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I recently received a call from a woman who received a letter from the IRS stating that she was not allowed to claim her two boys as dependents. Even worse, the letter she received also stated that she was now responsible for a tax liability amount of over $3,600.
She was floored because she couldn’t understand why the IRS would argue this. The boys lived with her, and she had been claiming them since they were born. She had always gotten a refund and this had never been an issue in the past.
Frustrated and looking for answers, she stated she called the IRS. After waiting on hold for an hour, she heard a message stating that due to the high volume of calls, she would need to call back another time. Then the phone disconnected. Understandably she was irate. She had just wasted an hour of her time and had gotten nowhere.
I explained to her that the problem is that she has fallen victim to a new and aggressive dependent denial IRS examination policy.
Recently, my office has been flooded with calls just like this. In an attempt to cut down on the abuse of taxpayers claiming dependents when they shouldn’t be, the IRS has put in place a new system that determines eligibility to claim minor dependents.
The IRS has been so aggressive with their enforcement; some taxpayers have become collateral damage as they really shouldn’t have been denied in the first place. Meaning, some taxpayers have the right to claim dependents but are still denied.
I explained to her the best way that I have been able to determine if her dependents have been disqualified is to ask four relatively simple questions. In order to qualify, the taxpayer must to be able to truthfully say yes to all four questions.
The first qualifying question is, “Are you the state-appointed legal guardian of the children?”
Her answer was “Yes.” She told me that she is the biological mother of the boys. In this case, had the boys been adopted through the state, then that would suffice as well. For example, if the kids were not biologically related and they were adopted or if the grandparents adopted the boys, they would qualify as long as the adoption is recognized by the state.
The women did mention that she was recently divorced and that she worried that her ex-husband might be trying to claim the children. She made it very clear to me that in the divorce decree it states that she, and only she, was able to claim the children. I explained to her that a lot of moms and dads tell me the same thing but unfortunately, the IRS does not look at it that way.
The IRS does not recognize civil documents so even if the judge ruled that her ex does not have the court ordered right to claim the children, he still may be able to via IRS standards. I then explained to her before we start blaming her ex for something he may or may not have done, let me ask her the additional questions to rule out other possibilities. She agreed. I was relieved and we moved on.
The next question I asked was, “Do the children live with you more than six months out of the year?”
Her answer here was also “Yes.” The IRS will not allow someone to claim a child as a dependent that does not live under the taxpayer’s roof. I explained to her that by claiming her kids as her dependents, she is telling the IRS that she is the one paying to support those kids including shelter, food, and clothing.
She also mentioned there was a time when the boys lived with her ex from time to time but that was only a month out of the year. I explained, in that case, he wouldn’t qualify because the dependent must live with the guardian a majority of the year (or more than six months) in order to qualify.
Since we had two of four yes answers, we moved on to the next question. I asked, “Do the school and doctor records match the address of the house in which they live with you?”
Again, her answer was “Yes.” I explained to her that in many cases, ex-spouses will try to claim dependents when the kids don’t live with them. And it is normal that the school/medical records match the home where the children live in. The IRS knows this and although they have always had a checks and balances system in place for dependents, this particular requirement is one that they have recently heavily enforced. Fortunately, the records did match the women’s residence, so we moved on to last question.
Finally, I asked the fourth and final IRS qualifying question: “Do you pay the rent or mortgage of the home that you live in.”
Unfortunately, her answer was “No.” Because of her recent divorce, she explained that she found herself in a financial bind and was forced to move into her parents’ house with her boys. To help save money, her parents have been allowing her to live there rent fee so that she may be able to catch up on her bills. Because of this, the IRS disqualified her from being able to claim her boys because she wasn’t paying rent.
Even worse, her parents can’t claim the children because they are not the state appointed legal guardian. Understandably the women was upset. She asked me “Well, who the hell gets to claim them then?” She then quickly apologized. I understand how frustrating this was for her and I took no offense. To answer her question, no one can. Not without a fight. I explained to her that the IRS wants her to throw up her hands and just allow them to walk all over her. And that most taxpayers will do that. I explained to her the only way to get this overturned is to show that she is the sole provider for these boys and that argument needs to be made to the people beyond the random agents that answer calls at the bottom level.
After a long and emotional conversation, the women decided that she did not want to try to tackle this issue on her own, so she just decided to hire my firm. After a review of her finances, we made the suggestion that even though she was giving her parents money for other things than rent, her parents could accept those amounts as rent. After a few months of fighting and some more repositioning of her expenses, we were able to show that she did indeed qualify to claim her boys. It was a long and seemingly unnecessary battle, but in the end things worked out.