Avoid an Audit when Claiming Children’s Dependency Exemptions

Avoid an Audit when Claiming Children’s Dependency Exemptions

Parents who are separated may run into trouble if they do not synchronize their tax deductions and credits for their children when they file separate returns.  When both parents claim the same tax deductions for their children, one or both of them may be audited by the IRS.  There are specific rules and procedures that must be followed precisely when claiming children’s dependency exemptions.

Rolle v. Comm’r., T.C. Memo 2015-93 (2015)

Mr. and Mrs. Rolle were separated on July 31, 2011, when one of the parents moved from the marital residence. Two young children were the product of their short marriage.  After separation, the children resided with their mother. Mother and father were divorced in 2012, and the Florida divorce court split the children’s dependency exemptions for that year.  The court did not allocate the children’s tax deductions for 2011.

Mother and Father filed separate income tax returns for 2011.  Father filed as a head of household and claimed both children as his dependents; Mother also claimed them on her return.

Father later received an IRS deficiency notice, telling him that he was being audited for claiming children’s dependency exemptions for 2011, filing as a head of household, and claiming an earned income credit (EIC).  Father appealed to the U.S. Tax Court.

Claiming Children’s Dependency Exemptions

In a Memorandum Opinion, the Tax Court reviewed the legal requirements for claiming children’s dependency exemptions. Under IRC § 152(c), a “qualifying child” must be the child or sibling of a taxpayer; living in the same principal abode as the taxpayer for at least half of the year; meet age requirements; not having provided more than one-half of the child’s own support for the taxable year; and not having filed a joint return with the child’s spouse.

If two or more individuals are eligible to claim the tax deduction for a dependent child, the tax code provides “tie-breaking” rules.  The parent entitled to claim the child’s dependency exemption is the parent with whom the child resided for the longer period of time during the taxable year; or if the time is equal, the parent with the greater adjusted gross income. IRC § 152(c)(4).

One parent may assign the children’s dependency exemption to the other parent, who would otherwise qualify but for the tie-breaker rule. Assigning the children’s tax deduction requires the eligible parent to sign IRS Form 8332, which must be attached to the income tax return of the parent who receives the benefit.  In this case, no IRS Form was signed or attached by the parents for 2011.

Head of Household Filing Status

Head of household filing status requires that an eligible parent shelters a qualifying child in his or her household for more than one-half of the year.  Practically speaking, head of household filing status is not available to parents who separate after June 30 of a taxable year (although it may be an option in subsequent years).  In the Rolle case, Father was not eligible for the head of household filing status.

Earned Income Credit (EIC)

The earned income credit (EIC) is a refundable tax credit available to certain lower-income taxpayers. IRC § 32.  Since the father in this case did not have “qualifying children” under the tax code, and was not a “qualifying individual” himself, he was not eligible.  Mother and father would have had to file a joint return in order to qualify.

The full opinion appears here.  To develop your tax strategy on claiming children’s dependency exemptions and related topics, consult my book Frumkes & Vertz on Divorce Taxation § 5.1.  In Western Pennsylvania, call me (Brian C. Vertz 412-471-9000) for a family law consultation or visit my firm’s website,- pollockbegg.com.