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Arthur Rubin
Arthur Rubin, Tax Preparer
Category: Tax
Satisfied Customers: 1561
Experience:  22 years of tax preparation experience, including individual, trust, and estate returns.
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audit question - IRS sent form 4564 requesting various items

Customer Question

audit question - IRS sent form 4564 requesting various items for a correspondence audit conducted on a t/p residing in Australia. There is one item that I do not understand the significance of:

background facts: both parents are USA citizens; children are USA citizens from birth; family resides full time in Australia; t/p's declared their children as tax dependents; as Australian citizens they receive about $1600 per month / $19k per year government support for the children. they earned and reported about $32k income on form 1040; they did NOT report gov't child support as income; they did not use the IRC 911 / form 2555 exclusion.

"A record of income or other funds received by or for the dependent including but not limited to social assistance, Social Security, V.A. benefits, and child support. Be prepared to show how these funds were used."

Q: What is the auditor looking for with the above question? I know that they are looking for any excuse to disallow dependents and ACTC
Submitted: 7 years ago.
Category: Tax
Expert:  Arthur Rubin replied 7 years ago.
I think what the IRS is looking for with that question is whether t/p meets the "support" test, per 26 USC 152(c)(1)(D) or 26 USC 152(d)(1)(C).

As an aside, are you sure the children are still US citizens, as well as being Australian citizens? In order to qualify for the dependency exemption, the dependents must be either US citizens or residents of the US, Canada, or Mexico.
Customer: replied 7 years ago.
The children have consular reports of birth abroad to prove USA citizenship. I'm not sure what you meant by "still", as if to imply that perhaps they lost USA citizenship at some point. Millions of ex-pat USA citizens reside the world over with dual citizenship.

Thanks for your 2-bits about the IRC 152 support clause(s). I'd like to keep the question open a bit longer to see if any other experts agree / disagree.
Customer: replied 7 years ago.
Hi Arthur - would you be able to provide some materials relevant to the issue at hand? That is, do you have any published positions papers, IRS bulletins, tax cases, IRS field agent instructions etc. that address the issue of parental support where the parents receive child benefits such as welfare payments, food stamps etc.? This is really the crux of the issue!

Expert:  Arthur Rubin replied 7 years ago.
Actually, I found two tax court cases, but they seem unfavorable to your position.

In Pavia v. Commissioner, T.C. Memo. 2008-270, it was found that food stamps and Medicaid benefits were to be considered support not supplied by the parent(s).

In Rasco v. Commissioner, T.C. Memo 1999-169, it was found that welfare (for an adult) and food stamps (both for an adult dependent, and for children) was to be considered support supplied by the individual (adult or child).

In both instances, the taxpayer who claimed the dependents kept the exemption, as, even including the welfare payments, the taxpayer supplied more than half of the support.

The regulations at 26 CFR 1.152-1 specify that Social Security benefits are included in "support", but it's not clear to whom the support should be attributed, so it's not particularly relevant to your case.

I'll see if I can locate Revenue Rulings on point later today (Sunday), but my topic index is not the best.

Edited by Arthur Rubin on 6/6/2010 at 10:20 AM EST
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Customer: replied 7 years ago.
excellent! In the case here where the parents earned $32k and received $19k child support, how does it look?

Also - the support clause for the "qualifying child" now states
"who has not provided over one-half of such individual’s own support for the calendar year in which the taxable year of the taxpayer begins"

IOW - the child must not be supporting himself by 50%+.

This could be more liberal than the Rasco case where he was claiming children that were not his own.
Customer: replied 7 years ago.
Thanks for the reference to the tax court precedent. If you are ready, willing, and able, then please address my further questions above, but in any case I accept your answer with gratitude.

Expert:  Arthur Rubin replied 7 years ago.
I can't find a specific court case or revenue ruling, but IRS Publication 501 suggests that welfare is considered "support by someone other than the taxpayer or the dependent".

Worksheet 1 on page 20 of the 2009 Publication 501 includes, on line 1:

Enter the total funds belonging to the person you supported, including income received (taxable and nontaxable) and amounts borrowed during the year, plus the amount in savings and other accounts at the beginning of the year

and on line 23:

Enter the amount others provided for the person’s support. Include amounts provided by state, local, and other welfare societies or agencies. Do not include any amounts included on line 1.

This worksheet then includes it as "support supplied by other than the dependent or the taxpayer". As you probably know, following publications only prevents you from willful underpayment penalties, rather than actually being binding on the IRS, but that's the best I can do.

Edited by Arthur Rubin on 6/11/2010 at 2:56 PM EST