Red Flags for an IRS Audit When Filing for a Dependent

The IRS requires dependents, even minor children, to file a federal income tax return if their income is above a certain level. If you have a young child with income, there are several IRS rules to be aware of, especially related to filing a return for your child, declaring your child’s income on your return and allowed exemptions.

Children who have earned or unearned income are legally responsible for signing and filing their own tax returns. If a child is too young to file, then the parent is responsible. Parents who don’t file on behalf of their dependent child risk having the child deficient on their taxes and even be subject to auditing. In this case, a parent needs to contact the IRS to let them know they have authority over the child’s income. The IRS will work with parents once they have been notified.

IRS Publication 929, Tax Rules for Children and Dependents, defines the levels of income required before a dependent needs to file a tax return. A big red flag for an IRS audit would be failing to report all of a dependent’s income. According to the 2017 version of Publication 929, single dependents under age 65 who are not blind must file a return when their gross earned income is greater than $6,350. If the dependent’s income is unearned, such as from interest or dividends, a tax return is required for gross income exceeding $1,050. There are separate levels for dependent’s whose income is a mix of unearned and earned.

There is currently only one exception to the rule that a dependent must file their own return, or have a parent or guardian file it in the case of a minor child. If the child’s unearned income from interest and dividends is less than $10,500, then the parent has the option of including the income on their return. This applies for biological and adopted children as well as stepchildren. If the child’s parents are married but filing separate returns, then the parent with the greatest income should include the child’s unearned income on their return. Publication 929 provides different rules for who files in the case of parents who are divorced, unmarried or widowed and remarried. Not following these rules could be a red flag for an audit.

The IRS does not allow a dependent to take a personal exemption on their tax return if they qualify as a dependent on someone else’s return, such as a parent. Taking this exemption could be a flag for audit, especially if the parent also took a dependent exemption. Even if the parent doesn’t take the exemption, the IRS does not allow the personal exemption.