Every year thousands of taxpayers attempt to e-file their return, only to get a nasty surprise–somebody else claimed one of their dependents. In the IRS e-file system, once a taxpayer appears as a dependent on a tax return, no other return will be accepted with that same person also claimed as a dependent. Unfortunately, some unscrupulous individuals will rush out and claim a dependent, usually a child, that they aren’t legally allowed to claim on a return filed very early in the tax filing season. Most commonly, this occurs among separated parents when a non-custodial parent with no permission to claim a dependent does so anyway.
So what does the person legally entitled to claim the dependent do? Well, while the authorized parent will wind up getting the tax breaks they’re entitled to from the dependent, unfortunately it may take some time.
In order to claim a dependent that has already been “claimed” in the e-file system, a taxpayer will have to file a paper return by mail. With that return, the taxpayer may want to include a brief letter explaining the situation, and include an item of evidence that the taxpayer actually has the right to claim the dependent in question. For example, a parent could include a copy of the child’s report card mailed to the parent’s address as proof of being the custodial parent. Most likely (although I am not aware of any fixed policy on this), the IRS will process the refund for the taxpayer based on claiming the dependent in question. Several months later, both individuals who claimed the dependent will likely get letters from the IRS demanding proof that the child may legally be claimed by the taxpayer. The unauthorized parent, as determined by the evidence provided to the IRS, will have to pay back the difference in taxes resulting from the dependent, and significant penalties as well.
Unfortunately, paper filing means waiting longer to get a refund. For many parents, this money may be urgently needed, and the extra weeks (or possibly months) involved in processing a paper return can cause financial difficulties. In this situation, there is one strategy that may offer some help. If the authorized parent is getting a refund even without the child that has been improperly claimed, then one strategy is to e-file a return claiming all dependents, deductions, and credits except for the dependent who is already claimed. This will result in the taxpayer getting part of the refund very quickly. The remaining refund can then be claimed by filing an amended return that includes the dependent in dispute. Filing the amendment will lead to the same process described above; both taxpayers claiming the dependent will be contacted and asked for evidence of their position.
Unfortunately, this situation is so common that nearly all tax preparers have seen it at some point, often multiple times. But rest assured the IRS will make sure that only individuals legally authorized to claim dependents will actually get the tax benefits from doing so.