Splitting the Kids

[New York Enrolled Agent]

And it's very clearly pointed out that the 8332 isn't required after 1984 divorce cases.

Newbie is correct.

In the past, both publications 504 and 17 have contained incorrect information about simply attaching a copy of a divorce decree (I believe both have been corrected). Congress amended section 152(e) to avoid having the IRS play judge. The custodial parent gets the exemption (regardless of support) unless the custodial parent releases the exemption. The Tax Court has repeatedly agreed with the IRS - unless there is an 8332 or its equivalent the custodial parent gets the exemption.

Here is a snip from Miller 114 TC 184

[start]Although section 152(e) was amended effective for years beginning after December 31, 1984, the only regulations promulgated with respect to section 152(e) since its amend[pg. 189] ment in 1984 are temporary regulations. Section 1.152-4T(a), Q&A-3, Temporary Income Tax Regs., supra, provides that a noncustodial parent may claim the exemption for a dependent child “only if the noncustodial parent attaches to his/her income tax return for the year of the exemption a written declaration from the custodial parent stating that he/she will not claim the child as a dependent for the taxable year beginning in such calendar year.” The declaration required under section 152(e)(2) must be made either on a completed Form 8332 or on a statement conforming to the substance of Form 8332. See sec. 1.152-4T(a), Q&A-3, Temporary Income Tax Regs., supra. The exemption may be released for a single year, for a number of specified years, or for all future years “as specified in the declaration.” Sec. 1.152-4T(a), Q&A-4, Temporary Income Tax Regs., supra. [end]

Typically a divorce decree does not contain ALL the required information and therefore cannot be used as the basis to claim the exemption.

[Roberts]

Divorce decree

It seems to me that you guys are working under the assumption that the divorce decree is going to be written improperly and will not meet the qualifications of 8332. Typically a divorce decree DOES include all of those portions of the 8332 because it is the standard format.

I'm a Divorce Financial Analyst and do extensive litigation support in this area. It is the exception to the rule that a divorce decree will be written improperly. As in the example given the spouse didn't even sign her divorce agreement. I've never seen that. I can't imagine anyone not personally signing their own divorce agreement.

[New York Enrolled Agent]

It seems to me that you guys are working under the assumption that the divorce decree is going to be written improperly and will not meet the qualifications of 8332. Typically a divorce decree DOES include all of those portions of the 8332 because it is the standard format.

I'm a Divorce Financial Analyst and do extensive litigation support in this area. It is the exception to the rule that a divorce decree will be written improperly. As in the example given the spouse didn't even sign her divorce agreement. I've never seen that. I can't imagine anyone not personally signing their own divorce agreement.

Actually, I'm under the assumption the Tax Court rules for the IRS very frequently in these cases. If you do a search on the Tax Court website, you will find that apparently, a good number of divorce decrees are defective for purposes of claiming the child and that a good number of taxpayers have learned the hard way.

The list of losing taxpayers is long. Just two examples for illustration purposes.

Lease TC Summary 2008-73
[start]Petitioners concede that they did not attach Form 8332 to their 2005 tax return. Petitioners attached the divorce decree to the 2005 tax return in lieu of Form 8332.

This case is similar to Miller v. Commissioner, supra. The taxpayer in Miller attached a divorce decree in lieu of the Form 8332. The parties' attorneys and the presiding judge had signed the divorce decree. In Miller the Court found that Congress intended the signature requirement of section 152(e)(2) to be strictly applied because it did not want Federal courts involved in State court custody fights. The Court further held in Miller that the signature of neither an attorney nor a judge was sufficient to satisfy the signature requirement for the parent relinquishing the dependency exemption deduction.

Ms. Lease did not sign the divorce decree and thus it did not meet the signature requirement of section 152(e)(2)(A). Therefore, petitioners did not file a substantial equivalent to Form 8332 with their 2005 tax return and are not entitled to claim the dependency exemption deduction for 2005. [end]

Or from Muncy TC Summary 2005-20

[start]In contrast, information concerning the years for which the dependency exemptions for the children were released, the date of the signature of the custodial parent, and, most importantly, the signature of the custodial parent itself consenting to the release were absent from the divorce decree. Therefore, the divorce decree did not conform in substance to Form 8332, and, consequently, it did not fulfill the requirements of section 152(e)(2).[end]

[David1980]

You would expect that the divorce decrees that get questioned in tax court are going to be largely defective. If it was a valid decree, it should have never gotten to court in the first place.

I continue to believe that the majority of divorce decrees meet the requirements for the 8332. That said, I check them for the requirement every time.

[Nashville]

Under the Table

The deduction is often negotiated during the divorce and I have many clients who "buy" the deduction from their ex after the fact.

These type transactions between potential claimees are under-the-table and are more numerous than anyone could know. There is a black market for children's social security numbers, now that EIC runs into the thousands of dollars. These folks assume that as long as there is no conflict in a dependent being claimed by more than one person, the entire matter will be "under the radar" with the IRS. And they are correct.

SITUATION: Guinevere does not work, collects child support from ex-husband, does not have to file, thus has no advantage in claiming her two children. Ex-husband is tax dodger, hasn't filed in 15 years, hasn't been caught. So she "sells" the SS# of her two children to Ernest I. Cromartie (note initials E.I.C.) for $500. Ernest has no legitimate dependents, but is able to collect $3500 EIC by virtue of claiming Guinevere's kids.

QUESTION: We all know this happens. The IRS has virtually no chance in catching this criminal act, although they somehow think preparers should know. But if IRS somehow finds out about it, would the $500 be taxable income to Guinevere?

[Roberts]

You would expect that the divorce decrees that get questioned in tax court are going to be largely defective. If it was a valid decree, it should have never gotten to court in the first place.

I continue to believe that the majority of divorce decrees meet the requirements for the 8332. That said, I check them for the requirement every time.

This is the point where I'm lost. When did we make the leap that we are going to Tax Court in any of this? To make that assumption you are 100% correct that the divorce decree isn't done correctly which is rarely the case. Why assume from what the OP said that this is the end result?

[erchess]

Taxable Income

The $500 would be income and all income is taxable unless specifically exempt. I don't think income from tax fraud is exempt so yes it would be taxable as Self Employment Income Sch C and SE. I don't think Drake Software has a business activity code that I would consider applicable so I don't know what I would do about that.

[Jesse]

You would expect that the divorce decrees that get questioned in tax court are going to be largely defective. If it was a valid decree, it should have never gotten to court in the first place.

I continue to believe that the majority of divorce decrees meet the requirements for the 8332. That said, I check them for the requirement every time.

I could be wrong, but I think the divorce decrees that are questioned are so only because both Mom and Dad claim the same child.

Do you always send in the divorce decree if a Form 8332 is not made available? I ask only because I have filed without the form 8332 and without the divorce decree and I've also sent a nonconforming divorce decree that was not questioned - all for same taxpayer over the years. Taxpayer is a personal friend and the Ex becomes so very nasty every year when asked to sign the Form 8332, so we quit asking. Doesn't make it right, but I have done it. Ex receives Social Security disability and child support so we're 99.9% sure she does not file a tax return. We are a little on edge since the stimulus payment of $300, wondering if she might have filed for that reason but haven't heard any squawking as of yet.

It seems to me that you guys are working under the assumption that the divorce decree is going to be written improperly and will not meet the qualifications of 8332. Typically a divorce decree DOES include all of those portions of the 8332 because it is the standard format.

I'm a Divorce Financial Analyst and do extensive litigation support in this area. It is the exception to the rule that a divorce decree will be written improperly. As in the example given the spouse didn't even sign her divorce agreement. I've never seen that. I can't imagine anyone not personally signing their own divorce agreement.

Maybe state laws differ? I have seen divorce decrees signed only by the judge and legal representatives and was explained to me that if both spouses(soon to be ex) agree with the terms they do not need to sign it. Also absent from most agreements that I've reviewed is the statement "I agree not to claim an exemption for XXXX" from the custodial parent.

Or as David1980 pointed out that if the divorce decree indicates the parent must be current on child support to claim the child, that the divorce decree does not meet the IRS requirements and is thus invalid as far as allowing the noncustodial parent to claim the child. Again these would most likely only be questioned if both Mom and Dad try to take the same child exemption.

Have a single client who seems to have two kids living with him full time (their mother is in a mental institution as I understand it) yet he only claims one as a dependent. He thinks "Yes the IRS requires that we split the kids for tax purposes even though their maintenance in lion share is mine."

Correct me if I'm wrong but I don't think the IRS nor any other US Taxing Agency would be the source of such a requirement. I even question whether the IRS would care if a taxpayer flouted a relevant order from Divorce Court. I claim that it boils down to where the children spent the most time which is a contest he wins one hundred percent to zero percent.

Ok who is right, me or my client and if I am right should I decline the job unless he agrees to claim both kids?

In my opinion, per IRS Dad has the right to claim kids UNLESS divorce decree or separation agreement states differently. If both parents tried to claim same children and it did come down to tax court, if there is a conforming divorce/separation agreement then Mom would win, nonconforming Dad still wins with IRS.

[JohnH]

How about 339900 - "Miscellaneous Manufacturing" ?

[WhiteOleander]

This is from the Kiplinger Tax Letter dated 06/26/2009

"Noncustodial Parents: Bad news on claiming dependency exemptions. Any conditions in the divorce agreement nix the exemption if the parent with custody hasn't signed Form 8332 to waive his or her rights to the exemption. For divorces before July 03, 2008, a signed divorce decree awarding the exemption to the noncustodial parent is OK in lieu of the 8332. But now, the Service says that it will reject signed decrees that have conditions, such as requiring payment of a settlement, that must be satisfied before the noncustodial parent gets the break. this is so even if the parent has documentation showing that the condition was met. That's even more reason to ensure the custodial parent provides a signed Form 8332."

[Nashville]

Same Book, Different Chapter

Oleander, very good and relevant information. But IRS has been issuing rulings like this since 1984. They have always wanted preparers to enforce this for them, but have backed away from wholesale overruling local judges, and would prefer not to do so. There are a few court cases where IRS has overruled in situations where the decree fails to give information as clearly as the 8332.

Large institutions of any kind are good at beating up on people, but are not so anxious to tangle with each other.

Getting the 8332 is always good advice, since all authorities accept that it is the ultimate "slam dunk" to justify a dependency exemption.

[erchess]

Rofl

How about 339900 - "Miscellaneous Manufacturing" ?

Did you have in mind that she is manufacturing children or manufacturing stories to tell the IRS or perhaps both?

Either way would love to talk to her about her business expenses except I don't think criminal enterprises are allowed deductions. The depreciation schedule would have been particularly fun.

[JohnH]

Both.
Glad to see you got it (but not surprised).