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A single mom in Seattle thought she was playing by the rules. She earned under $19,000 per year as a hairdresser, supported her two children, and shared a home with her parents. Then the IRS audited her, claiming that she simply didn't earn enough money to be able to live in Seattle, and must be hiding something. Two years and $10,000 in accountant bills later, the IRS has determined that she isn't trying to run a scam, but can't figure out who her children are dependents of.
At the root of the IRS's issue is the family's inter-generational living arrangement. To a rational person, this is a good way to get by when you're experiencing hard times. To the IRS, this raises red flags as to who really supports the children
In the end, the parents were cleared. The IRS also backed off trying to reclaim Rachel's earned income tax credit.But the agency insisted Rachel couldn't prove she was supporting her children — she didn't have enough receipts — so she had to stop claiming them as dependents. A few weeks ago she paid back $1,438 (plus penalties and interest!) on that issue.
...
Legally, Rachel's kids now are in tax limbo. I met them at the Porcaros' house and they seemed real enough, jostling and pleading to play video games. But as far as the IRS is concerned, they don't exist. Neither Rachel nor her parents can claim them as dependents.
"I tell you, we don't buy a roll of toilet paper anymore without keeping the receipt," Rob said.
Nicely done, IRS, for taking something rather straightforward--making sure a low-income person receiving the Earned Income Credit is entitled to it--and turning it into a bureaucratic nightmare for a whole extended family.
$10 an hour with 2 kids? IRS pounces [Seattle Times]
(Thanks, David!)
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