From Taxpayer Advocate Nina Olson

[RLymanC]

Not room for entire article. Continued in next thread

The entire article is written by Nina Olson......nothing has been added by me.

Example 1: Separated Parent Who Receives Public Assistance for Her Household
Here, a mother who lived separate and apart from her spouse for many years is raising her three children (all under the age of 13) on her own. She earns $ 7,500 a year as part of her state's welfare to work program. She also receives food stamps, section 8 housing benefits, state fuel assistance, and Medicaid for her children. Before 2005, she could not claim the dependency exemption or head of household status because the government provided more than half the cost of support of her children and could not claim head of household status because she was considered married under section 7703. Under UDOC, because her children meet the age, relationship, and residency tests, she can claim the dependency exemption. However, she still does not meet the "not married" test of section 7703(b) because she does not provide more than one-half the cost of maintaining the household. Because she must file married filing separately, she is not eligible to receive the EITC.

Example 2: Nonresident Parent Provides Support for Child Living With Grandparents
A six-year-old boy lives the entire year with his grandparents, who are married and have $ 12,000 in pension income for the year. Throughout the year, the boy's father sent payments totaling $ 25,000 to the grandparents for the support of the child. The boy is the qualifying child of the grandparents because the relationship, residency, and age tests are met. Even though the father provided more than half the support of his son, the father may not claim his son as a qualifying child because the father did not share a principal place of abode with his son. Also, the father may not claim his son as a qualifying relative because the son is a qualifying child of the grandparents.

Example 3: Teenage Twins With Deceased Parents Who Live With a Neighbor
The twins are qualifying children with respect to each other (they meet the residency, relationship, and age tests). The neighbor provides all of the support for the teenage children, but under the current rules would not be able to claim the children as qualifying relatives because each child is a qualifying child of the other./8/

Example 4: Live-In Boyfriend Who Provides Support for Girlfriend and Her Child
A single mother lives with her boyfriend and her 10-year-old son. The mother has no earned income; the boyfriend earns $ 30,000 per year and supports his girlfriend and her son. Under the current rules, the son is the qualifying child of the girlfriend (he meets the residency, relationship, and age tests). The boyfriend may not claim the girlfriend's son as a qualifying child unless the boy is a foster child placed with the boyfriend by an authorized placement agency or by a court./9/ The boyfriend may not claim the girlfriend's son as a qualifying relative because the son is the qualifying child of the girlfriend. Also, if the relationship is in violation of local law, the girlfriend will not be considered to be a member of the boyfriend's household for determination of household status./10/

Example 5: Affluent Family With a Boomerang Older Child
The parents in this home earn $ 400,000 and live with their 28- year-old son, who earns $ 25,000 a year as a medical resident, and two teenage daughters. The daughters are qualifying children of the parents (the daughters meet the residency, relationship, and age tests), but the parents do not benefit from claiming dependency deductions for their daughters because of the alternative minimum tax. Under the current rules, if the parents do not claim the daughters as dependents, the 28-year-old son can claim his younger siblings as qualified children./11/

Example 6: Another Taxpayer With a Boomerang Older Child
A single parent in this home earns $ 75,000. The 28-year-old son earns $ 10,000 in income and is living at home with his parent. The son meets the relationship and residency tests but fails the age test for a qualifying child. The son is not a qualifying relative because he makes more than the exemption amount./12/ Thus, the single parent cannot claim the child for purposes of the dependency exemption or the head of household status. In 2004 the parent could have filed as head of household, because there was no "exemption amount" limitation.

Now, I don't think Congress thought specifically about most of those cases when it passed the law -- I know I certainly didn't identify them and I have spent decades studying and teaching the code's family status provisions as well as representing taxpayers before the IRS and the courts in disputes involving those provisions. But now that they are identified, what do we do about them? Well, for one thing, we can eliminate the problem in Examples 2 through 4 by adding two simple words -- "claimed as" -- to section 152(d)(1)(D) so that the term "qualifying relative" means an individual "who is not claimed as a qualifying child of such taxpayer or of any other taxpayer for any taxable year in the calendar year in which such taxable year begins."
I note that this change would treat taxpayers as mature individuals who are able to structure their affairs rationally and decide among themselves who is the "right" person to claim various family status benefits. I also note that although this change would give the taxpayer an opportunity to qualify as a qualifying relative, the taxpayer would still have to pass the support test, the child's income (if any) would have to be less than the exemption amount, and in some instances (for example, the live-in boyfriend) the taxpayer would have to not be in a relationship that violates local law./13/ All of those limitations were in the code before enactment of the UDOC. So all we've done with this change is open the door for the taxpayer to qualify as a qualifying relative.

The fifth example is more difficult. Here, allowing taxpayers to decide among themselves enables taxpayers to game the system, or at least come up with a result that doesn't really reflect the economic responsibilities and circumstances of the household./14/
One solution would be to bring back the recently repealed "cares for" test as applied to siblings./15/ The "cares for" test was difficult to administer and involved the submission of a great deal of personal information by the taxpayer and the exercise of discretion by IRS examination employees. One approach to the fact scenario in Example 5 would be to brush off the "cares for" requirement and make that a qualifier for a brother or sister when, and only when, the child lives with the brother or sister and someone else who could claim the child as a qualifying child (for example, the wealthy parents). That antiabuse rule would apply to a very small universe of taxpayers, would correct a longstanding flaw in the EITC as well as the new UDOC, and would not undermine the goal of uniformity in the definition of a child among the family status provisions, which benefits a very large universe of taxpayers.

The administration has advocated a different approach to prevent the result in Example 5. Treasury's proposal would allow only a parent to claim a child as a qualifying child if a parent resides with the child for over half the year. The parent could waive the child-related tax benefits to another member of the household who has a higher AGI./16/
The parents in Example 6 may be able to claim the son as a dependent if the son meets the requirements for a qualifying relative. There is no age requirement for qualifying relatives, so being 28 is not a problem. But because the son makes more than the $ 3,200 exemption amount, he is not considered a qualifying relative of his parents. Note that if the son was between jobs and earned less than the exemption amount, the parents would be able to claim head of household status and claim the son as a dependent. Is that really an unreasonable policy? If your able-bodied adult child has an economic setback, all U.S. taxpayers will help that person get on his feet via the tax system. But if the able-bodied adult child is staying at home to save dollars, Congress has said, fine, but we can't ask all the other taxpayers to subsidize that decision.

[RLymanC]

Continued

To me, the most disappointing aspect of the recent discussion in the tax press is that it demonstrates how little tolerance folks have for actual tax simplification. There will be losers in tax simplification. We will overlook details in tax simplification and have to fix them later. And there will be lots -- I mean, lots -- of opportunity to take cheap shots at policymakers who have tried to undertake tax reform. If that is how a universally acclaimed, bipartisan reform is treated, how will we act when we try to achieve major simplification -- say, repeal the AMT? Will folks who universally condemn that provision today complain about the reform tomorrow? How sad for taxpayers if such an environment defeats tax reform and simplification efforts even before they begin.

Let's not throw the baby out with the bathwater. In adopting a single definition of a child where five definitions existed previously, Congress provided a monumental service to approximately 160 million Americans. Of the few resulting problems affecting limited numbers of taxpayers, most can be addressed through technical corrections. But to blow those examples out of proportion and then add back to the code five different definitions of a child would be a disservice to 160 million people and would constitute terrible public policy.

FOOTNOTES
/1/ The Working Families Tax Relief Act of 2004, P.L. No. 108-311, section 201, 118 Stat. 1166 (2004).

/2/ IRC sections 2(b) (head of household); 21 (child and dependent care credit); 24 (child tax credit); 32 (earned income tax credit); and 151 (dependency exemption). Section 7703(b) provides an exception to the general determination of whether an individual is married and states that some married persons who are living apart from their spouses may be treated as unmarried. Although the new uniform definition did not alter the rules in section 7703(b), there is an administrative proposal in the 2007 budget that will improve the current rules. Department of the Treasury, General Explanations of the Administration's Fiscal Year 2007 Revenue Proposals (Feb. 2006), p. 58-61.

/3/ IRS Compliance Data Warehouse, Tax Year 2004 Individual Return Transaction File.

/4/ For example, a child could qualify the taxpayer for head of household because the taxpayer paid more than one-half of the actual cost of maintaining a home but not qualify as a dependent of the taxpayer because the taxpayer did not pay more than one-half of the imputed support of the child.

/5/ See, e.g., Lindy Paull, Chief of Staff, Joint Committee on Taxation, Testimony Before the House Committee on Ways and Means (July 17, 2001); Gene Steuerle, "How Complexity Arises for Low-Income Taxpayers," Tax Notes, July 23, 2001, p. 561; National Taxpayer Advocate, 2001 Annual Report to Congress, Pub. 2104 (Rev. 12-2001) at 82-100; Les Book, "The IRS's EITC Compliance Regime: Taxpayers Caught in the Net," 81 Or. L. Rev. 351, 371-72 (2002); Department of the Treasury, Proposal for Uniform Definition of a Qualifying Child (Apr. 2002); Tax Executives Institute, Letter regarding recommendations of the AICPA/ABA/TEI task force on tax simplification (Sept. 13, 2002), Doc 2002-21696, 2002 TNT 185-16; Robert Greenstein, Executive Director, Center on Budget and Policy Priorities, Statement Before the House Appropriations Subcommittee on Transportation and Treasury (May 7, 2003); Department of the Treasury, General Explanations of the Administration's Fiscal Year 2005 Revenue Proposals (Feb. 2004), pp. 73-78; The Honorable Fred T. Goldberg Jr., Commissioner, Internal Revenue Service, 1989-1992, Testimony Before the House Committee on Ways and Means (June 15, 2004); Elizabeth Maresca, Associate Clinical Professor, Fordham University School of Law, Testimony Before the House Committee on Ways and Means (June 15, 2004); American Bar Association Section of Taxation, letter regarding pending tax legislation (June 30, 2004), Doc 2004-13584, 2004 TNT 127-16; American Bar Association Section of Taxation, letter regarding H.R. 1308 -- Working Families Tax Relief Act of 2004 (Oct. 18, 2004), Doc 2004-20480, 2004 TNT 203-17.

/6/ In his recent letter to the editor of Tax Notes, Tom Daley produces a very clever flow chart of the former and current dependency exemption requirements. Tom Daley, "A Picture to Match Buckley's Thousand Words," Tax Notes, Mar. 27, 2006, p. 1493. Unfortunately, Daley did not produce the flowchart that tracks the decision tree for a taxpayer trying to navigate all five family status provisions before enactment of the UDOC. It is the interaction of those provisions that was the problem. The current dependency exemption flowchart should, in most instances in which the child is a qualifying child, indicate eligibility for the other family status provisions.

/7/ The Gulf Opportunity Zone Act of 2005, P.L. No. 109- 135 section 404, 119 Stat. 2577 (2005).

/8/ The children meet all of the tests for a qualifying relative with respect to the neighbor because the children have the same principal place of abode as the neighbor for the entire tax year and are part of the neighbor's household (relationship test), the children do not have gross income in excess of the amount of the dependency exemption, and the neighbor provides more than half of the support for the children. See section 152(d). However, the requirement that a qualifying relative cannot be the qualifying child of the taxpayer or another taxpayer prevents the neighbor from claiming the children. See section 152(d)(1)(D). But for that requirement, the neighbor would be entitled to claim the children as qualifying relatives.

/9/ Section 152(f)(1)(A)(ii) provides that a child, for purposes of section 152, includes an eligible foster child of the taxpayer. Section 152(f)(1)(C) defines an eligible foster child as an individual placed with the taxpayer by an authorized placement agency or by the courts.

/10/ Section 152(f)(3) provides that an individual will not be treated as a member of the taxpayer's household if at any time during the tax year the relationship between the individual and the taxpayer is in violation of local law.

/11/ Under the tie-breaker rule in section 152(c)(4), if an individual is claimed as a qualifying child by two or more taxpayers, that individual will be treated as the qualifying child of the taxpayer who is the parent of the individual. If more than one parent claims the individual, the child will be considered the qualifying child of the parent who resided with the child for the longest period of time. If both parents resided with the child for the same amount of time, the parent with the highest adjusted gross income for the tax year is entitled to claim the child as a qualifying child. If no parent claims the child as a qualifying child, the taxpayer with the highest AGI for the tax year is entitled to claim the child as a qualifying child. Note that the tie-breaker rule does not apply unless two or more taxpayers actually claim the same individual as a qualifying child. That is in contrast to the limitation in section 152(d)(1)(D) that denies an individual from being treated as a qualifying relative if the individual is a qualifying child of any taxpayer (even if not actually claimed as a qualifying child of any taxpayer).

/12/ Section 152(d)(1)(B).

/13/ Section 152(f)(3).

/14/ I note that this problem has always existed within the EITC context (that is, pre-UDOC enactment). There is nothing in section 32 that prevents taxpayers who are eligible to claim a child for the EITC to agree among themselves who should actually claim the credit. The tie-breaker rule in the old section 32(c)(1)(C) applied only when an individual was actually claimed by two or more taxpayers. So in this case, under the old rules, if the parents didn't claim the child, the 28-year-old son could claim his sibling if he is otherwise eligible for the EITC. Congress and taxpayers have accepted that outcome in an area of tax law that could confer significantly more benefits than the dependency exemption and child tax credit.

/15/ Under the prior rules, section 32(c)(3)(B)(i)(II) required that a taxpayer claiming as a qualifying child a brother, sister, stepbrother, or stepsister, or a descendant of any such individual must care for the child as the taxpayer's own child. There was a great deal of uncertainty on the part of taxpayers as to what constituted "caring for" the child as one's own child. See Gilmore v. Commissioner, T.C. Summ. Op. 2004-38, Doc 2004- 6708, 2004 TNT 59-10; Barajas v. Commissioner, T.C. Summ. Op. 2002-59, Doc 2002-12846, 2002 TNT 103-16. Because the "cares for" test was vague and hard to administer, and introduced a type of support test into the EITC definition of qualifying child because it would require a showing of activities such as purchasing food, clothing, medical care, and other items, Congress eliminated the "cares for" requirement when it passed the UDOC rules.

/16/ See Department of Treasury, General Explanation of the Administration's Fiscal Year 2007 Revenue Proposals (Feb. 2006), p. 55-57.
END OF FOOTNOTES

[Koss]

Source?

Where did this come from?

Has this been published?

Is the entire text of this post a direct citation, or is part of it a citation and part of it a comment from RLymanC?

Burton

[RLymanC]

Buton

No comments from me.

I'll try ro find out the source

This was sent to me by the IRS agent in the local office.

Here is the first part of the article.

Tax Notes

April 11, 2006
UNIFORM QUALIFYING CHILD DEFINITION:
UNIFORMITY FOR MOST TAXPAYERS

AUTHOR: Olson, Nina
Internal Revenue Service;
Office of the Taxpayer Advocate

National Taxpayer Advocate Nina Olson defends the Internal Revenue Code's new definition of "qualifying child," which, she says, "on balance, constitutes a vast improvement over the rules that existed previously."
Nina E. Olson is the national taxpayer advocate.
* * * * *
Over the last few weeks, a spate of newspaper articles has criticized aspects of the uniform definition of a qualifying child (UDOC) enacted as part of the Working Families Tax Relief Act of 2004./1/ Most of the articles have criticized results in a limited number of cases that the writers say either were unintended or are unfair. While some of the critiques raise legitimate issues that can and should be addressed, I believe the UDOC, on balance, constitutes a vast improvement over the rules that existed previously. To see why, it would be helpful to review how we got to where we are today and what the UDOC is trying to accomplish.
Before 2005, there were five definitions of a "child" for purposes of the most basic provisions of the Internal Revenue Code.

/2/ Those family status provisions potentially affect 81 million taxpayers and 79 million children.

/3/ As a tax return preparer and advocate for low-income taxpayers, I found that situation abominable. Taxpayers ended up with vastly different results among the different provisions with respect to the same child -- if they managed to get the correct results under the code. In many cases, the variety of definitions led to inaccurate results.

/4/ The intent of the UDOC was to bring about some uniformity for the vast majority of taxpayers who had to meet five or six different tests just to determine whether basic family status provisions under the code actually applied to them. The proposal was supported by the Bush administration, the Joint Committee on Taxation, the national taxpayer advocate, the American Bar Association Section of Taxation, the American Institute of Certified Public Accountants, the Tax Executives Institute, and many academics.

/5/The new law has, in fact, done just what it set out to do -- it has provided uniformity for most taxpayers, reduced the burden of record keeping for most taxpayers, and eliminated the need for the IRS to inquire into the most personal aspects of most taxpayers' lives. Of course, there are some cases in which the provision has perverse or unintended results.
But that should not come as a surprise to anyone. Those of us who worked on the issue knew all along that creating a single definition required a trade-off. By collapsing five different definitions into one, inevitably there would be some winners and some losers. That's inherent in tax simplification. But most of us believed at the time -- and I continue to believe strongly -- that the benefits of simplifying the definition for 160 million Americans (81 million taxpayers and 79 million children) outweigh the concerns that have been raised in a few circumstances that affect relatively few taxpayers.
In those unusual cases, we need to decide whether not getting the intuitively "right" answer warrants muddying up and complicating the code and forcing the IRS to poke its nose into many taxpayers' affairs.
Most taxpayers with children, to determine whether they are eligible to claim five of the six family status provisions, now need only look at three primary requirements -- relationship, age, and principal place of abode. That's it! Those requirements are in contrast with the former statutory scheme of five different tests

./6/ The idea was that if you qualify under those three simple tests, you are eligible to claim the tax benefit. If you do not qualify under those tests, well, we've retained most of the prior law, so you may still be eligible under those rules. But you'll have to put up with more complex requirements and record-keeping burdens.
As I have noted above, with any legislation attempting simplification via uniformity, there will be winners and losers, and certainly some unintended results. Try as everyone might, legislators and administrators cannot envision every consequence of a legislative change. That is why we have to look to the tax professionals and commentators to identify problems. In fact, the tax bar immediately identified a problem with the treatment of children of divorced or separated parents under section 152(e), and Congress passed a technical correction before the 2006 filing season began.

/7/ Thus, Congress has proved itself willing to act quickly to correct unintended results in this statute.
Regarding UDOC, it appears that practitioners went through the entire 2005 filing season without advising their clients of the effect of the new law and without raising identified problems to the attention of my office, at least. Had they done so, Congress might have been able to enact technical fixes before the beginning of the 2006 filing season. But now we find ourselves in the situation of playing "gotcha" and calling for repeal of the statute.
Now, let's consider six fact scenarios. The first example is a situation in which the UDOC rules operate as intended to allow tax benefits when the old rules may have disallowed them. The first example, however, illistrates that there is room for legislative improvement in this area. The next four examples are often cited to show that the UDOC rules have undesirable or unintended consequences. Examples 2 through 4 are situations in which UDOC denies tax benefits to taxpayers who we might want to receive them. The fifth example is a situation in which the UDOC rules allow a windfall for taxpayers who clearly were not the intended beneficiaries of those rules. The sixth and final example describes a situation in which reasonable minds might differ as to whether the result is a problem.

[jainen]

After next week

After next week I'm going to look at the issue in example #3. I don't believe two kids can be qualifying children of each other in a way that would keep someone else from claiming them.

[Koss]

"I told you so"

After next week I'm going to look at the issue in example #3. I don't believe two kids can be qualifying children of each other in a way that would keep someone else from claiming them.

Jainen, I raised this issue over two months ago on both message boards. The case of the twin brothers was analyzed in an article that I co-authored with Douglas Lee. The article is posted on my personal website at www.usakoss.net. The title of the article is A Disturbing Example.

I posted a message concerning this problem on the other board on 01/25/06. You responded the same day with the following post:

I tip my hat to you, Burton. You have come up with a scenario that I can't explain with the law as it stands now. Maybe they will address it in the regs. It's not even that unusual. The two brothers would be Qualifying Child to each other, and if there is no genuine parent in the home you have a real mobius strip.

My original post was rather lengthy, and can be found at the following link:

http://www.quickfinder.com/view_detail.asp?ID=55340&level=0

Your response can be found at this link:

http://www.quickfinder.com/view_detail.asp?ID=55354&level=2

What I find a bit disturbing in the article attributed to Nina Olson is Example 4. (No, I am not referring to the oft-cited “Example 4” in Publication 17.) This example describes the Canonical Unmarried Couple (or as Jainen has suggested, “nonstatutory family”). The last sentence of this example says:

Also, if the relationship is in violation of local law, the girlfriend will not be considered to be a member of the boyfriend's household for determination of household status.

This is extremely misleading, and it suggests that the Taxpayer Advocate herself, or her staff, may not understand the intricacies of the new law.

Even if the relationship does not violate local law, a girlfriend is not a qualifying person for Head of Household filing status. A qualifying relative is not a qualifying person for HoH if they meet the relationship test only by living in the household the entire year. But the sentence cited above implies that a girlfriend does qualify you for HoH if the relationship does not violate local law. (This particular limitation is not a change from the prior law.)

With all that being said, it is refreshing to hear the Taxpayer Advocate explicitly stating that the law should be fine tuned. I have to concede that she has a good point when she observes that the tax professional community could have attempted to raise these issues before the end of 2005, but did not do so.

The “twin brothers” scenario was first suggested to me by Doug Lee. We posted an article about it on my website on 01/25/06. There is no clear evidence as to whether this particular problem had been previously published anywhere.

Having said that, it almost looks like the Taxpayer Advocate read the article and then changed a couple details to avoid direct plagiarism. In the article on my website, the twins are nine years old and are living with a cousin. The outcome is the same.

Burton

[Unregistered]

First - Income Tax is tantamount to slavery.
Second - abolishing the personal income tax would be the best thing that ever happened ot this country.

Now the first case seems wrong to me. She is seperated and meets as far as I can tell the "unmarried for tax purposes" definition. Anyone else?

I can't say I am upset about them not giving her EITC or other bennies. However I think the "tax advocate" is just wrong on this one. Shocking I know. an IRS employee who does not know the tax code, just shocking. (that's sarcasm)

[Koss]

First Example

First - Income Tax is tantamount to slavery.
Second - abolishing the personal income tax would be the best thing that ever happened ot this country.

Now the first case seems wrong to me. She is seperated and meets as far as I can tell the "unmarried for tax purposes" definition. Anyone else?

I can't say I am upset about them not giving her EITC or other bennies. However I think the "tax advocate" is just wrong on this one. Shocking I know. an IRS employee who does not know the tax code, just shocking. (that's sarcasm)

If she is legally married she cannot use Head of Household unless she:

(i) lived apart from her spouse during the last six months of the year;
(ii) provided more than half the cost of keeping up a home which
(iii) was the main home of her child, stepchild, etc.

Read the example again. Under the fact pattern provided, she did not pay more than half the cost of keeping up the home.

Even under the old law, and even if she was legally divorced, she does not qualify for Head of Household if she is not paying more than half the cost of keeping up the home.

Burton

[Koss]

Tax Reform

When everyone agrees that the area needs a new landfill, everyone wants it built somewhere else. This is sometimes referred to as the NIMBY syndrome: Not In My Back Yard.

In California and certain other extreme liberal outposts, people have adopted the BANANA approach to zoning laws: Build Absolutely Nothing Anywhere Near Anything.

For tax reform, I recommend the LACAN theory:

Let All taxpayers Claim Anyone Not otherwise claimed.

Those interested in this particular theory should plan to enroll in Accounting 745, which will be offered online at Duke University this fall. The title of the course is Deconstructing the Internal Revenue Code. It is the first time in the history of Duke University that an accounting course will be taught by a professor from the English Department.

Burton




***
This post is a satire.