Dependent exemption denied - now what?

[Margaret CPA in OH]

Client had child with girlfriend in 2003. They split up, court order states child support paid and dependent alternates with client in odd years for tax purposes. Client came to me in 2006, mother of child agreed to sign Form 8332  and wrote in relinquishing EVEN years, listing out 2006, 2008, etc.  In 2006, '08, '10, and '12 we filed mailing in 8332.  In 2014, efile rejected so paper filed WITH 8332 (not sent as before with 8453) attached. Return was pulled for audit. 

Client had married in 2006 and he and wife had sons in 2007 and 2010.  Examiner denied all dependents and required proof for all such as birth certificate, school records, etc.  Client mailed in all required docs and another 8332.  Examiner still denied first child and added accuracy penalty of $1162. Examiner also stated that 8332 was not timely filed which I vigorously deny having collated the return myself.  In any event, another was sent as sometimes original paper forms are misplaced, etc.  I've never had a resubmitted form denied.

I got involved with POA and multiple phone calls but never got through to the examiner.  Agents noted comments but could do nothing except pass along my requests for consultation. One finally suggested filing Form 12203 to appeal.  We did and it crossed in the mail with a letter accepting the 2 sons but still refusing the daughter.  Then another letter arrived now removing the penalty but assessing the additional tax ($1592 with the loss of a dependent exemption and child tax credits return went from refund of $3304 to balance due) plus interest or suggestion that we can go to tax court.

At no time, despite POA on file have I received any copies of documents.  Grrr. There is no statement as to exactly WHY this exemption was denied after acceptance for 4 years.  One agent speculated that the court document said odd years although signed 8332 states even years (I thought IRS regs and forms superseded court documents), another agent revealed a note in the file that the examiner questioned the legitimacy of the signature on the 8332. Duh!  It's the same one on the court documents!

The client cannot pay what I've billed to date and I will adjust.  I've suggested that he consider to just not exercise his right to claim his daughter to avoid further issues.  Which year should he use if he does want to claim her until she is of age?  If odd years, do we file amended 2013 and 2015 although the mother will not sign a new 8332?  If even years, does he get skunked again in 2016 and 2018 (the last year)?  The letter says to call the Taxpayer Advocate which I did a few months ago without any help at all. 

Any suggestions would be very welcome!

[Lee B]

If you still have time, I would suggest talking to the examiner's supervisor.

[SaraEA]

Custodial parents have a right to revoke a previously signed 8332.  Perhaps the mother did so.  As far as the IRS is concerned she can claim the child.  If your client wants to fight her refusal to sign, he will have to take her back to court.  If he can't even afford to pay you, I'm sure he can't afford to do that.

Speaking of payment, " The client cannot pay what I've billed to date and I will adjust."  WHY?????  You are now doing MORE work for him.  If his attorney won't go back to court for free, why should his tax pro do extra work for free?  I would charge for the work you've done after filing--it's not your fault this happened.  If he can't pay you in full, ask for a payment plan or at least get an assurance that he'll pay when he is able.  He sounds like a long-time client so you have to decide if he'll eventually come across.

And don't be so quick to take his side.  You say "he'll get skunked again" and just believe that the signature is hers.  Just maybe it isn't, and she told the IRS she never signed.  Maybe he badmouths the mom in front of his daughter, is late in child support, maybe he doesn't show up for his days with the child and habitually disappoints her.  Face it, you don't have all the facts and don't know both sides of the story. Just charge your fee and help him as best you can with what is truly a legal matter.

I have a client whose ex claimed their child even when it wasn't his year.  She was afraid to fight it because he refused to visit his son if he couldn't claim him.  This year she was awarded full custody and the jerk still claimed the kid.  She fought this one and received her full refund.  Bet he won't try that again.

[Margaret CPA in OH]

Thanks, SaraEA, for your thorough and thoughtful reply. I will ask about a possible revocation of 8332.  I think that there are currently strained relations between the parents so this is possible.  I would like to think IRS would mention this.  I tried multiple times to speak with the examiner's supervisor - all those messages that were presumably passed along including hours and days I could be reached.  No calls ever came.

You are correct that I don't know fully both sides of the story.  I do know that client and daughter have good relations as he has brought her here several times when she has stayed with him and family.  But there may be other things going on, true. I do tend to believe him as the mother has repeatedly claimed the child every single year which is why we've mailed in 8332 in the even years.

Yes, he is a long time client and has always paid, eventually.  He's had some tough years with rentals and his real estate business but always made good on the bill.  I will still likely make an adjustment because this was all post season so I had the time and it was a learning experience - I had never heard of 12203, for example.  The decision about calling Taxpayer Advocate or pursuing Tax Court will be his.  I have, as stated, recommended that he just forget trying to claim her as it is a challenge every time and this one was over the top.  It is unpleasant every year and he would have only 2 more to go (unless she has revoked the 8332 and it now goes back to odd years - sigh, I don't even want to know).  In my opinion, it isn't worth it as it continues to facilitate bad feelings and may affect his relationship with the child.  The child at 18 will choose her sides, if needed.

Thanks again, I will pass this along. 

[DANRVAN]

Just bumped this up as a reference for your current thread.

[Margaret CPA in OH]

Thanks.  I keep at this because this is a 10 year client who tries to do the right thing.  And I firmly believe he is in the right on this.  I am doing this mostly without charge as I am semi-retired, have the time, and it's the first time this has ever happened to a client.  I just hope he wins.