Losing $6K tax refund-How to correct???

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mike34683
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Losing $6K tax refund-How to correct???

Post by mike34683 » Mon Apr 26, 2010 9:56 pm

Sons 2009 rtn rejected by IRS as three dependent children(age11/12/13) were
already "claimed" . Seems grandpa had his CPA file seperate 1040's for kids to
report tax losses of $2300 each(no income offsets) on mut fds in their name.

Can son file 1040X and request IRS to "cancel" kids returns so he can properly claim them on his joint return and collect proper exemptions & credits ??
Bear in mind the kids had no income to claim only capital losses.

Are there any alternate stratergies to pursue here ?? thks in advance.

KCJayhawker
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Re: Losing $6K tax refund-How to correct???

Post by KCJayhawker » Mon Apr 26, 2010 10:09 pm

mike34683 wrote:Sons 2009 rtn rejected by IRS as three dependent children(age11/12/13) were
already "claimed" . Seems grandpa had his CPA file seperate 1040's for kids to
report tax losses of $2300 each(no income offsets) on mut fds in their name.

Can son file 1040X and request IRS to "cancel" kids returns so he can properly claim them on his joint return and collect proper exemptions & credits ??
Bear in mind the kids had no income to claim only capital losses.

Are there any alternate stratergies to pursue here ?? thks in advance.
Take the kids' returns and his to a CPA to file amended returns...and have Grandpa pay for it since he caused the trouble.

livesoft
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Post by livesoft » Mon Apr 26, 2010 10:10 pm

Talk to grandpa's CPA. That's what grandpa pays her for.

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Dale_G
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Post by Dale_G » Mon Apr 26, 2010 10:12 pm

I'm sure you will able to "fix" this. The cpa ought to fix it for free. On the other hand, given his apparent skill, maybe just call the IRS and ask them what to do. :)

Dale
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djw
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Post by djw » Mon Apr 26, 2010 10:39 pm

What's the legal basis for "grandpa" to file 1040s on behalf of each of his grandkids if he's not their legal guardian?

Why file 1040s reporting tax losses on kids who don't owe taxes and aren't likely to owe taxes any year soon?

If grandpa filed one 1040 for each child, that's NOT the same as "claiming" them as exemptions on grandpa's 1040.

By definition, filing a 1040X "cancels" the previously-filed 1040.

The "son" who is presumably their legal guardian can file 1040Xs for each child showing no income and no tax losses. These should probably be mailed to the IRS in the same envelope with dad's 1040 that was rejected by the IRS, as his response to the IRS rejection letter.

If a 1040X results in additional taxes due, interest will be owed.
If not, there should be no tax or penalty, except that grandpa might possibly have to explain to the IRS why he filed (and presumably signed) 1040s for his grandkids when he wasn't their legal guardian, and without the knowledge or consent of their actual guardian. If he wasn't legally entitled to file these, he's theoretically guilty of fraud, especially if there was some financial benefit to him.

Under these extraordinary circumstances, dad might want to hire an accountant to rubber stamp the kids' 1040Xs and dad's resubmitted 1040. Certainly don't follow the above suggestions based on my advice alone, or the advice of anyone else on an internet forum for that matter.

P.S. It just occurred to me that if the mutual funds are "in their names" that means that their ss#s are associated with those accounts. In that event, it MAY be necessary report any capital gains or losses on the kids' individual 1040s, depending on how large the amounts are. If these accounts have the kids' ss#s on them, shouldn't the son be managing these accounts as their guardian, rather than the grandpa? The more I think about it, the more it sounds like a dysfunctional family mess that could benefit from some face-to-face clear communication and cooperation rather than one party (grandpa) going off on his own with his CPA with no consultation with the son (aka their legal guardian).

Perhaps if grandpa can understand that creating these tax losses may be hurting rather than helping the kids and parents taxes, he might grudgingly concede that it might have been better to think things through a bit further before acting presumably behind everyone else's back. Just another case of good intentions gone awry.
Last edited by djw on Mon Apr 26, 2010 10:49 pm, edited 1 time in total.
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sscritic
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Re: Losing $6K tax refund-How to correct???

Post by sscritic » Mon Apr 26, 2010 10:44 pm

mike34683 wrote:Sons 2009 rtn rejected by IRS as three dependent children(age11/12/13) were
already "claimed" . Seems grandpa had his CPA file seperate 1040's for kids to
report tax losses of $2300 each(no income offsets) on mut fds in their name.

Can son file 1040X and request IRS to "cancel" kids returns so he can properly claim them on his joint return and collect proper exemptions & credits ??
Bear in mind the kids had no income to claim only capital losses.

Are there any alternate stratergies to pursue here ?? thks in advance.
Did grandpa meet the tests for claiming them as dependents? One thing to check is the support test for grandpa to claim them as a qualifying relative.
How to determine if support test is met. You figure whether you have provided more than half of a person's total support by comparing the amount you contributed to that person's support with the entire amount of support that person received from all sources. This includes support the person provided from his or her own funds.
http://www.irs.gov/publications/p501/ar ... 1000220939
Also
A child is not your qualifying relative if the child is your qualifying child or the qualifying child of any other taxpayer.
If your son can claim them, grandpa can't.

Filing a return does not prevent someone else from claiming you as a dependent. For example, your son can file a return and claim them and also file returns for them. Their returns just have to reflect that they can be claimed as a dependent on someone else's return. If grandpa didn't claim them as dependents, then your son can.

If these are your son's children, aren't you the grandpa? :)

pshonore
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Post by pshonore » Tue Apr 27, 2010 7:55 am

Sound like the kids claimed a personal exemption on their own returns - this means no one else can claim them as a dependent. Normally, there is absolutely no reason for the child to claim a personal exemption and it almost always benefits the parent to claim it. As an aside, if the kids sold a fund and had gross proceeds exceedling the filing requirement, a return is required, but no tax is due because of the loss.

Once the IRS rejects an e-filed return because someone else claimed the dependency exemption, the only thing you can do is 1. remove the kid(s) from your return and e-file again or 2. mail in the return. When the IRS receives the mailed in return, they will note the conflict and notify you. At that point, send in a detailed explanation of what happened. Alternatively, the kids could file amended returns (not claiming themselves) but those could take quite a long time to get processed by the system.

pshonore
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Re: Losing $6K tax refund-How to correct???

Post by pshonore » Tue Apr 27, 2010 8:10 am

sscritic wrote:
mike34683 wrote:Sons 2009 rtn rejected by IRS as three dependent children(age11/12/13) were
already "claimed" . Seems grandpa had his CPA file seperate 1040's for kids to
report tax losses of $2300 each(no income offsets) on mut fds in their name.

Can son file 1040X and request IRS to "cancel" kids returns so he can properly claim them on his joint return and collect proper exemptions & credits ??
Bear in mind the kids had no income to claim only capital losses.

Are there any alternate stratergies to pursue here ?? thks in advance.
Did grandpa meet the tests for claiming them as dependents? One thing to check is the support test for grandpa to claim them as a qualifying relative.
How to determine if support test is met. You figure whether you have provided more than half of a person's total support by comparing the amount you contributed to that person's support with the entire amount of support that person received from all sources. This includes support the person provided from his or her own funds.
http://www.irs.gov/publications/p501/ar ... 1000220939
Also
A child is not your qualifying relative if the child is your qualifying child or the qualifying child of any other taxpayer.
A Grandchild is considered a qualifying CHILD of the grandparent (as well as of the parent and any siblings, etc) The is no support test for a qualifying child as long as the child does not provide more than half of their own support. Normally the parent has the superior claim, but not always, depending on where the child lives, income, etc.

sscritic
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Re: Losing $6K tax refund-How to correct???

Post by sscritic » Tue Apr 27, 2010 8:32 am

pshonore wrote: A Grandchild is considered a qualifying CHILD of the grandparent (as well as of the parent and any siblings, etc) The is no support test for a qualifying child as long as the child does not provide more than half of their own support. Normally the parent has the superior claim, but not always, depending on where the child lives, income, etc.
Aarrrrgh. I had it right, then edited my response to switch to the wrong answer.
So one of the issues is did the children live with grandpa:
Residency Test: To meet this test, your child must have lived with you for more than half of the year.
If grandpa, son, and children all lived together, the grandpa cannot claim without the permission of the son:
Example 1—child lived with parent and grandparent.

You and your 3-year-old daughter Jane lived with your mother all year. You are 25 years old, unmarried, and your AGI is $9,000. Your mother's AGI is $15,000. Jane's father did not live with you or your daughter. The rule explained earlier for children of divorced or separated parents or parents who live apart does not apply. Jane is a qualifying child of both you and your mother because she meets the relationship, age, residency, support, and joint return tests for both you and your mother. However, only one of you can claim her. Jane is not a qualifying child of anyone else, including her father. You agree to let your mother claim Jane. This means your mother can claim Jane as a qualifying child for the dependency exemption, child tax credit, head of household filing status, credit for child and dependent care expenses, exclusion for dependent care benefits, and the earned income credit, if she qualifies for each of those tax benefits (and if you do not claim Jane as a qualifying child for any of those tax benefits).

Example 2—parent has higher AGI than grandparent.

The facts are the same as in Example 1 except your AGI is $18,000. Because your mother's AGI is not higher than yours, she cannot claim Jane. Only you can claim Jane.

Example 3—two persons claim same child.

The facts are the same as in Example 1 except that you and your mother both claim Jane as a qualifying child. In this case, you as the child's parent will be the only one allowed to claim Jane as a qualifying child. The IRS will disallow your mother's claim to the six tax benefits listed earlier unless she has another qualifying child.
On your point about the children claiming exemptions for themselves: the instructions for line 6 are pretty clear
Yourself. If someone can claim you as a dependent, do not check box 6a
Grandpa either filed incorrectly for himself, incorrectly for the children, or both.

pshonore
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Post by pshonore » Tue Apr 27, 2010 9:09 am

Figuring out who can claim who is always a challenge. (By the way there are special rules for divorced and separated parents).

The rules for qualifying child/relative have been in effect since Tax Year 2005. Here's a classic case - John and Mary make $250K a year and file a joint return. They have a 19 yr old son, living at home, who works and makes 13K. He is not their qualifying child because he fails the age test. They have a 10 yr daughter also living with them. Because of their income, they are partially phased out of personal exemptions and allow the son to claim his sister. Now technically, the daughter is a qualifying child of the son (but not vice-versa). She meets the relationship, residency, age and support test. The son claims his sister as a dependent. He has no tax liability and in addition gets a Child Tax Credit and Earned Income Credit and MWP . His refund will be approx. $4443. That is until this year. Effective with Tax Yr 2009, the IRS changed the rules so that only the parents could claim the daughter in this situation. However, anyone who met these conditions for previous years, (2007 and 2008) could still amend their returns

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verbose
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Post by verbose » Wed Apr 28, 2010 1:47 pm

It sounds like the kids' 1040s have a person exemption on them, which is probably the default setting for the CPA's software.

I had a similar situation with my kid this year. I filed a 1040 for her to claim a capital loss. This is a good tax strategy because it gets carried over every year and might eventually offset taxable income (the math is fuzzy on whether it ever will, but it might). She didn't claim a person exemption and her standard deduction was $800 (I think). I claimed her on my return. No issues reported.

Other posters are right that Grandpa's CPA is responsible for fixing this, for free.

MarkNYC
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Post by MarkNYC » Wed Apr 28, 2010 3:52 pm

Many people mistakenly believe they can choose whether to claim a dependency exemption on their tax return for their child or let the child claim the personal exemption on the child's tax return. A child who is "eligible to be claimed" as a dependent of another taxpayer CANNOT claim a personal exemption on their own return, even if no one else claims the dependency exemption. High-income parents who would lose the tax-benefit of a child's dependency exemption due to phase-outs or AMT may waive claiming the dependency exemption to permit their student dependent to claim an education credit if the child has sufficient income to benefit from the credit, but this does not entitle the student dependent to claim a personal exemption on his or her own tax return.

mike34683
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Losing $6K tax refund-How to correct???

Post by mike34683 » Sun May 02, 2010 9:13 pm

Thanks for all the imput.Will file a 1040X along with kids rtns to show
they did not claim exemption-simply filed to claim tax loss on Mutual
Funds. Hopefully this will clear up the confusion and preserve my
original refund claim......

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