Monday, February 6, 2012

The ‘Wrong on SO Many Levels’ Case

Taxpayer was found ineligible for: dependency exemptions, head of household status, earned income credit, AND additional child tax credit. Children claimed were the grandchild and nephew of TP’s wife. On the bright side, he did prevail in reducing the assessment for unreported unemployment benefits by showing he did not actually receive the amount reported on the 1099-G. The state recouped some money he defrauded them out of in a past year by garnishing his benefits in the questioned year but they never adjusted the amount reported on his 1099-G for those debits.

Take aways:

• If a taxpayer asserts a reasonable dispute with respect to any item of income reported on a third-party information return and he has fully cooperated with the IRS, the IRS will have the burden of persuasion.

• TP provided documents from the state that showed what he actually received. There is no legal basis for including in income for 2009 amounts that were “denied” to petitioner in 2009 because of overpayments in at least 1 year before.

• Taxpayer might have been entitled to at least the dependency exemption if the children lived with him all year, they were not dependents of someone else, and he provided over one-half of their support but he offered no evidence to that effect.

• The first test for determining if you are eligible for head of household status is that you can’t be married as of the close of the tax year. Taxpayer was married.

• In order to be eligible for EIC you must file a joint tax return. In this case, the combined income on a joint return would have been too high to qualify for EIC.

• In some cases a TP would qualify for regular child tax credit but be unable to benefit from it due to a lack of tax liability. To mitigate this situation, the nonrefundable portion of the CTC may be replaced with the refundable ACTC for TPs within a certain income bracket. As you might guess, this TP was eligible for neither regular CTC nor additional CTC.

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