Monday, October 25, 2010

Right conclusion TIGTA but WRONG reasoning!

Here is "Scenario 1" from the Treasury Inspector General for Tax Administration (TIGTA) report on their secret shopper visits to Volunteer Income Tax Assistance sites in 2010:

The taxpayer was single, had never been married, and lived with his or her sister. The taxpayer had 1 child, age 7, who lived with the taxpayer in the home of the taxpayer's sister during school vacations, including the months of June and July, three months of the year. The child lived with the other parent during the school year. Wages reported on the 2009 Wage and Tax Statement (Form W-2) totaled $16,435. The taxpayer received a 2009 Interest Income (Form 1099-INT) totaling $26.35. The taxpayer attended college part-time, and the cost was paid by the taxpayer's sister.

According to TIGTA:

"An accurately prepared tax return would result in the taxpayer receiving a refund of $438."

(No way for me to check the accuracy of this statement, since the TIGTA report does not provide any information on taxes withheld or estimated taxes paid, if any, but it seems plausible, based on the information provided and typical withholding patterns.)

However, TIGTA goes on to say:

"Because the taxpayer did not provide more than 50 percent of the support for the child, he or she could not claim the child for child tax credit purposes."

Right conclusion, TIGTA, but WRONG reasoning!

The reason that the taxpayer can't claim the child for child tax credit purposes is that the taxpayer did not LIVE with the child for more than half the year!

The support test for the child tax credit does NOT require the taxpayer to provide more than 50% of the child's support. As long as the child is not providing more than 50% of her own support (which is quite unlikely, given that she's 7 years old!), she meets the support test for the Child Tax Credit for the other parent, with whom she lives more than half the year.

So, yes, TIGTA, you reached the correct conclusion, but you have shared your faulty reasoning process with the world, contributing to further confusion.

Thanks a lot, TIGTA!

If the IRS audits taxpayers, and TIGTA audits the IRS, who audits TIGTA?

Sounds like a Bertrand Russell recursive paradox.

1 comment:

  1. The old rules for the support test still confound auditors and now, obviously, TIGTA. That's pretty sad.