Does 1099 misc based earned income qualify for earned income child credit?

When I did my son's return for 2010 he had a 1099 MISC from Harvard as a research participant. I did not say he owned his business. This was incorrect and IRS audit returned it as such. IRS wants a lot of money back. So I did an amendment and added Schedule C. Turbo is qualifying his 2 kids for full earned income credit. Now he has a much bigger refund that IRS owes him. Why would IRS not have corrected it this way?
    Self-employment income does qualify as "earned income" for the Earned Income Credit.  Assuming the other criteria are in place such as being within the income limits and there is "net profit".  

    The IRS will not "prepare" a tax return for you and if they adjust your return for any potential credits or deductions that you may have missed, then that is similar to "preparing" the return for you.

    Often, what the IRS does is what is called a "line item" audit.  I am not sure if that is what happened in your situation though.  Basically, how it works is that if an "item" or "line" is not reported correctly (and they catch it), they will only adjust the return for that particular item.  Or, they may question the amount reported or how it is reported and have you substantiate it through your documentation.
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