Audits for Determining Who is Eligible to Claim a Dependent
Tips for Avoiding and Resolving Your Tax Audit over Dependents
Blended families are more the rule than the exception these days. Tax mistakes are common, however, and it's not at all rare for two taxpayers to claim the same dependent due to complex family circumstances.
If you don't have a legal custody agreement with your ex, it might be unclear who should claim your child as a dependent. You and your sibling might both think you're entitled to claim your parent because you've been helping to support her, and sometimes an adult dependent might file his own tax return claiming his own personal exemption.
All these situations will catch the attention of the Internal Revenue Service, which has specific rules for determining who is eligible to claim a dependent. The IRS rules are a bit complicated and they're multi-layered, but they make it pretty clear who qualifies as a dependent and which taxpayer is eligible to claim him.
The Effect of the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (TCJA) eliminated personal exemptions from the tax code when it was signed into law at the end of 2017. Taxpayers can no longer claim exemptions for each of their dependents, at least through 2025 when the provision potentially expires. This doesn't mean that claiming dependents won't offer a few nice tax breaks, however.
Several advantageous tax credits and a few deductions depend on having one or more dependents, so you can bet the IRS will continue to keep an eye out for multiple tax returns that claim the same ones, even while personal exemptions aren't an issue.
How Duplicate Social Security Numbers Are Detected
The IRS uses a computer system to accept and process tax returns, and the system screens for Social Security numbers that appear on more than one return.
The second tax return to be filed using the Social Security number for a dependent that's already been claimed—or for someone claimed as a dependent who has also claimed a personal exemption for himself, which isn't allowed either—will trigger a red flag from the computer. The second filer will receive an electronic-filing error message.
Not to worry...yet. The message is simply an early warning flag.
What to Do If You're Flagged
Go back over your tax return. Make sure you got your dependent's Social Security number right. You might have transposed numbers and inadvertently entered someone else's.
If the number is correct, reach out to anyone else who might have claimed your dependent as his own, such as your ex or a sibling who's been helping you support a family member. Find out if they've claimed your dependent.
If someone else has claimed your dependent, review the tax rules for doing so. The IRS publishes tiebreaker tests to help taxpayers determine who gets to claim a dependent. You might even want to touch base with a tax professional so you're sure you understand the complex rules and tests and you get it right.
Determining Who Can Claim the Dependent
It's typically only possible for one taxpayer to qualify to claim a certain dependent. For example, one rule is that a qualifying child dependent can only be claimed by the taxpayer with whom he lived for more than half the year. The IRS also evaluates your relationship to the dependent.
An exception exists if the custodial parent has voluntarily given the dependent deduction to another taxpayer by providing a written release statement to the IRS on Form 8332. This sometimes happens in divorce situations.
How the IRS Handles Audits Over Dependents
The IRS will first attempt to determine which taxpayer is not entitled to the dependent, and it will send an audit notice to that person. If the IRS can't determine which taxpayer isn't eligible, it will randomly select one of the tax returns for an audit or send notice to both taxpayers. If the first taxpayer successfully defends his tax return, the IRS will automatically audit the other tax return that claimed the same dependent.
Defending Your Tax Return in a Dependent Audit
Return your tax return to the IRS for further processing if you're sure you meet all the criteria to qualify to claim your dependent. You might also want to hire a tax professional. Only attorneys, certified public accountants, and enrolled agents are authorized to represent you in an audit with the IRS.
Be prepared to provide documentation to prove that you meet all the criteria to claim your dependent. You might have to prove your relationship to the individual, that your dependent is a citizen of the United States, Canada, or Mexico, or that the dependent did not provide more than half of his or her own financial support. The more documentation you have, the better.
Be prepared to provide school records or medical records that indicate that both you and your dependent lived at the same address for more than half a year, although this rule is waived for some qualifying relative dependents such as your parent. You can find a list of acceptable supporting documents in IRS Form 886-H-DEP.
Most of these audit procedures will take place through the mail. The IRS will mail you a request for information, and you'll write back and send in copies of your supporting documents.
What to Do If You Lose
You can appeal the decision of the auditor, or you can take your case to U.S. Tax Court if you and the IRS can't come to an agreement about your dependents. But an ounce of prevention is always worth a pound of cure, so do your best to avoid getting tangled up in this sort of situation in the first place. Address the issue of who gets to claim a dependent before anyone files their tax returns. Talking this over with family members can go a long way toward preventing problems.
A Bigger Problem
It's also possible that you might have a much bigger problem on your hands if you can't identify anyone else who claimed your dependent. Your dependent's Social Security number might have been compromised, and someone unknown to you has used it to file a tax return in her name. Although the IRS has taken major steps against tax-related identity fraud in recent years, this problem is by no means eradicated.
Notify the IRS immediately if you suspect this is the case. You can find instructions for how to handle such a situation on the the IRS website, including filing a complaint with the Federal Trade Commission, notifying the major credit bureaus, and completing and submitting Form 14039 to the IRS. You can also call them at the number included on the notice that your dependent's Social Security number was used on another return.