Treasury, IRS propose status test for four refundable tax credits
Treasury and the Internal Revenue Service are proposing an immigration-status test for the refundable portion of four federal tax credits, a change that could reduce some taxpayers’ refunds if it is finalized.
The IRS announced the proposal on August 19, 2026, and the proposed rule was published in the Federal Register on August 20. It is not final, remains open for public comment and does not immediately change current filing requirements.
Four credits are covered
The proposal would apply to the refunded portion of the adoption tax credit, child tax credit, American opportunity tax credit and earned income tax credit.
A refundable credit can have two different effects. Its nonrefundable portion reduces federal income-tax liability but generally cannot create a payment beyond that liability. Its refundable portion can exceed the remaining tax liability and create an overpayment that may be available for a refund, credit or offset.
The proposed regulations would treat that excess portion as a federal public benefit under the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, or PRWORA. They would not change the underlying nonrefundable credit amount when a taxpayer otherwise qualifies under the Internal Revenue Code.
Who could qualify
Under the proposed standard, a taxpayer receiving the refundable amount would generally need to be a U.S. citizen, a U.S. national or a qualified alien under PRWORA.
Qualified-alien categories include lawful permanent residents, people granted asylum, refugees, certain people paroled into the United States for at least one year and other groups defined by federal law. The proposal therefore would not exclude every noncitizen; eligibility would depend on whether the person falls within one of the statutory categories.
Status would generally be measured when the taxpayer first files the initial, amended or late federal return claiming the affected credit for that tax year. The proposed rule ties the determination to the filing date of the return that first claims the credit.
For a joint return, the proposal generally would allow the refundable portion if at least one spouse is a U.S. citizen, U.S. national or qualified alien. The other spouse would be treated as qualified for this purpose under the proposed regulations.
Claimants would have to attest to their status
If an affected credit produced a refundable amount, the taxpayer—or one spouse filing a joint return—would have to declare eligibility under penalty of perjury. The declaration would be made on the federal return, an amended return or a schedule designated by the IRS.
The proposed rule says the IRS intends to update forms and instructions. A taxpayer who failed to provide the required declaration in the prescribed manner would not be eligible to receive the affected refundable amount under the proposal.
Agencies estimate hundreds of thousands could be affected
Treasury and the IRS estimate that 49 million individual returns could claim at least one of the four credits in tax year 2026. About 24 million of those returns could produce a refundable federal public benefit.
The agencies estimate that 200,000 to 700,000 taxpayers—about 0.8% to 2.8% of the 24 million—could be ineligible under the proposed status rules. They said they do not have direct data on qualified-alien status, so the range is a rough estimate rather than a definitive count.
The agencies’ analysis also includes an estimated dollar range for the potential impact, but emphasizes that the figure is uncertain and assumes taxpayers do not change their behavior in response to the rule.
What changes now
Nothing in the proposal establishes an immediate change to current filing procedures. Taxpayers should wait for final regulations and any updated IRS forms or instructions before changing how they file.
The proposal also does not target an ordinary tax refund in general. An ordinary refund typically returns money a taxpayer overpaid or had withheld. The proposed restriction concerns the part of an affected refundable credit that exceeds the taxpayer’s federal income-tax liability and is treated as an overpayment under the proposal.
Comments are due October 5
Written comments must be received by October 5, 2026. Requests to speak at the public hearing and outlines of topics must also be received by that date. The hearing is scheduled for October 14, 2026, but the notice says it will be canceled if no hearing outlines are submitted by October 5. Requests to attend must be received by 5 p.m. Eastern time on October 9.
After the comment period, Treasury and the IRS could revise the proposal, issue final regulations or take another action. Any final rule would need practical implementation guidance, including updated forms or instructions, before taxpayers could reliably determine how a new certification requirement would work.
Sources
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