Shifty-Eyed Surprise

[Snaggletooth]

Shifty-Eyed Sam lives in a dumpy one-room apartment alone and during the year works multiple jobs - enough to keep him alive. Shortly before Christmas he finds some welfare queens who never file a tax return, and pays them $200 apiece for use of their kids SS #s, report cards, medical records.

Here comes Sam into Four Eyes Frank Fast Tax prep store. "I've got two nephews and a niece living with me. My brother went to prison in February and my sister just couldn't afford to keep her son. I've had a hard time, but they been living with me since February and I've had to raise them and take care of them my own self."

"Frank, I want to claim these three as qualifying relatives, and also file as head-of-household." Sam plops down a few W-2s which total about $15K in income. EIC to the max.

"OK Sam, looks like you've got their SS cards, and corroborating paperwork. I don't see any problem. With EIC you're probably looking at about a $7,000 refund. We offer RALs and you can have your money, less $800, by the end of the day."

"Sounds good Frank. I can really use it. I'll go out tonight and buy some pot...I mean...groceries for the kids."

"Sam, there's just one catch. The government now says you are responsible for covering every member of your household with medical insurance."

"Whaaaaaaaat? Just look at my income. I can't afford to buy insurance for myself, let alone these snotty-nosed brats."

Questions from Snaggletooth:
1. Is Frank accurate about having to cover for the kids? Does each household dependent give rise to an insurance requirement?
2. Even though the penalty may calculate to next to zero, please comment on the effect this news might have on Sam next year.

[David1980]

Questions from Snaggletooth:
1. Is Frank accurate about having to cover for the kids? Does each household dependent give rise to an insurance requirement?
2. Even though the penalty may calculate to next to zero, please comment on the effect this news might have on Sam next year.

1. Yes. Tax household for 8965 includes taxpayer, spouse, and any individual claimed / can be claimed as a dependent. So if nephew lives with and qualifies as dependent it would be taxpayer's responsibility to make sure they have medical insurance. And yeah, probably with reporting $15k of income the penalty is going to amount to $0 anyway. Under 100% of poverty level wouldn't qualify for any subsidy on the exchange so odds if it being > 8% of household income are good.
2. Depends what Sam's tax situation is next year? I'd guess these people aren't likely to go from $15k of income to $150k of income, so probably situation next year will be the same as this year and he can buy the use of dependents once again.

Other thought:

pays them $200 apiece for use of their kids SS #s, report cards, medical records.

Unless those medical records and report cards show Sam's apartment as the address, why does he care about them? A report card showing a completely different address is definitely not good documentation of residence when you're trying to prove the kid lives with you. Yeah, the kid exists. Maybe even the kid lives in the US - could be good for claiming CTC on a dependent with an ITIN in establishing they live reside in the US. But for EIC, I see no worth to this at all.

[TaxGuyBill]

(1) Yes, he would be required to have health coverage for the children.
(2) There probably wouldn't be a penalty, due to insurance costing more than 8% of income, so it wouldn't affect next year either.

However, Frank needs to improve his EIC due diligence. With a fishy situation like that, I would want the medical or school records to show the SAME ADDRESS as the taxpayer.

Also, I would ask why don't the children have Medicaid/CHIP.


EDIT: It's looks like David beat me to it. :-)

[ATSMAN]

One way to scare the daylights out of people like Sam who borrow kids is to say that they will be responsible for those kid's penalty and IRS may take away any future refunds! I don't think people realize this.

But the real truth is that most of those kids are probably covered by a state medicaid program. At least in my state they will qualify for MassHealth!

[David1980]

One way to scare the daylights out of people like Sam who borrow kids

I wish congress would do something about it. Instead, they cut enforcement money to the IRS. It's almost as if congress wants to increase the tax fraud going on.

[Bees Knees]

If Sam makes $15,000 for the year and files HOH, his penalty for not having insurance for himself and/or the kids is limited to $195 ($15,000 minus $13,050 X 1%).

For $195 of penalties, the $7,000 in EIC is a good deal. Costs less than what the welfare queen charged for him to use their SSNs. Seems like a non-issue to me.

[Gene V]

If Sam makes $15,000 for the year and files HOH, his penalty for not having insurance for himself and/or the kids is limited to $195 ($15,000 minus $13,050 X 1%).

For $195 of penalties, the $7,000 in EIC is a good deal. Costs less than what the welfare queen charged for him to use their SSNs. Seems like a non-issue to me.

My calculation for penalty is $237 per software not $195

just wondering if my software is accurate

[TaxGuyBill]

My calculation for penalty is $237 per software not $195

just wondering if my software is accurate

The actual math would be $237.50. I'm not sure why the software rounded down rather than up.

[taxea]

Before bothering with the ACA issues I would require an 8832 from the applicable parent

[David1980]

Before bothering with the ACA issues I would require an 8832 from the applicable parent

Can't tell if serious...

[ATSMAN]

Unless you are dealing with random walk in traffic in your operations you should not generally face such a situation.

I don't have any walk in traffic and the common situations that I face are unmarried parents who split up and one parent claims the child regardless of the rules of who can claim the child.

If we follow the due diligence required for EITC, we should be able to spot if the "kids" are being rented for the sole purpose to qualify for EITC.

I have one client who is a foster mother and she bring me the letter from the state agency when they place a child with her.

[MDEA]

shifty eyes

As an office that handles this type of client he would need birth certificates to prove these children are related. He would need school records or medicaid card to show children live with him. We showed 142 clients like this the door last year.We keep track of all walk outs and why.If you handle this type of business you must set up guide lines to protect yourself.

[Corduroy Frog]

Question for MDEA

MDEA, now that the IRS has allowed "qualifying relatives" to be dependents, how does a birth certificate help?

By the way, congratulations for showing 142 of this skurf of society to go get their return somewhere else. I'm sure some of them found someone else, maybe some of them just gave up. At least you weren't sucked in by their stories.

[MDEA]

Shifty Eyed

They must show by birth certificates the relationship. Child"s shows Mother & Farther must show that they are related to one of them. We end up with drawing family tree to prove relationship. My average charge for An EITC return is $300.00. It takes time to do it correctly.

[David1980]

MDEA, now that the IRS has allowed "qualifying relatives" to be dependents, how does a birth certificate help?

Well, it is true that a "qualifying relative" doesn't have to be related to the taxpayer. In which case you wouldn't need a birth certificate or anything to claim them. Bring a random homeless person into your home, they live there the full year, you provide all their support, seems like a legitimate dependent to be claimed on the return.

However, for that dependent to be used for EIC purposes they need to be "qualifying child", not "qualifying relative". So for EIC purposes, the relationship very much does matter. That's the whole son/daughter, brother/sister, or descendant of thing. So if someone is presenting a child as their nephew you could prove the relationship with establishing the parent is a brother/sister and the child is a son/daughter of that parent. If someone is presenting a child as their "step child", same idea - prove that the marriage to the parent actually existed and that the child is a son/daughter of whoever they were married to.