Every year the IRS and Franchise Tax Board send out thousands of questionnaires to taxpayers for clarification on their tax filing statuses. We regularly work with clients at our tax law offices in San Diego, Orange County and Los Angeles to help them choose the correct filing status
One of the most misunderstood tax filing status’ is Head of Household. According to the IRS Publication 501, in order to claim Head of Household you must meet the following requirements:
- Have paid for over half the cost of keeping up your home for a year (rent, utilities etc.) for yourself and your qualifying dependent.
- A qualifying dependent lived with you for more than 6 months of the tax year that you are filing for.
But what does this really mean for you, and how should you respond to these questionnaires? Let’s try and clear up some of the confusion.
The intent of the Head of Household filing status, primarily, is for single parents. This means an unmarried parent, living with their child or children and being the primary support for them.
It does not mean a parent who pays child support and gets to claim the child on taxes as a dependent.
The difference between filing single and head of household can be the difference between owing taxes and getting a rather large refund. For this reason, it is also one of the areas many filers are tempted purposefully mark incorrectly in order to reap the benefits of a large refund.
Here’s an example.
A person making $50,000 a year, who files as single, and is allowed to claim 1 child as a dependent would receive approximately a $700 refund.
If the same person files as a head of household status instead of single the $700 refund jumps up to $1400.
Now, you can see why many filers are tempted to incorrectly mark their filing staus when all they have to do is check a different box on their return and double their money.
To understand how big the issue has become, in 2007 California audited 150,000 state returns where people had claimed head of household status. It turned out that 20% of those claiming head of household did not have the right to do so. That equals out to around 30,000 people.
The Head of Household filing status is specifically designed to help reduce poverty and provides a real boost to those that truly qualify for the status and is good for the citizens filing, but it is also ripe for abuse.
Where Filers Make Mistakes
Many filers both accidentally and purposefully claim head of household when they are not supposed to. Our tax attorneys commonly counsel parents who mistakenly believe that since they pay child support and they can claim the child as a dependent every other year, that it makes them eligible for Head of Household status. While this entitles them to claim the deduction and tax credit, it does not allow them to claim the head of household status if the child lived primarily with one parent throughout the tax year.
In fact, the mother can allow the father to claim the child as a dependent and still herself claim head of household for the same child as the child lived primarily with her.
While many simply do not understand the rules, many more know that they shouldn’t claim head of household but file under that status anyway. If someone claims head of household when they understand they are not entitled to, they could be charged with tax fraud.
Will You Get Caught?
This is the million-dollar question with no concrete answer. The IRS in a typical year audits less than 1% of IRS tax returns so the likelihood is low that you will get caught filing incorrectly.
However, the California Franchise Tax Board sends out filing status letters every August to tens of thousands of taxpayers so your chances are exponentially higher on a state level.
What Happens If I Do Get Caught?
It’s the most common question our tax lawyers answer when we deal with status questionnaires. Most likely you will have to pay back the correct amount and in addition will be charged penalties and interest.
In the case where California State Income Taxes found 30,000 misclassified filing statuses, the state assessed $35 million in taxes and penalties against the 30,000 filers who claimed head of household erroneously. That works out to $1166 that had to be paid back—and that’s just for the state. The IRS penalties were most likely higher.
But wait, there’s more. If the IRS catches you filing Head of Household fraudulently they will not allow you to claim it again for ten years even if you are legitimately entitled to it down the road. It’s called a dis-allowance penalty.
Finally, the IRS also has the right to fine you up to $250,000 for fraud, and if they really want to press the issue they have the right to imprison you for up to 5 years.
What Would Your Defense Be?
Imagine filing head of household when you shouldn’t have. You get your $1400 refund no problem. Then a month or two later you get a letter from the IRS or the Franchise Tax Board saying you are being audited.
How are you going to prove your child lived with you for six months or more of the last year? They are not going to take your word for it. They will want to see school records, lease agreements, doctor’s bills etc. You will not be able to convince them, nor have documentation you need to fool them.
You will also have to sign this when you file your return:
Every taxpayer that signs a return agrees to this statement:
Under penalty of perjury, I declare that I have examined this return, including any accompanying statements and schedules and, to the best of my knowledge and belief, it is true, correct, and complete.
You will be at their mercy.
If you find yourself in this position, immediately contact the tax experts at RJS LAW to discuss your options. Our licensed tax attorneys have years of experience with issues like this and we can help you map out a defense, as well as negotiate, potential settlements if necessary. Every case is different and there are no guarantees, but at the very least you’ll know what your options are.
We have convenient offices in Los Angeles, Irvine in Orange County and San Diego and we are ready to help.
This article is intended to offer general opinion and should not be considered legal advice since every case is different. If you have questions about your tax situation, please contact a qualified tax professional.