There is often a disconnect between what a court directs a taxpayer to do and what is permitted under the Tax Code.
It can be seen in issues related to the child and dependent care credit, the earned income credit, Head of Household filing status, and other items that relate to the area of divorced parents. However, it can surface in other areas as well, noted Robbin Weiner, CPA, of Dayton, N.J.-based E. Martin Davidoff & Associates.
“As professionals we not only have a responsibility to fully explain all of the tax implications of these matters to our clients, but also to advise them on these matters, and to follow up to make certain that they are adhering to the agreements that they have entered into,” she said. “This should be the case with attorneys and judges as well.”
“There are a million areas in which how the court resolves an issue isn’t the way the IRS treats it, so you end up in court to see what the contract said,” she observed.
She cited a recently divorced client who came into her office. “The divorce court declared that the parents of the child were to split the aftercare expenses. The mom was the custodial parent and in order for her to work, she incurred additional after care expenses. The court instructed the father to reimburse her for 60 percent.”
The father’s former accountant prepared a return and told him to just put the credit on the return and say he was the Head of Household. “But you’re not allowed to do that if you’re not the custodial parent,” said Weiner.
The custodial parent is generally the parent with whom the child lived for the greater number of nights during the year, according to Form 8332 instructions.
“Form 8332 releases the claim to the exemption for a child by the custodial parent,” said Weiner. “The waiver may be used by the noncustodial parent for the purpose of claiming the child tax credit and the dependency exemption. But Notice 2006-86 specifically says that the noncustodial parent cannot claim the child and dependent care credit.”
“The court said to the father that he had to reimburse the mother for an expense she’s ultimately not incurring because she’s receiving a portion back as the dependent care credit,” said Weiner. “The court said she didn’t have to reimburse him—he had to get it back on his own return—but it’s not an option for him to do it that way.”
“The end result is that the court ordered him to do it one way, but the IRS doesn’t allow it that way,” she added. “The only way to correct this is to permit the paying parent to make the reimbursement net of the anticipated dependent care credit.”
“The fact that attorneys and judges are not familiar enough with these areas creates additional stress and expense for the parties involved,” Weiner said. “In this case, they have to go back to their lawyers to resolve the situation.”
The takeaway is that accountants, lawyers and tax advisers should be on guard for these situations, and do the necessary work ahead of time to avoid them.
3 Comments
I am fighting with the washington state courts over tax exemption of a child that I have court ordered custody of, and neither parent has visitation or physical custody. The judge is giving tax exemption to the father and telling me I have to sign form 8332 even though it states on that form that the child has to be in the physical custody of one or both parents. Shouldn't all Judges have to follow the law whether it's state or federal and shouldn't they know the law before making a ruling.
Posted by: marbles | July 3, 2012 12:46 PM
Report this Comment
While the custodial parent should be the one who gets to claim the exemptions, the other parent can still claim the child as a "head of household qualifier" This allows that parent acknowledgement in specific areas of the return.
On the flip side Family courts are still giving non-custodial parents permissionn to claim children in any number of scenarios. I tell my clients that Tax law trumps family law if the custodial parent doesn't furnish the non-custodial parent with the 8332 to file with their tax return. If this rule was enforced, it would make the life of the preparer far less stressful. We work with the IRS for weeks to get the mess of the unfortunate custodial parent--who often desperatly needs the money--straightened out.
Posted by: Suzy | June 5, 2012 12:54 PM
Report this Comment
It is not the job of the court but the duty of the attorney to tell the judge what the law is and to bring have the judge take judicial notice of the law so he knows where to look, what the law is that he needs to apply and make a correct judgement. Few judges will know tax law, even in tax court.
I've only practiced before 1 judge who would tell an attorney not to tell him what the law states but, in his case he was the chair of the committee that wrote the law and could cite bible, chapter and, verse as well as the committee intent, congressional debate and interpretations, etc.
At times an outcome might be a scalp scratcher such as in 1 case I had, the opinion supported the plaintiff's position and then rom left field found for my client. The plaintiff's attorney and I were on the phone to each other within minutes of receiving the opinion and judgement and we both agreed the judgement had to be appealed by both of us or, to return to the court for review. We decided to settle rather than risk the judge correcting the judgement or an appeal court reversing for a new trial and the associated costs. We settled by figuring the costs of the appeal and splitting it by 50% so, my client came out ahead and did not have the exposure. He was not happy in having to pay anything but, agreed it was the least risky solution and less costly than going back to court to prove he was right.
Posted by: BrianL | June 5, 2012 10:08 AM
Report this Comment
Add Your Comments...
Already Registered?
If you have already registered to Accounting Today, please use the form below to login. When completed you will immeditely be directed to post a comment.
Not Registered?
You must be registered to post a comment.