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mtngrrl11 | What happens when the IRS investigates a dependant dispute? |
I claim my sister as my dependant for 2007. She was a live-in-nanny for a couple at the time, and did not live with me, however I provided more than half of her monetary support during this time. She was a student. The people she lived with, working as their nanny, used her social to claim her as a dependant, even though she was an employee. They paid her under the table and attempted to claim her, even though she advised them not too. Now both returns are being pulled and the persons who employeed her are threatening to file false charges if we don't back down. Any advice?
Additional Details
She made less than 800.00 as room and board were part of the employement agreement. The people who hired her are now attempting to say she only babysat occasionally and they took her in out of the goodness of their hearts. |
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Charles G
 |
First, the person who hired her as a nanny is off her rocker. The IRS will deny the claim, and possibly may come after them for employment taxes. Their suit will go nowhere if they are dumb enough to file it. (would have to be admitting to tax fraud to a judge, not a smart move).
Whether you can claim your sister as a qualifying relative of not depends on how much she made (over $3500?). A qualifying relative can be a relative, or must live in the household all year. So that test is met.
The tests are officially (and what the IRS will look for)
1. Cannot be a qualifying child of your parents
2. Must be a relative (sister counts) OR live in household all year
3. Gross income less than $3500
4. Must provide more than half of her total support |
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Judy1
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It's possible that both claims will end up being disallowed, and that both your sister and the couple she was a nanny for will end up getting busted for evading the tax on what she was being paid.
The first step in the process, which has apparently already happened, is that the IRS send a letter to both parties saying that two returns have claimed the same dependent, and if you can't legally claim her, to file an amended return dropping the exemption. Then if nobody does, the IRS asks both to provide proof that their claim is legitimate, and then makes a decision based on the proof provided.
Your sister didn't live with you, so to claim her you'd have to show that you provided over half of her support for the year, and that her gross income for the year was under $3400. The value of the housing and food and household expenses she received as a live-in nanny is part of her support, so you'd have to show that that value, plus any money she made and used for her own support, is less than you provided. Support includes more than just money. You don't say how much support you provided to her for the year, but unless it was a lot, you aren't going to be able to show that you provided over half of her support. And if she was paid (even under the table) over $3400 for the year, your claim is gone.
The couple she was working for is on very thin ice, especially if your sister describes the situation accurately to the IRS. They can only claim her if she lives with them ALL year (all 365 days of it), her gross income was under $3500 for the year (and legally that would include what they paid her), and they provided over half of her support. The big problem for them is showing that they were just providing her a place to live to be nice to her, and that she wasn't working for them in return. Some will end up depending on how your sister describes the relationship. If for example they were strangers to her and they found each other through an ad for a live-in nanny, that pretty well finishes their claim, and they're also liable for paying her under the table rather than properly paying her and withholding taxes, and paying employer taxes on what they paid her. If they are long-time friends or relatives, and claim she was coming to college in their city and they gave her a place to live at no cost to her, gave her money now and then as a gift when she needed some, and yes, once in awhile she watched their kids while they went out to dinner or something but she wasn't paid for that, and that wasn't the reason she was living with them, their claim could possibly fly if your sister backs them up.
Not sure what kind of "false charges" they could file if you don't back down, so I wouldn't worry about that. They'd me more likely to be digging themselves in deeper rather than getting YOU in trouble.
This sounds like a real mess. But it also sounds like both claims will probably end up disallowed. |
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chatsplas
 |
Don't back down. NOT enough info to tell IF you can legitimately claim her, but they can't. They're WAY out of line. She's NOT related to them and must live with them for the entire year, make less than $3500, and they must provide more than half her support. They should be declaring her as employee, using her social to get the child and dependent care credit, and paying the nanny tax. They will end up owing!!
You write a letter stating facts, dates, addresses, etc. As student, who pays tuition and fees?
May wish to consult with tax professional, but don't worry about this--they are more likely to have serious tax repercussions. And just what charges are they threatening to file? Hope she has moved out of there!!!
And now that both returns are being pulled, even if you were to back down (DON'T), they are unlikely to be able to claim her, and to have their return more fully scrutinized. |
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wartz
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If I fill in some blanks, my prediction is that the person entitled to the exemption for your sister is your sister. She probably has enough income under or over the table to make her nobody's dependent but her own. He employer may be entitled to child care credit based on payments made to her and will also be liable for household employment taxes on her wages aloing with negligence penalites. You will be entitled to nothing but will not be liable for penalites. |
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Helen, EA in PA
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How much did your sister make that year? Maybe she should have claimed herself.
They cannot claim her, they are her employees. Let the IRS fight it out, send them a letter stating why you are eligible to claim her and they will work it out.
Helen, EA in PA
Additional - Qualifying relative does NOT have to live with the taxpayer. Qualifying relative.
To be your dependent (defined earlier), a person must be either your qualifying child (defined earlier) or your qualifying relative. Generally, a person is your qualifying relative if that person:
Lives with or is related to you,
Does not have $3,400 or more of gross (total) income,
Is supported (generally more than 50%) by you, and
Is neither your qualifying child nor the qualifying child of anyone else. |
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Jss
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You can claim your sister even if she did not live with you if you provided more than half of her support and she did not earn more than $3400 in 2007.
Read Qualifying Relative dependent requirements:
http://taxipay.blogspot.com/2008/03/requirements-for-claiming-dependent.html
IRS will check relationship, your income and proof that you provided more than half of her support.
If you did not meet the requirement, you will need to amend your tax return and pay the tax due with interest and penalty.
Penalty can be waived if you have reasons. |
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acmeraven
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Get PUB 17 from IRS.GOV free forms & publications; do the flow chart. I have worked in tax field for 37 years and can tell you this from the top of my head; you can claim your sister; the people who hired her as a nanny cannot. They have also committed several very bad no-no's and may be in very deep doo-doo with the IRS; and with the revenue agency in the state in which they reside. They did this to themselves and you are blameless. Have a Merry Christmas. |
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travelguruette
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If she made over $3500 then she claims herself. No one else is entitled to claim her. Once they investigate and finds she is an employee she must claim her income and the couple paying her is required to pay employment taxes. That is what they are trying to get around. You probably need to amend your taxes and and pay back they money with the penalties and interest. That is what happens when you set out to cheat the IRS. |
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v b
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The employers are bluffing. They can fire your sister. Big deal, she can find a better place to work.
One issue that hasn't been raised is that when the IRS untangles this, they will inform the employers that a) they couldn't claim her as a dependent and b) that she was an employee. If your sister was paid more than $1600 during the year, they were supposed to file a W-2 and withhold fica/mc taxes. Since they didn't, the IRS will have them ramp up the W-2 to include the taxes they are now going to have to pay. For example, if they paid her $4000 a month (and this amount does NOT include anything for room/board--that's not an issue) for 3 months, then they will issue your sister a W-2 for $4306, since they should have been withholding 7.65% for fica/mc.
Then the question becomes, based on her total income, her age, her status as a student (but only if she was full-time), can you claim her as a qualifying child or qualifying relative. And even if you can claim her for EIC.
Use the page 18 in pub 501 to determine the support issue. For someone under 19 (or under 24 if a full time student), the test is that your sister did not support herself. (Note, for EIC there is no support test.) For someone who is older there are 2 tests--income of $3500 or less *and* that you provided more than half of her support, including the value of the room and board her employers provided. |
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bostonianinmo
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Neither you nor your sister's employer can claim her as a dependent. Once the IRS gets the facts and proof from both you and her employer, they will deny BOTH exemption claims. You and her employer have opened a huge can of worms that is going to affect ALL of you.
For you to claim your sister under the Qualifying Child rule requires that she live in YOUR home for more than half of the year except for temporary absences. To claim her under the Qualifying Relative rule requires that she live in your home ALL year. Neither of these tests was met, so you may NOT claim her.
Her employers may not claim her. She was their employee, NOT their dependent.
Both you and her employer need to amend your returns and drop the dependency claim. Your sister can claim her own personal exemption. Under the situation described, nobody else can. She also needs to file her own tax return, using the W-2 from her employer and the employer is required to give her a W-2 for the wages that they paid her.
Your sister is a household employee. Her employer must report her wages using Form W-2 and complete Schedule H for their own return to calculate the Social Security and Medicare taxes that THEY must pay.
I'm a bit surprised by the other 2 answers. They're usually pretty good, but missed the mark by a mile on this one. |
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