Two parents living together and filing their taxes together don’t need to work out an arrangement about who can claim their child as a dependent, but this is a common situation for parents who are separated or divorced. The Internal Revenue Service does not allow a dependent exemption to be taken for the same child on two separate returns. Doing so could put both parents at risk of an IRS audit and possible penalties for underpayment of taxes.
TL;DR (Too Long; Didn't Read)
If two individuals claim a dependent on a tax return, both of the returns will be flagged by the IRS and reviewed in order to determine which is valid.
Which Parent Can Claim a Dependent Child?
In the case of divorced or separated parents, the IRS allows biological children, stepchildren, adopted children and foster children to be claimed for a dependent exemption. In addition, a child must be under the age of 19, or under the age of 24 if a full-time student. The IRS requires the child to have lived with the parent who claims the exemption for more than half the tax year, to not have provided more than half of his or her own support during the year and to not be married and filing a joint return. For example, a 21-year-old son who was a full-time student, married and living with a parent could not be claimed by the parent if the son planned to file a joint return with his wife.
IRS Written Notification for Exemption Errors
A parent enters their dependent's Social Security number on their income tax return to claim the dependent exemption. When the IRS detects the same Social Security number for a dependent entered on more than one return, both returns are flagged as containing an error. For taxpayers who electronically file an income tax return, the second return filed that duplicates the Social Security number will be rejected automatically. The IRS then sends out a letter to both taxpayers.
Amending a Return with Exemption Errors
If a parent knows they were the custodial parent and qualified to take the exemption, no response to the IRS notification is required. For mistaken claims, the IRS will ask the taxpayer to review the tax return and file an amended return that doesn’t claim the dependent. A taxpayer can file an amended tax return within three years of the original tax return year or within two years of paying relevant taxes, whichever is later. If the amended return results in additional taxes, the IRS may exact penalties. In the case of an accidental error, the penalties may be waived.
You Could Be Flagged for IRS Audit
The IRS may decide to schedule an audit due to two taxpayers claiming the same dependent. An audit can be done up to three years from the date of filing of the original tax return. However, if the IRS believes a non-custodial parent claimed a dependent exemption on purpose to avoid paying taxes, an audit could be scheduled after the three year limit. The audit notification will give instructions about the evidence to gather to prove why the taxpayer thought the child could be claimed as a dependent. Parents being audit should make copies of all supporting documentation and furnish the information to the IRS by the specified deadline.
Result of an IRS Audit
The IRS will review both parents’ documentation to determine who had the right to claim the dependent. The IRS will make a decision that typically awards the claim to the person whose turn it was based on a divorce or custody agreement or based on who had physical placement of the dependent for more time during the tax year. If both parents shared equal time, the IRS awards the claim to the taxpayer with the higher adjusted gross income.