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As far as the IRS, unless you are going against a court order then they aren't going to get involved and you would be fine in an audit. The issue is who is providing for the child and it would like, clearly, you are.
It is always difficult to change the custody of a child. However, the biggest difficulty is in proving that the mother is a fit parent and this is where the grandmother is about to get bit by a double edged sword because when she claims the mother can't care for the child then she has to explain why the child has been with the mother so much. If the mother wasn't fit then it was negligent for the grandmother to allow the child to go over there and stay.
I have found that judges are very, very tired of grandparent custody cases so that works in your favor as well.
The only other thing I can tell you, although you're free to ask any follow ups you would like, is that documentation is everything in these type of cases so the more things you have the better off you are.
Is the mother representing herself or does she have a lawyer?