EIC Question, Oh Boy

[geekgirldany]

Client's daughter, her husband, and son... lived with my clients all of 2013. Actually have been living there for several years. The daughter's husband in previous years never had a job. Well last year he worked for 2 months and was told by a friend they could get a bunch of money back claiming their child and filing jointly.

From talking to my client he did not make much and will I am sure would only get back a few hundred in EIC. Daugher & Husband are saying they will claim their son this year and do not want the grandparents to claim him. Although they have claimed him the past two years.

I was reading the tie breaker rules, my client has the highest AGI and has provided over half support for the child. I am confused reading Pub 596 & the examples in it.
It reads as though the parents have the right to credits and claiming the dependent first even thought did not provide over half of that child's support.

Is that right?

Can my client claim the grandchild for the EIC, CTC, dependency? Or No since the daughter/husband say they are going to claim him (I do not know if they have filed their return or not).

Does not seem right that my clients supports all of them but may not can claim the grandchild just because the daughter says she wants to.

[David1980]

It reads as though the parents have the right to credits and claiming the dependent first even thought did not provide over half of that child's support.

This is true. There is no requirement that the parents spend a dime of money on the kid in order to be their qualifying child. And if tie-breaker rules come in to place, parents will win over grandparents.

Perhaps the grandparent can give the parents whatever the tax refund would be the parents in exchange for the parents letting the grandparent claim the kid.

[geekgirldany]

Thanks David for clearing that up. Like I said ridiculous that is so.

I'll have to talk to the grandparents. The parents believe they will be getting a huge amount back and I know they won't. Hopefully they can work it out.

[ddoshan]

I had a situation last year whereas the parents wanted to claim their two children. They didn't make that much so their refund would have been only around 1400-1600 or so. It did come to light that because of their situation they had lived with her mom all year. I suggested maybe it might be better if they let her claim the exemptions, but they became a little upset with this idea. But with some persuasion they did agree to have her mom come in to see what difference it would make. As it turned out letting her claim the kids resulted in 4 grand or more in additional refund over what they would have otherwise received. Naturally they were quite happy to let her claim the kids. Grandma agreed to let them have pretty much all the money.

[buzzardbreath]

Pick and Choose

In these dysfunctional families and estranged relationships, it's like each party thinks they can pick and choose, or split/share among numbers of children just like they could draw cards out of a deck.

I don't have many of these, but from my exposure, most of these clients don't want to live with what I tell them and they go somewhere else. They either go to another preparer who does whatever they want to do, or else they change the story to convince a preparer of their validity.

[geekgirldany]

Yeah it is something else and these situations are become more and more common. More children living at home with their own children, not working, or even going to college/tech school.

It would result in nearly a $4,000 difference in refund. So maybe they can work it out.

I do not have many EIC clients and I have know these folk for years. Really would not mind if they went to another place. EIC returns are not worth it unless you charge the $500 penalty you may get.

[Burke]

This is true. There is no requirement that the parents spend a dime of money on the kid in order to be their qualifying child. And if tie-breaker rules come in to place, parents will win over grandparents.

Perhaps the grandparent can give the parents whatever the tax refund would be the parents in exchange for the parents letting the grandparent claim the kid.

I almost had the same situation a few years back. Grandparents supported 2 grandchildren and they lived with them the entire year. Worthless daughter ran down to HRB early in Jan and claimed both, got the EIC & CTC, etc. Grandparents' exemptions were disallowed later when they filed. IRS send all sorts of documents asking for verification of support, address, etc, which they submitted, but they never got anything.

[ttbtaxes]

Eitc

From an layman's perspective, you would think that claiming a child would be the most basic issue in the tax world. They probably think, "Hey, if you can't get that right , how can you get the harder things correct?"

I never had many EITC clients, maybe one or two. I made a decision three years ago not to prepare any tax returns that who would generate an EITC. Too much exposure. I don't regret that for a minute.

If I did prepare EITC returns, I would insist that every client sign a letter of representation outlining the facts so they couldn't throw me under the bus on an audit. I can see it now, "I never told him blah, blah, blah." Ah, yes you did and here is your signature to prove it.

[Steve Stang]

EIC for Grandparents Supporting Granddaughter

I have a couple who are supporting their grandchild who has lived with them F/T for more than 3 years. The mother of the child is deceased and the father lives more than 3 hours away providing no financial support. The grandparents receive SSI and a W2. They already care for a disabled adult son. Raising a 10-year old is certainly an added financial burden. The father has always claimed the daughter and probably gets the CTC (don't know his income for EITC) but it certainly seems unfair.

The granddaughter meets all the dependency rules (qualifying relative, support, residency, US citizen, unmarried, etc.).

The way I read things, the father would likely win if challenged by IRS as he is the parent - though not the custodian.

Can I at least get the grandparents the dependency exemption and CTC even if not EITC? I think I can override my software and check off that the grandchild is not EIC eligible and just use the other credit and deduction.

[David1980]

I have a couple who are supporting their grandchild who has lived with them F/T for more than 3 years. The mother of the child is deceased and the father lives more than 3 hours away providing no financial support. The grandparents receive SSI and a W2. They already care for a disabled adult son. Raising a 10-year old is certainly an added financial burden. The father has always claimed the daughter and probably gets the CTC (don't know his income for EITC) but it certainly seems unfair.

The granddaughter meets all the dependency rules (qualifying relative, support, residency, US citizen, unmarried, etc.).

The way I read things, the father would likely win if challenged by IRS as he is the parent - though not the custodian.

Can I at least get the grandparents the dependency exemption and CTC even if not EITC? I think I can override my software and check off that the grandchild is not EIC eligible and just use the other credit and deduction.

The father does not live with the granddaughter? If that is true, the granddaughter is not a qualifying child of the father. If granddaughter is qualifying child of grandparents then father cannot claim the granddaughter.

[David1980]

If I did prepare EITC returns, I would insist that every client sign a letter of representation outlining the facts so they couldn't throw me under the bus on an audit. I can see it now, "I never told him blah, blah, blah." Ah, yes you did and here is your signature to prove it.

This is a common sentiment, but deserves a caution. The 8867 is titled the Paid Preparer's EIC Checklist after all. There is a potential $500 penalty per return on the preparer for failing to do proper due diligence on EIC returns. Say someone walks in with SSN for their three nieces and claims to have made $15,000 on his "lawn care" business. No records of any of it, no documentation for the dependents. You could have him sign a statement that he understands if audited he has to provide documentation yada yada but does that really help you meet the due diligence requirements? I don't think so. I'd refuse to do that return myself.

[ddoshan]

Steve ... for heavens sakes, as David mentions, if the situation is as you describe that the grandchild lives with the grandparents full time then they have every right to claim their grandchild.

[zeros]

EIC -Not worth It!

I'm thinking more and more that it simply is not worth the chance of being penalized. Not sure my client's documents would be satisfactory in an audit. I had 29 EIC clients last year, and don't know if that is considered a lot or not. I don't think I make enough from them to warrant taking the risk.

[ddoshan]

I'm thinking more and more that it simply is not worth the chance of being penalized. Not sure my client's documents would be satisfactory in an audit. I had 29 EIC clients last year, and don't know if that is considered a lot or not. I don't think I make enough from them to warrant taking the risk.

If your clients situation is as you describe and you explain the rules to them and they want to claim the child it is their decision. Your option is to decide whether or not to have them as a client.

[David1980]

I'm thinking more and more that it simply is not worth the chance of being penalized. Not sure my client's documents would be satisfactory in an audit. I had 29 EIC clients last year, and don't know if that is considered a lot or not. I don't think I make enough from them to warrant taking the risk.

I also think the EIC penalty is taken too seriously in some cases. On one extreme you have a parent claiming their own children with solid documented W-2 income. No red flags at all, no reason to suspect anything, no reason to require any evidence from them IMO. At the other extreme, you have people claiming children other than their own with business income that can't be substantiated. I avoid those folks. And then there's everything inbetween - the shades of gray. Some make sense, some maybe you want to see something to substantiate that the kid does live at the taxpayer's residence or ask additional questions. Some you just want to avoid.

The language the IRS uses is:

"If a reasonable and well-informed tax return preparer knowledgeable in the law would conclude that any information the taxpayer has given you appears to be incorrect, incomplete, or inconsistent with the taxpayer's eligibility to claim the EIC, you must ask the taxpayer reasonable questions to get information that is correct, consistent, and complete. You must document the questions you asked and the answers you received. This is how you meet your knowledge requirement."

So existing clients I've done for years claiming their own children? I don't even blink. No reason to suspect the information is incorrect, incomplete, or inconsistent. I mark off the applicable "Did not rely on any documents" on my 8867 and move on.