EIC calculation discrepancy with IRS notice - self-employment impact on Earned Income Tax Credit

Thanks for the insight! I didn't realize the business loss could affect the EIC calculation differently than I thought. Do you know specifically how the IRS treats an S-Corp loss versus a Schedule C loss for EIC purposes? My tax software didn't seem to flag this as an issue. Also, could my husband's self-employment income be treated differently since he's a sole proprietor and I'm working through an S-Corp? Our daughter definitely qualifies (she lives with us full-time and meets all the tests).

The S-Corp versus Schedule C distinction is precisely what might be causing the issue. For EIC purposes, S-Corp income is treated differently than direct self-employment income. As an S-Corp owner, your income is considered wages only if it was actually paid to you as W-2 wages - business profits that flow through to you on a K-1 don't automatically count as "earned income" for the EIC calculation. If your husband is a sole proprietor, his net earnings from self-employment would count as earned income. But if you didn't pay yourself W-2 wages from your S-Corp and instead just had a loss, that could affect the total earned income calculation for EIC purposes.

How did the tool actually work with your self-employment income? Did you have to upload your full tax return or just the CP11 notice? I'm facing a similar issue but with Schedule C income versus rental income affecting my EIC.

Sounds convenient, but I'm skeptical. Does it actually explain the calculation difference in a way you can understand? I've used "analysis" tools before that just spit out generic explanations without pinpointing the exact issue.

You upload your tax documents like your return, schedules, and the CP11 notice. The system analyzes everything together to pinpoint discrepancies. It specifically recognized my Schedule C income but flagged that my software wasn't applying the correct EIC calculation method when combined with other income types. Regarding the explanation clarity - that's actually what impressed me most. It didn't just say "calculation error" - it showed side-by-side comparisons of how the IRS likely calculated my EIC versus how my software did it, including the specific lines and rules that were misinterpreted. It even referenced the exact IRS publication sections applicable to my situation.

Wait, how does this service actually work? Does it just help you skip the IRS phone queue somehow? I've been trying to reach them for 3 weeks about my own EIC issue.

This sounds like BS honestly. Nobody can "skip the line" with the IRS. If there was a service that could actually do this, everyone would be using it and the IRS would shut it down immediately. I'll stick with waiting on hold for 2 hours like everyone else.

It doesn't "skip the line" in the way you might think. What it does is have an automated system that continually calls the IRS for you and navigates the initial prompts. When it finally connects with the queue, it calls you and connects you directly. So you're still in the same queue as everyone else, but you don't have to personally sit on hold or repeatedly call when you get disconnected. For those skeptical, I get it - I was too. But it's a legitimate service that just handles the tedious part of getting through the initial IRS phone tree and hold times. The IRS doesn't "shut it down" because you're still going through their normal process, just with technology handling the repetitive calling and waiting. And once you're connected, you're talking directly to the IRS - the service isn't on the call.

I definitely checked the tables for the right year, and our investment income is thankfully well below the limit. Did you ever encounter issues specifically with how business losses affect EIC? I'm wondering if there's a worksheet or something that might explain how the IRS is calculating this.

There is actually a specific worksheet for EIC with self-employment income/losses that might explain the difference. It's called Worksheet B in the EIC instructions. The key thing to understand is that business losses can reduce your earned income for EIC purposes, but how those losses are allocated between spouses on a joint return follows specific rules. Also, if you received any nontaxable combat pay and elected to include it in earned income for EIC purposes, this could affect the calculation. Sometimes tax software handles these special situations differently than the IRS.

This!!! I made this exact mistake a few years back. My S-Corp had profits that flowed to my personal return, but since I didn't pay myself W-2 wages, I wasn't eligible for as much EIC as I thought. Took me forever to figure out why my numbers didn't match the IRS.

@Andre Rousseau, you're absolutely right about the complexity! I've been following this thread because I'm in a similar boat with my own EIC issue. The key resource that helped me understand the calculation better was IRS Publication 596 (Earned Income Credit), specifically the worksheets in the back. For rental income combined with Schedule C, you'll want to look at how the IRS treats "passive" vs "active" income for EIC purposes. Rental income typically doesn't count as earned income for EIC unless you're a real estate professional, but your Schedule C income would count (adjusted for any losses). The most frustrating part is that tax software often doesn't flag these nuanced issues during preparation. Based on what others have shared here, it might be worth using one of those analysis tools or getting through to an actual IRS agent to understand their specific calculation before deciding whether to dispute it.