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I received a letter from the IRS today stating that I am

Hi, I received a letter...
Hi, I received a letter from the IRS today stating that I am being audited..
JA: What state are you in? It matters because laws vary by location.
Customer: South Carolina
JA: Has anything been filed or reported?
Customer: As in my taxes? Yes ma'am
JA: Anything else you want the lawyer to know before I connect you?
Customer: They're asking for proof of my dependants claimed and proof on my claiming head of household. My neighbors whom have been unemployed for years have two daughters that myself and my fiance have helped financially throughout the years. I was under the impression that I was able to claim them on my taxes (as did their parents).. I'm finding out today that apparently you're not allowed to do that? And now I'm having a complete meltdown
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Answered in 31 minutes by:
7/15/2017
Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
Satisfied Customers: 3,928
Experience: 3+ decades of varied tax industry exp. Tax Biz owner
Verified

Hello. Thank you for choosing this Q&A service for assistance. We appreciate your trust in us. My name is Angela. I will be assisting you today. As for your inquiry, unless a taxpayer's situation meets certain qualifications, he or she cannot claim an individual as a dependent, even if they do provide financial support for that individual. You are likely being audited because you did not meet the required qualifications. For the purposes of IRS, there are two types of dependents, a qualifying child and a qualifying relative. The criteria for both are listed below:

Qualifying Child:

Relationship

  • Your son, daughter, adopted child1, stepchild, foster child2 or a descendent of any of them such as your grandchild
  • Brother, sister, half brother, half sister, step brother, step sister or a descendant of any of them such as a niece or nephew

Age

  • At the end of the filing year, your child was younger than you (or your spouse if you file a joint return) and younger than 19
  • At the end of the filing year, your child was younger than you (or your spouse if you file a joint return) younger than 24 and a full-time student
  • At the end of the filing year, your child was any age and permanently and totally disabled3

Residency

  • Child must live with you (or your spouse if you file a joint return) in the United States4 for more than half of the year

Joint Return

  • The child cannot file a joint return for the tax year unless the child and the child's spouse did not have a separate filing requirement and filed the joint return only to claim a refund.

REFERENCE SOURCE:

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/qualifying-child-rules

-----------------------------------

Qualifying Relative:

Tests to be a qualifying relative:

  1. The person cannot be your qualifying child or the qualifying child of any other taxpayer.
  2. The person must either (a) be related to you in one of the ways listed under Relatives who do not have to live with you on page 19 of Pub. 501, or (b) live with you all year as a member of your household (and your relationship must not violate local law). There are exceptions for temporary absences, children who were born or died during the year, children of divorced or separated parents or parents who live apart, and kidnapped children.
  3. The person's gross income for the year must be less than $4,050. There is an exception if the person is disabled and has income from a sheltered workshop.
  4. You must provide more than half of the person's total support for the year. There are exceptions for multiple support agreements, children of divorced or separated parents or parents who live apart, and kidnapped children.

REFERENCE SOURCE:

https://www.taxact.com/support/14153/2016/qualifying-relative-dependency-test

Likely the children that you claimed did not meet any of the above requirements and this is why the IRS is questioning you claiming them. My suggestion is to be honest with the IRS and let them know that you were under the impression that because you were providing financial support to these individuals that you could claim them as dependents. It is likely that the IRS is going to tell you that not knowing the rules is not an acceptable defense and there might be some penalties involved. However, you will not go to jail or anything like that.

Let me know if you require further assistance with this matter. If I have answered your questions, I ask that you please take the time to scroll to the top of the page and select 3 or more stars to positively rate my response so that I can receive credit for assisting you. Thank you in advance.

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Customer reply replied 4 months ago
Thank you for getting back to me.. I feel like a complete fool for this. Have you dealt with these kind of situations before? And if so, what was the outcome? Paying back my return plus interest? I am so glad you mentioned that I will not go to jail because I have been in tears over the fear of that alone. I just want to get this resolved and move forward and never make this kind of mistake again. Also, should I just contact the IRS by phone and discuss this matter?

Hello again. You are welcome. I understand being up in arms about this matter. You're not alone, many people experience the same reactions when dealing with the IRS. Yes, I have dealt with situations such as this before, numerous times. Don't feel like a fool, you simply didn't know the complex tax rules, as many people don't. Sometimes experience is the best teacher, and unfortunately, this is one of those times. You can respond to the IRS by agreeing with them that the individuals do not qualify as dependents. If there is a place to write an explanation on the audit request, simply write that in error and due to your lack of understanding, you were not aware of the complex tax rules that relate to claiming dependents. If there is no extra space, attach a letter stating such. Other than possibly owing the IRS money and getting penalized, you should be ok.

A positive response is appreciated. Thank you in advance.

Tax.appeal.168
Tax.appeal.168, Tax Accountant
Category: Tax
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Experience: 3+ decades of varied tax industry exp. Tax Biz owner
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