Claiming Kids

[Snaggletoof]

At some point, someone will bring this up so I thought I would start early and avoid the rush.

The "new" definition of a child which was to solve all the problems ran into a buzz saw, possibly more than one.

At the heart of the professional responsibility is the question: "Do you override a decree of a local judge to allow (or not allow) deductibility for a dependent?"

This is not the first time IRS directives have flown in the face of state-ordained judges. In 1985, a similar regulation was enacted and the IRS had preparers do their dirty work for them by disallowing local decrees. After putting preparers out on the firing line, the IRS withdrew and honored local decrees by allowing deductions if the awarded party would simply attach a copy of the decree to his tax return. Preparers acting with due diligence ended up with a lot of egg on their face.

I didn't want a repeat performance of this, so for 2005 returns I honored local decrees as long as the party would show me the decree. But I explained to all parties that the IRS had changed their criteria and did not intend to honor the local judge. I explained that as soon as enough time elapsed for court challenges, I would establish my own position as to how to handle the matter in 2006 and future years.

This issue was discussed at great length on the TMI board last year, and there was support on both sides of the issue from some of the most knowledgeable people on the board. Although not a heavyweight, I tended to side with the strict interpretation that a Federal tax law would override a state court on a Federal issue (i.e. US income tax). However, I remember the debacle which occurred in the 1980s.

Without launching yet another repeat discussion on the merits of both positions, let me ask you to contribute by describing court cases, possible technical corrections, etc.

We will all have to deal with this problem again. If we override local decrees, there will always be the proverbial "tax guy across town" who will honor them and take our customers. I don't mind standing up for what's right, but I want to make sure I'm right.

[jainen]

nothing to do with the IRS

>>the IRS had changed their criteria and did not intend to honor the local judge<<

First of all, it has nothing to do with the IRS interpretation of anything. It's the plain law, passed by Congress and signed by the President. So unless you have a constitutional issue (states' rights, anybody?) then forget about finding a court case.

Second of all, nobody is "overriding" the local judge. The divorce decree is binding on the parties involved. It is not binding on the parties not involved, such as the IRS. If the divorce decree says one spouse can claim the kids, go ahead and claim them all you want. The IRS doesn't have to accept the claim unless it meets certain standards spelled out in the law. The element most often missing is the other spouse promising (or being ordered) to NOT claim the kids.

[Snaggletoof]

Not clear

Jainen, we are required to make a definitive decision when we fill out these returns as to whether we under due diligence can sign off on a parent claiming a child. We can't just "honor the local decree if we want to" unless we believe it is proper. I have over the years lost more than a few customers to the "guy across town."

And the Congress passing the law and President signing it is not as open-and-shut on the matter as you make it sound, unless you are of that opinion yourself. This board encountered some very detailed and formidable posts from people whom I consider to be quite authoritative, and who have found loopholes in the code/regulations which cast uncertainty on your position. If you would like to run this to ground, you might revisit some of the posts from last January/February.

[jainen]

Congressional intent is not clear

>>revisit some of the posts from last January/February<<

I remember those discussions well. Mostly they were whether someone could be a qualifying child to more than one person, since the new "uniform" definition still varied among the five benefits. The IRS has sinced clarified that the answer is no, which was my position all along.

>>over the years<<

Yes, compliance with that particular law was uneven, so in 2004 Congress agreed to allow the divorce decree in lieu of Form 8332. However, a year later they changed it back to the original requirement--no divorce decree unless it has exactly the same information as Form 8332, including the custodial spouse's unconditional certification that she will not claim the child. Although the reinstated rule was retroactive to January 1, 2005, it was not signed until December 21st. Many preparers had already completed their annual update course and Pub 17 had already been published by then, so there was a lot of confusion in January and February. By now you should have figured it out, though.

>>whether we under due diligence can sign off on a parent claiming a child<<

You say "honor the local decree" like it's some sort of backstage pass. It is just the judge's order to the two litigants. It's not about you and it certainly doesn't make any claim to change tax law.

>>Congress passing the law and President signing it is not as open-and-shut on the matter as you make it sound<<

Well, okay then. I suppose you could argue that changing it and then changing it back again shows that Congressional intent is not clear.
.

[Black Bart]

>>whether we under due diligence can sign off on a parent claiming a child<<

You say "honor the local decree" like it's some sort of backstage pass. It is just the judge's order to the two litigants. It's not about you and it certainly doesn't make any claim to change tax law.

>>...not as open-and-shut on the matter as you make it sound<<

Well, okay then. I suppose you could argue that changing it and then changing it back again shows that Congressional intent is not clear.
.

Why are you attacking him for bringing up a legitimate question? You talk as if we're operating in academia or some sort of ivory tower in which the perceptions of our clients as to our competence and interpretation of tax law has no bearing whatever on our practices.

Is the bruff and abrupt declaration to Snag in your previous post the same thing (and the same way) you're going to put it to your divorced clients; i.e., "go ahead and claim them all you want. The IRS doesn't have to accept the claim unless it meets certain standards"? That sounds more like an IRS auditor defending the "company line" than a tax preparer trying to help a customer.

And I can just imagine a client's reaction to your "backstage pass" statement above when he/she brings a copy of his divorce decree to your office and you tell them it's worthless and doesn't mean a thing to IRS (or you). They'll most likely weigh their choices: "wonder who knows more about law -- Judge Tome or taxman jc?" It's a pretty good bet they'll go with the judge and go across town to the chain that's taking all comers.

As to "Congressional intent;"you're implying that:

(1) they made a mistake
(2) they corrected it properly
(3) he's a dope for not recognizing it and taking your viewpoint that real-world consequences are irrelevant
(4) everybody should live happily ever after (aka "who cares what clients think?)

I recently attended a tax seminar -- the lecturer, a former IRS auditor, commented on the revision of 1-1-05: "If clarification was the goal, then clearly Congress bungled it. The authors of this obviously were advised by those who had no practical field experience whatever."

[Bees Knees]

Desk side manners

Unfortunately, we are the ones placed in the middle. A legitimate divorce settlement over who gets to claim the kid, verses an Internal Revenue Code that says the settlement didn’t have the correct T’s crossed, or the right number of I’s dotted.

Besides ethics training, maybe we need to start a training program for tax professionals on bed side manners (or desk side manners).

[Snaggletoof]

Bees Knees

Bees, thanks for the defense. I feel very much the same way you do about the backstage pass and the suggestion that we be flippant about the issue, which IS very relevant to our practice and no doubt will arrear its head again this season.

Most of us have come to the point where we expect this kind of acerbic response from Jainen. We've learned to navigate past this factor and derive a good deal of subject matter from his posts. Lack of diplomacy aside, one of our most knowledgeable board members.

Incidentally, I remember several excellent posts from you on this subject last year. Expect another round again this year -- if I don't bring it up, someone else will.

Regards, Ron J.

[jainen]

No.

>>the same thing (and the same way) you're going to put it to your divorced clients<<

No. I am not talking to my clients now, but to professional colleagues. Calling that an ivory tower is a rather "acerbic response" in its own right.

[Unregistered]

Snags

You asked for court citations. One of the best discourses you will find is a regular tax court case called Miller 114 TC No. 13. I would suggest you read the case and use it to show any clients (or potential clients) why you must follow the IRC.

One salient passage:
"Although the Permanent Orders granted Mr. Lovejoy the right to claim the dependency exemptions for his children, a State court CANNOT (emphasis added) determine issues of Federal tax law. See Kenfield v. United States, 783 F.2d 966 [57 AFTR 2d 86-792] (10th Cir. 1986)); White v. Commissioner, T.C. Memo. 1996-438 [1996 RIA TC Memo ¶96,438] (citing with approval Commissioner v. Tower, 327 U.S. 280 [34 AFTR 799] (1946))."

New York Enrolled Agent

[Snaggletoof]

Nyea

New York Enrolled Agent, thanks for your specific answer to my post. Based on the decision, it appears the IRS is going to make it stick this time instead of caving in like they did in the '80s.

You perceived the situation as I presented it and gave a specific answer and I thank you for that. I also enjoyed the discussion from Jainen, Bart, and Bees Knees. Bart, if you haven't noticed by now, is an erudite fine Southern Gentleman, although he would prefer you think of him as dumb hillbilly...

Thanks for your participation on the board -- you've been active before and offered some excellent insights over the last several months.

[WhiteOleander]

I really don't see this as a problem for the IRS or Congress.
I blame the attorneys and Judges involved in settling these divorce cases.

The attorneys and Judges should know what the tax law is regarding claiming the children for tax purposes and not make agreements that are contrary to the tax law.

So, the clients need to look to their attorneys when they ask why they cannot do something that the attorney told them to agree to in their settlement. It is the attorneys' "Due Diligence" to know the laws they are advising about.

JMHO

[Snaggletoof]

Oleander

...what you say SHOULD be true, but in the real world, this is not what happens.

As a matter of fact, if you've prepared taxes very long, you're aware of all the myths on the street. And your customers tell you, "My cousin married an ATTORNEY, and HE says you can claim your underware if you don't buy it at Wal-Mart..." or some ridiculous other myth.

The perception is that the lawyers and judges in your town are omniscient, and YOU are just a lowly tax preparer. We have to deal with this faulty perception, even though what you say is 100% correct. Fact of the matter, some of the WORST tax returns I've ever had to fix have been prepared by lawyers.

[veritas]

Why are you attacking him for bringing up a legitimate question? You talk as if we're operating in academia or some sort of ivory tower in which the perceptions of our clients as to our competence and interpretation of tax law has no bearing whatever on our practices.

Is the bruff and abrupt declaration to Snag in your previous post the same thing (and the same way) you're going to put it to your divorced clients; i.e., "go ahead and claim them all you want. The IRS doesn't have to accept the claim unless it meets certain standards"? That sounds more like an IRS auditor defending the "company line" than a tax preparer trying to help a customer.

And I can just imagine a client's reaction to your "backstage pass" statement above when he/she brings a copy of his divorce decree to your office and you tell them it's worthless and doesn't mean a thing to IRS (or you). They'll most likely weigh their choices: "wonder who knows more about law -- Judge Tome or taxman jc?" It's a pretty good bet they'll go with the judge and go across town to the chain that's taking all comers.

As to "Congressional intent;"you're implying that:

(1) they made a mistake
(2) they corrected it properly
(3) he's a dope for not recognizing it and taking your viewpoint that real-world consequences are irrelevant
(4) everybody should live happily ever after (aka "who cares what clients think?)

I recently attended a tax seminar -- the lecturer, a former IRS auditor, commented on the revision of 1-1-05: "If clarification was the goal, then clearly Congress bungled it. The authors of this obviously were advised by those who had no practical field experience whatever."

This begs the question "who is writing our tax laws". Recent right brain thinking graduates from law school who with their macintosh computers are writing our tax code thats who.

What happened to the good ol days when we had the likes of roll me on the carpet Bob Packwood?

[WhiteOleander]

...what you say SHOULD be true, but in the real world, this is not what happens.

As a matter of fact, if you've prepared taxes very long, you're aware of all the myths on the street. And your customers tell you, "My cousin married an ATTORNEY, and HE says you can claim your underware if you don't buy it at Wal-Mart..." or some ridiculous other myth.

The perception is that the lawyers and judges in your town are omniscient, and YOU are just a lowly tax preparer. We have to deal with this faulty perception, even though what you say is 100% correct. Fact of the matter, some of the WORST tax returns I've ever had to fix have been prepared by lawyers.

That is my point exactly. And sometimes I tell my clients to go back to their attorney and ask him/her why they advised them to agree to something that is totally against the tax code.

I won't take the fall for bad advice from divorce attorneys.

[Lion]

We have divorces prior to the law change

Divorce decrees written before the new uniform definition of a child can mean that even the best lawyers and most thorough parents -- who even consulted with their tax advisors -- can find that which parent gets to claim their children under the UDC is not the parent they intended in the decree. And we'll have to live with this for as long as 18 or 24 years. I probably complained about my own joint return during the tax season. When my husband divorced his first wife, promising to pay no less than 65% of his daughter's support, he was assured by his lawyer and tax advisor (I wasn't in the picture then!) that she would be his dependent for tax purposes. Then came this tax season. Daughter spent more days with mom than with dad, so the old decree doesn't fit the new law and hubby can't claim his daughter. But, we really can't blame the lawyers who operated under the only laws that existed when they wrote divorce decrees for divorces that predated the new UDC. Although, I do jump on lawyers for many other reasons!