section 6213(g) (relating to the definition of mathematical or clerical errors) is amended by striking “and” at the end of subparagraph (H), by striking the period at the end of subparagraph (I) and inserting “, and”, and by inserting after subparagraph (I) the following new subparagraph: “(J) an omission of information required by section 32(k)(2) (relating to taxpayers making improper prior claims of earned income credit).”. (b) Increase in Net Loss Disregarded for Modified Adjusted Gross Income.—Section 32(c)(5)(B)(iv) is amended by striking “50 percent” and inserting “75 percent”. (c) Workfare Payments Not Included in Earned Income.—Section 32(c)(2)(B) is amended by striking “and” at the end of clause (iii), by striking the period at the end of clause (iv) and inserting “, and”, and by adding at the end the following new clause: “(v) no amount described in subparagraph (A) received for service performed in work activities as defined in paragraph (4) or (7) of section 407(d) of the Social Security Act to which the taxpayer is assigned under any State program under part A of title IV of such Act, but only to the extent such amount is subsidized under such State program.”. (d) Certain Nontaxable Income Included in Modified Adjusted Gross Income.—Section 32(c)(5)(B) is amended— (1) by striking “and” at the end of clause (iii), (2) by striking the period at the end of clause (iv)(III), (3) by inserting after clause (iv)(III) the following new clauses: “(v) interest received or accrued during the taxable year which is exempt from tax imposed by this chapter, and111 STAT. 957 “(vi) amounts received as a pension or annuity, and any distributions or payments received from an individual retirement plan, by the taxpayer during the taxable year to the extent not included in gross income.”, and (4) by adding at the end the following new sentence: “Clause (vi) shall not include any amount which is not includible in gross income by reason of section 402(c), 403(a)(4), 403(b), 408(d) (3), (4), or (5), or 457(e)(10).”. (e) Effective Dates.— (1) The amendments made by subsection (a) shall apply to taxable years beginning after December 31, 1996. (2) The amendments made by subsections (b), (c), and (d) shall apply to taxable years beginning after December 31, 1997.