EIC Audit

[zeros]

I have a client who is going through a paper audit focusing on the EIC. He claimed his 25 year old daughter (not a student) (income: $2500) and her son (age 2). He also claimed his granddaughter (age 2) from a son who doesn't live there. All three lived with him. IRS was asking for proof of whether he provided a home and also proof that they lived with him.

In a previous corresponce with them, I supplied his mortgage statement, repair bill, property tax statement to attempt to prove that he provided a home.

Also, provided birth certificates to prove that he was related to them.

Proving that they lived with him is a little more difficult. The daughter has 3 w-2's with his address. I believe I provided a couple of medical records that show each child with the same address as him.

He received a letter last week from them stating that they are working on it and would advise by July 2nd. In a letter received yesterday, it seems like they did not budge on the original charge back and disallowed, all 3 dependencies, child tax credit, EIC and also denied HOH. Nasty penalty also. I'm wondering if there is another determination letter coming, like the one mentioned on July 2nd?

Anyhow, we can appeal so was wondering if anybody has any good ideas as to what more information could be supplied?

[taxea]

Is daughter's driver's license at his address? Does the 3 year old go to preschool? Would any of the neighbors or friends be willing to sumit a statement? Does daughter have a phone in her name at his address? What about car registration?
Or call the IRS and ask what they they would accept as proof of occupancy by the daughter.

[Gary2]

Why isn't the 1 year old living with a parent?

[FEDUKE404]

Uphill climb

I would think the greatest burden would be to prove the daughter/her son and other grandchild did in fact reside in his residence for the required time frame.

After that, things could get dicey since it seems likely there was some "government money" arriving for some/all of the three offsprings of the parent. The existence of such could create several problems with the scenario you presented, primarily along the lines of allowable dependents to include any related "dependent of a dependent" issues.

Good luck!

FE

[Black Bart]

Last time

I had one of these was in '01 and it sounds like IRS hasn't changed much. Took some time (started April/finished August) and doing like what you're working on, but they finally let my guy keep the EIC.

Taxea listed some good suggestions. Also might add to it the insurance policy on house and utility bills. Assume you have their SS cards -- if not get some duplicates. School records are best for kids, but sounds too young (don't know if pre-K accepts 3-yr. olds).

We got notarized statement from neighbors on each side of them (like this):

To Whom It May Concern:

This is to verify that I am well-acquainted with John Doe and I have personal knowledge that his daughter_________, grandson _________, and granddaughter_________ lived with him at his house on 1010 Main St. in Minneapolis, MN for the entire year of 2011.

___________________________ Date____________
William Goodneighbor

Don't know if you could pull it off in the big city, but my client lived here in rural Podunk Junction and the mailman (postal has good credibility) wrote a letter saying he confirmed from observation that kids one and two lived there with him.

I don't remember if he got IRS letters in the (nonsensical) sequence you're getting, but anyway just keep on sending stuff and there's a good chance you'll outlast 'em. Good luck.

[zeros]

Living with a Parent?

Why isn't the 1 year old living with a parent?

I believe the mother is quite young. The mother and father are not married. They might live together though. Not certain of this.

[Gary2]

I believe the mother is quite young. The mother and father are not married. They might live together though. Not certain of this.

You didn't say whether you did the original return, but if you had, you'd need to do better than that for due diligence. Though I don't agree with their logic, the IRS position is that an infant not living with a mother is "inconsistent, incorrect, or incomplete."

Even if you hadn't done the original, it would have been useful to go through the due diligence items when responding to the IRS. In other words, at least for the granddaughter, include in your proof of her living with the grandfather an explanation of why she wasn't living with either parent. He didn't just walk into the hospital and take the baby home, at least not without a lot of paperwork or the mother accompanying him.

Did you get an 886-H-DEP or 886-H-HOH? While they say to send either "...medical records..." or "A letter on official letterhead from ... medical provider", the latter is surely more compelling, particularly if it can cite dates, and not only confirm the address but also that the grandfather is allowed to make medical decisions.

[Gary2]

Also, in the case of the daughter, you'll have to prove support. This could be tricky if she's getting SSI, food stamps, free medical care, etc.

And this is assuming that none of them are getting SSDI. Remember that Social Security benefits are considered support provided by the individual. In a large household, the household expenses are normally divided evenly, so it doesn't take much SSDI for a child to be considered self-supporting.

[David1980]

Did more than one person claim the dependents? You could also have multiple people sending in documentation trying to prove that they are the ones that should get the dependent.

Did he claim the same three dependents the prior year? Any issues in the past?

[dodgedipduck]

Unless the 25-year-old is disabled, she is too old to be a qualifying child for EIC.

With this mishmash of relationships, I'd be inquiring as which other people claimed the EIC and other tax benefits for the same children.

[DaveO]

The 25 year old can sign her own statement that she lived with the taxpayer and that the taxpayer supported her. Have it notarized. Get the parent of the 1 year old to sign a statement that the child lived with and was supported by the taxpayer and that they did not claim the child. I've had a couple of these that ended up in appeals where we won but not after plenty of grief along the way. In both cases the appeals officer stated that the case should never have gone that far before being resolved.

[MLINDER42]

Eic Audit

How did the people pay you to take to appeals?I have a couple every year but I do not have the time to take to appeals with out some payment.

[DaveO]

We charged but not nearly enough for the time it took. One case was an individual who was used to getting EITC and the issue came up when a nephew moved in. The other was a father whose ex-wife had died suddenly and he had the kids move in. In the first case we deeply discounted our bill. In the second case we charged close to full price since the taxpayers income had only dropped due to the time away from his work required by becoming the custodial parent.

As you may expect the first taxpayer thought the whole process should have been free for him just like the money had been.

In the second case the taxpayer was happy to pay for us doing something clearly beyond his ability.

[dodgedipduck]

The 25 year old can sign her own statement that she lived with the taxpayer and that the taxpayer supported her.

Again, there is an age test for EIC.

From Pub 596:

A qualifying child is:

Under age 19 at the end of 2011 and younger than you (or your spouse, if filing jointly)
Under age 24 at the end of 2011, a student, and younger than you (or your spouse, if filing jointly)
or was . . .
Permanently and totally disabled at any time during the year, regardless of age

The 25-year-old cannot be a qualifying child unless she's disabled. It doesn't matter how many documents you submit to the IRS.

[JohnH]

For me, this discussion just reinforces my opinion that preparing a few EIC returns is bad business. Too many risks and too many opportunities to be hassled by clients who can't pay the going rate for extra services when one blows up in your face.

If you only prepare a half-dozen or so and one of them gets into this logjam, you waste a tremendous amount of time and resources getting the problem resolved. On the other hand, if you prepare a large number of them, you can at least consider averaging the cost of sorting out the problem returns over your entire population of clients by bulding a reasonable allowance into your fees.

So it's either choose to do a bunch of them or leave them alone altogether. Personally, I think I'll stick with the "accidental EIC" returns only, and send the others down to HRB. Sure would be nice if one of you were located nearby so I'd have a trusted preparer to recommend them to.