February 6, 2006
Mark W. Everson
Commissioner
Internal Revenue Service
1111 Constitution Avenue, Northwest
Washington, District of Columbia 20224
Dear Commissioner Everson,
As president of the National Association of Enrolled Agents (NAEA), I write on behalf of approximately 40,000 enrolled agents (EAs) nationwide. The purpose of this letter is to share with you our concern with the ambiguity and interpretation of a recently-passed law.
Section 201 of the Working Families Tax Relief Act of 2004 revises the Internal Revenue Code (IRC) §152 definition of a dependent. IRC §152, titled Dependent Defined, is creating a good deal of controversy in the practitioner community. A literal interpretation of that section appears to lead to unintended consequences in determining the dependency status of some individuals. Enrolled agents would like the Service to consider some of the stranger applications of such an interpretation and request guidance so practitioners can correctly carry out the intent of Congress in creating the two categories of dependents: qualifying child and qualifying relative.
The first problem is in the interaction between the rules for a qualifying child and the rules for a qualifying relative. IRC §152 states that a qualifying relative cannot be the qualifying child of any other taxpayer (emphasis added). In IRS publications this has been translated into language such as the qualifying child of anyone else or the qualifying child of another person. The ambiguity is puzzling and leaves us to ask whether these are just nuances or significant changes? Perhaps it’s best to illustrate the problems by using examples.
- A boyfriend (age 30) who lives with and completely supports his girlfriend (age 28) and her son (age 5) would be able to claim the girlfriend as a qualifying relative but would not be able to claim the girlfriend’s son. This is because the son meets the definition of a qualifying child with respect to the girlfriend, even if the girlfriend (it is assumed in both examples the girlfriend has no income) does not file a tax return or claim any tax benefits using the son.
- Now assume the boyfriend is 60, the girlfriend is 58, and the son (who does not work or earn any income) is 35. What happens now? The boyfriend can claim both the girlfriend and the son as qualifying relatives.
It does not make sense that the intent of the law was to only allow older dependents to be claimed in these examples. Did Congress really intend to not allow anyone to claim the child in example 1?
The next example shows another unintended consequence of the new §152.
- Twin nine-year old children of deceased parents, who live with their adult cousin for the entire year and are fully supported and cared for by the cousin, cannot be claimed as dependents by the cousin. Under the new rules, this cousin cannot claim the two children as qualifying relatives because the children meet the definition of a qualifying child with respect to one another. The problem does not exist if there is only one such child living with a cousin, so if each twin were to be taken in by a different cousin, they could be claimed as qualifying relative dependents.
It does not make sense that the intent of the law was to allow siblings in such a predicament to be claimed only when they are separated from one another.
This example may not occur often but it further illustrates that immediate guidance is needed.
- Twin nineteen-year old brothers live together in their home and attend school full-time. Their parents are deceased. The brothers do not provide more than half of their own support. Although they have part time jobs and earn about $5,000 annually, their principal support comes from their aunts and uncles who together contribute about $25,000 per brother towards their household and college expenses. The aunts and uncles do not live with the brothers. Each brother meets the definition of a qualifying child with respect to the other. Putting the dependency rules together with this, if each twin is able to claim the other as a dependent, it means that the other one cannot because a dependent cannot have dependents. However, since neither can be claimed, it means they can have dependents. This loop continues endlessly – we now have the qualifying child paradox.
The intent of the law could not have been to create a situation where the outcome of applying the law cannot be determined.
This final example is indeed interesting. It is adapted from a weekly tax newsletter.
- Mom, dad, Alice (14), and Joe (22) live in the family house. Mom and dad file a joint return with an AGI of $400,000. Since Alice is a qualifying child of mom and dad, they could claim her as a dependent but would receive no tax benefit as their personal exemptions are phased out and the child tax credit would not be available to them. Joe is not a full-time student and his only income is a W-2 with $15,000 in wages. Under §152, Alice is a qualifying child of Joe, so he claims her as a dependent and thus gets the child tax credit and yes, even the earned income tax credit. Assuming Joe had no tax withheld, he goes from a balance due of $683 to a refund of $3,158.
It is beyond reasonable belief that the intent of the law was to allow such largesse.
To paraphrase a famous quote, “Mr. Commissioner, we have a problem.” Clearly, the concept of creating a Uniform Definition of Child was well intended. Unfortunately, as it is being applied we are seeing unintended consequences. NAEA urges the Service to address these problems and, as always, we stand ready to assist as needed to help solve them.
Sincerely,
Francis X. Degen, EA
President