Wednesday, July 18, 2012

The 'Form over Substance' case

In this case we see the IRS proactively disallowing exemptions and other child related credits/deductions for the noncustodial parent due to his failure to attach form 8832.

In my personal experience this has only occurred in situations where both (divorced) parents claimed the same children in one year but perhaps this case is an omen of things to come. The taxpayer might have done a number on himself by unwisely and unnecessarily attaching a copy of his divorce decree to his tax return. The decree stated he was not the custodial parent (ergo: should have attached an 8832), something the IRS would otherwise have had no way of knowing. Self-preparing can be costly!

The internal revenue code states in a nutshell that the custodial parent is entitled to the exemption unless such person relinquishes the exemption in writing via form 8832, or a statement in the divorce decree with VERY specific wording. In cases of joint custody, the custodial parent is the person who the children stayed with for one more day of the year – not the person named as the custodial parent in the divorce decree. (Keep a detailed calendar!)

Yes, I am saying that the divorce decree drafted by your $300+/hour atty which states you get to ‘take the kids’ on your tax return in odd years is likely not worth the paper it is written on, for this purpose. I have almost never seen a decree that would hold up to IRS scrutiny. This is why a consult with a CPA is very important as a part of any divorce. Your best bet is to demand a signed 8832 form as a condition of the divorce. It can specify multiple years. Alternatively the statement in your decree:

Must be an unconditional release of the custodial parent’s claim to the child as a dependent for the year or years for which the declaration is effective. A declaration is not unconditional if the custodial parent’s release of the right to claim the child as a dependent requires the satisfaction of any condition, including the noncustodial parent’s meeting of an obligation such as the payment of support. A written declaration must name the noncustodial parent to whom the exemption is released. A written declaration must specify the year or years for which it is effective. A written declaration that specifies all future years is treated as specifying the first taxable year after the taxable year of execution and all subsequent taxable years.

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