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IRS Insists Mom is Too Poor to Support Kids

December 8, 2009 · 55 comments

In this economy, folks are very happy to pass judgment about the state of other people’s finances. It has, after all, been conflicting for many (myself included) to watch the government bail out people – and corporations – that have made poor decision after poor decision. As a result, folks are eager to point fingers, wag tongues and make lists explaining how to be a responsible adult. A short one would go something like this:

  • Get a job.
  • Take care of your children.
  • Don’t spend beyond your means.

According to the Seattle Times, Rachel Porcaro did all of these things. A single mom, she took a job at Supercuts in Seattle, Washington to support her two boys (ages 8 and 10). To save on housing, she lived with her parents, paying them a nominal rent. She went without a car.

You’d think she was doing all of the right things.

Except you’re not the IRS.

Porcaro was selected for audit last year. When she asked why she was chosen, the IRS explained that she was too poor.

Yuh-huh. You read that correctly.

The IRS determined, through its handy-dandy database of “what it takes to get by” that her income was too low to support her family. Her income, $18,992, was about half of what the IRS thinks you need to manage a family of three in Seattle. Bells went off – the IRS assumed that she was hiding income (of course).

Even though the IRS eventually found that she wasn’t hiding income – they made some other determinations. The result was that Porcaro owed the IRS a whopping $16,000 in tax for the years 2006 and 2007. That was $16,000 that Porcaro didn’t have – her salary for those two years was just over twice that amount.

What went wrong?

For starters, Porcaro claimed both of her children as dependents on her income tax return. The IRS determined that she wasn’t actually supporting the children and denied her claims to treat them as a dependent; she also lost her right to the earned income tax credit (EITC).

The EITC is a refundable federal income tax credit targeted to low to moderate income working individuals and families. The whole idea behind the EITC was to provide an incentive to work. It helps offset Social Security taxes for taxpayers who work but make a limited amount of earned income during the year; if the EITC exceeds the amount of taxes owed, the result is a credit. To qualify, you must work and file a tax return. Porcaro did both.

To sort out the whole mess, Porcaro did what you’re supposed to do in these situations: she retained the services of a tax professional. The result? The IRS audited Porcaro’s parents.

And again, you read that correctly.

The IRS figured that Porcaro couldn’t possibly be supporting her own children on her salary. To prove that Porcaro wasn’t supporting the children, the IRS wanted to see her parents’ financial and other records.

Porcaro’s parents eventually survived the audit without assessment. They did, however, incur substantial bills in the process. So much for that whole trying to save money bit…

As for Porcaro? She was able to keep her earned income tax credit but failed to prove that her children could be considered dependents. The result was that she owed back taxes plus penalty and interest.

Interestingly, the IRS apparently would not let her parents claim the children as dependents either, which does make me think that there’s a little bit to the story that we don’t know. We don’t know, for example, where the father of the children is or whether he provides any support – that would be a key part of the audit. And we don’t know what kind of medical or child care expenses were incurred – and how those were paid. In the tax world, those kinds of details are important.

But notwithstanding the details, the overall picture is not a good one. As the number of audits ramps up, I’d like to think that targeted audits have more substance to them than comparing a taxpayer to a chart of norms. In the span of a few years, we’ve gone from an overwhelming number of families living in McMansions and driving giant SUVs to those buying smaller houses and relying on SmartCars and scooters (yes, I live in the city). What even constitutes the norm anymore? Is that really the best method to use for a targeted audit?

And let’s straighten out what it is that we want to “solve” when it comes to taxpayer fraud. I know that Congress believes that the EITC is a vehicle for abuse. But honest taxpayers who rely on the EITC shouldn’t fear that the credit makes them more vulnerable to audit by the IRS. If folks in Congress hate the EITC, then they should get rid of it. It’s just that easy. But don’t keep it around just so that there’s something to complain about. We’ve got plenty else that can fill that role.

It would be easy to characterize this story as either an anomaly of “IRS gone wrong” or “that’s exactly what you’d expect from IRS” depending on your view. But I don’t think that either description is completely apt. And I think we’d be missing the bigger lesson here.

This isn’t about Rachel Porcaro. Or the IRS. Or rogue agents. And it’s not about audits.

It’s really about agendas and the economy. As the economy slows, I fully expect more of these horror stories. There is immense pressure at IRS to try and collect more revenue now because the coffers are otherwise empty (trust me, I’ve talked to these folks a lot lately, it’s a different world). And yet, we’re still spending, spending, spending. Middle America simply can’t sustain it. And if our story is that we want people to find a way out of this collective hole that we’ve dug for ourselves, then we need to stop throwing dirt on them.

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{ 31 comments… read them below or add one }

1 Jose Anes December 8, 2009 at 9:32 am

Sad story.

We should not be spending money auditing poor people – they do not have the money to pay the costs of the government employee auditing them anyways. I feel bad for taxpayers who spend money on things that don’t improve our situation.

I also feel bad that, in times of financial distress, the IRS is going back to their abusive behavior that they had years ago.

However, I do not feel too much pitty for someone who receives Earned Income Credit. In my opinion, it should be abolished, or given to everyone that receives an Earned Income, regardless of income level. Same for someone who receives a child deduction (higher income payers get the deductions reduced). Is either given to all or to none. The fact that it is a “law” doesn’t make me feel better or worse… There are so many laws that are ignored by the government depending on the situation.

2 Brad December 8, 2009 at 9:33 am

Kelly,

I think you hit it on the head. It appears that there is more to the story than we are led to believe.

3 Nate December 8, 2009 at 9:57 am

From the IRS’ perspective, low income taxpayers are easy targets. They generally cannot afford competent legal counsel and often maintain poor or inadequate records. Why not audit them and avoid the long, expensive fight of chasing down “real” tax cheats that can afford the finest attorneys and CPAs? Isn’t this just an example of the IRS maximizing the utility of the taxpayer dollars upon which it operates?

4 Bo Ives December 8, 2009 at 12:07 pm

Hi Kelly,

I’m with the IRS on this one. By living at home the mother should not have received the earned income credit. She was not supporting her children, the grandparents were. You say she was paying market rent, it would take an audit to prove that the parents were reporting the rent as income. The EIC is so abused. I regret that congress has decided to make the IRS a welfare agency. More resources are spent going after EIC cheats then tax cheats. The ability to claim children as dependents for EIC purposes are “traded” or “sold”. Taxpayers are “surprised” when they learn that their children show up on tax returns for repeat years when they only intended their “trade” for one year. Once a social security number is given out that child may possibly find other fraudulent claims on their identity. This sytem is WRONG.

5 Kelly December 8, 2009 at 12:10 pm

Bo, to clarify, I said she was paying nominal rent – I couldn’t vouch for whether it was market (but if it is, I might have to move to Seattle!). ;)

6 Darrell in Mo December 8, 2009 at 1:30 pm

Here is what I don’t understand. The definition of Qualifying Child states the child “does not provide more than 1/2 of their own support”. It does NOT state the person claiming the dependency must provide more than 1/2 of the support. If support is coming from anyone other than the dependents themselves it should not be an issue.
Is it possible the IRS has determined the mother could be a dependent of her parents and thereby failing the dependent taxpayer test?

7 Kelly December 8, 2009 at 1:47 pm

Darrell, That’s a good question. Or that the husband had already claimed them (that’s what I was wondering)?

8 Dwindle December 8, 2009 at 2:25 pm

This is what we pay the IRS for. She’s hiding money and refusing to pay taxes on it, and deserves to be jailed just like I would be. She’s obviously making at least another $12-15K a year in tips. Her tax credits amounted to abject fraud, and she wasn’t even bothering to pay taxes. I shelled out $12 a year alone last year in taxes, and I surely don’t make the money she makes. Any pity on this woman is wasted.

9 Darrell in Mo December 8, 2009 at 2:32 pm

Kelly, after further thought I’m in agreement with you. The mother could not be a dependent of her parents (fails the gross income test for qualifying relative). The ex more may have claimed them by providing a divorce agreement that meets the 8332 criteria. Under that scenario the ex only has to show he and the mother together provided more than 1/2 total support for the children and they lived with either parent for more than 1/2 the year. The mother may have needlessly opened the support/income can of worms by claiming the children as dependents.

10 Darrell in Mo December 8, 2009 at 2:34 pm

Excuse my typo, strike the “More” in 3rd sentence.

11 Urbie December 8, 2009 at 2:43 pm

I just got back from one of my HRB training classes, and one thing they keep hammering at is that the IRS is on the lookout for EITC cheats (of which there are many, as has been pointed out). So we’re going to be telling our tax clients that we have to do plenty of due diligence to make sure their returns are bulletproof in case of an audit. Some clients will be unhappy, because they’ve never had to show much (if any) documentation for their kids in past years — especially if they used other retail tax preparers.

I’m of two minds about this. The thing is, the EITC is pretty much what conservatives such as Milton Friedman argued for — a “negative income tax” that would help low-income people. I think that’s better than sending poor people a welfare check — it’s supposed to encourage them to work. Nonetheless, there are a lot of people who game the system — they hide income so that what they show on their return is right in the “sweet spot” where they get the biggest EITC. I see this all the time in my office, even if I can’t prove the client is hiding income. So I have to tell them, “I’ll file the return, but if the IRS audits you, they’re going to want to see your kids’ doctor bills, school records, your records of rent you paid,” etc., etc., etc.

I hate to say it, but the IRS may be right on this one — the taxpayer is probably gaming the system, even if she doesn’t realize that’s what she’s doing. It’s hard to know for sure without having all the pertinent facts in front of us.

12 Mary Roberts December 8, 2009 at 2:50 pm

Our office does a lot of low income tax returns, and we are quite aware of the fraud that is all too common. As practitioners we have a multitude of due diligence requirements that must be met because of EITC fraud. We’ve had clients in similar situations, usually audited because they filed as head of household when they should have just filed as single since the parents are providing the home. I must side with the IRS here, if she’s paying $400 a month to her parents, who knows what that payment is for… is it actually rent, or is it just covering some of her and her childrens grocery, utility, housing, insurance, transportation, and/or medical expenses? Her parents probably provided over half the support for the children, that’s the only part I don’t understand… probably more to this story.

13 Joyce December 8, 2009 at 4:10 pm

Like many that have posted a response, I’m of two minds on this one. On one hand…most she does “appear” to be doing everything right and looks to be picked on but on the other hand, if she’s hiding something or misusing deductions (dependents/EITC), then she should be hit with the back taxes & penalties. If someone prepared her taxes and used the children as dependents when it seems the husband claimed them also… then shame on them. Tough break. :(

14 Chris December 9, 2009 at 12:24 am

How about we avoid all the audits and move to the Fair Tax?

15 Heather Villa December 9, 2009 at 8:27 am

My first thought when I started reading your blog was one of horror. I mean, it seems so wrong and horrifying to think the IRS can have our children taken away because they deem the parents unable to support them. However, upon further thought and reading, I also believe there is more going on than meets the eye, which I have found to be the case in most stories we here.

16 cs December 9, 2009 at 4:35 pm

I think that Rachel Porcaro might still married but living apart from her spouse, so her filing status is either “married filing separately” or “head of household”.

As we all know, the “married filing separately” cannot claim EITC; and “head of household” has to provide a home for her dependents.

I think that IRS was questioning her on how she paid more than half the cost of keep-
ing up a home for the year. She cannot, so she lost the “head of household” status and the EITC.

17 Jeff Day December 9, 2009 at 10:16 pm

There must be a lot more to this story, than just this story!

A. For EITC no support has to be shown/paid whatsoever NONE, NADA, A Dime!

B. For a parent to claim a child as a dependent under the age of 19, the parent does not have to financially support the child NONE, NADA, A DIME!
The only requirement in this regards is that the children do not support themselves 50%. It makes no difference if the custodial parents gets support from the father or her parents, or the government.

Amazing to see some of the comments etc. Wish I could find out “The Rest of the Story”

Jeff Day EA
Evansville, IN

18 pharmacy technician January 6, 2010 at 1:30 am

Amazing as always

19 Tami January 31, 2010 at 10:11 am

This is sad. I think the government was just harassing her and making excuses to keep tax payers money. It doesnt add up? I have three children. and for FOUR YEARS living in DE..I made LESS than 11,000 a year. THATS RIGHT. I made like 4.80/hr. working in a nursing home. I rented my own townhome. Received 94.00 a week in child support. I did it ALL ON MY OWN. I wonder why I was never audited? unbelieveable. ANd you know its sad because my husband and I now make 47,000 a year, we have ONE child at home, the rest are grown and our electric is over 800 a month. Almost as much as our rent. Oh but that figure for our income is BEFORE the 240 a week comes out in health insurance! Its harder making it today than it was in the mid 90s on less that five bucks and hour. Disgusting. We cant even afford milk half the time. I feel sorry for people

20 Mandy Hoffman January 31, 2010 at 1:43 pm

I understand that the government doesn’t have enough money so they are getting it elsewhere. try getting a traffic ticket these days. They will cost you at least $400 and they are handing them out way more than they used to. I have a solution. Why don’t we abolish INCOME tax and just charge a flat federa;l sales tax? Maybe an extra 10%. Than everyone who bought anything would be paying their fair shhare. That would include those who get paid “under the table.” Like the drug dealers, pimps, prostitutes, illegals.
And then all those people working for the IRS wopuld have to find something else to do to make a living.
But I don’t think this will ever happen. The IRS is like the Mob. They run the country and noboby has any control over them. It is really tiome to stop letting them run our lives and making us afraid.

21 Mandy Hoffman January 31, 2010 at 1:44 pm

Sorry about the spelling on my earlier post. Fat fingers!!

22 A.G. February 3, 2010 at 5:51 pm

On the other hand, having children one can’t support would not be “living within one’s means.”

Many years ago, Pennsylvania sent me a letter questioning how I could survive on my income. Well, living in a tent and eating ramen noodles, rice, and kidney beans and having no children or pets to support allowed me to survive until I could get a full-time job. When I got the letter, I laughed, figuring, “Sure, let them come after me…what can they take?” I was too busy just trying to survive to go through any audit, so I just let them do what they wanted. I never heard anything more from it—-perhaps they realized I don’t cheat on my taxes and that some people are just plain honest and responsible.

23 Mrs Smith March 6, 2010 at 9:11 am

I agree with many posts: that we don’t know the entire story here. Because of disclosure laws, the IRS cannot weigh in. Therefore the story is one-sided. The grandparents were certainly a factor. Porcaro paid a nominal amount for rent? Poof! Now her parents must be audited to verify the assertion and to ensure the income was reported on THEIR return. What did the rent include? What about personal living expenses? Did Porcaro receive child support (nontaxable)? I am, however, disappointed in the negative comments regarding the IRS. Auditors aren’t out to “get” anyone. They’re normal people like you and me. Their job entails enforcing the tax code, which is written and enacted by Congress. So if you’re unhappy with the Code, contact your Congressman and complain. That would be more beneficial than complaining on a blog.

24 PFC March 6, 2010 at 10:36 am

As someone who makes a living doing taxes, I see alot of these cases. I work at HRB and we are doing due diligence with each case of EITC. This is setting off alot of our clients who have never been questioned before. This credit is an Earned Income Tax Credit. I have had people try to claim it with only 3500 in income. Why is the IRS not going after them? Could it be because there is no way they could pay the penelty and interest this woman who made a living could. Makes you think, doesn’t it. Maybe this woman should buy an apartment building and take several thousand dollars of write offs like the really rich people do.
And would you stop with the fair tax that is never going to happen because the really rich would never let that happen since they would be just a taxable as the rest of us.

25 Faith March 6, 2010 at 12:45 pm

Who could have helped the Porcaros? Was she not given any other recourse? If not why no? Are there no other government agency that single moms or the poor, like her, like me could turn to?

There are a great number of people who are earning over $100k in a year. Why can’t they put a cap on they? And how do we post complaints about abusive IRS agent? How do we file a lawsuit agains them? Can we even file a lawsuit against them? They cannot be allowed to start acting like gods. Focusing on everyone in Porcaros family is excessive. What were they trying to accomplish?! Add the whole family in the welfare system? How is that going to help with our economy?

Can someone in the government really look at the big picture and fix this? It does not seem fair what the IRS did to this woman and her family.

26 Mrs Smith March 7, 2010 at 12:16 am

@PFC: The EITC is on a bell curve, so if someone only made $3500 they’re not going to get as much EITC as someone who reported enough income to get the max EITC. So would it be in the government’s best interest to pursue that person who reported $3500? Or should they examine somone who got the max EITC? And please don’t throw in the rental activity arguement. They get examined as well…..@Faith: What other recourse would you suggest Ms. Porcaro have? On what grounds? Your post includes some kind of cap on people who make $100K. To what cap are you referring, and how does that relate to Ms. Porcaro? As far as lawsuits, on what grounds would the lawsuit be? Whatever’s put on the tax return must be backed up by documenation, for anyone, rich or poor. If someone says they’re paying someone else for working for them, or for rent, that brings another person into the mix. Is the premise of your “lawsuit” that no one should have to prove what they say? However, I do agree with many, and I never get tired of saying that there’s a lot about our govt and tax system that needs to be fixed, so call your CONGRESSMAN and complain. THEY write the tax code, THEY provide the guidelines for enforcement.

27 telliott April 27, 2010 at 10:54 am

I know from the Audit experience that what is in the guidelines given to us by the IRS every year is just that a guideline. When you are audited by the IRS, they don’t go by those booklets. They have their own internal rules they follow. My audit resulted in the denial of my husbands travel expenses because his company would not allow him to copy their procedures showing non=reimbursement for his travel expenditures. Although it was required by his employer. Because of that, his expenses were denied, resulting over three years to a $10K return to the IRS.

Now, as for dependents, if the parents received income from a child while living at home to cover the cost of living there, the parents can not claim the child or the child’s children on their tax return. In the case above this was the incident. However, regardless if the mother lived with her parents, she is entitled to declare them as dependents as long as she can prove she has supported them 1/2 the year. IF there is a spouse who has the right to claim them on their tax return, they can do that, and the mother can not legally have them on her tax return.

there is a fine line between the booklets and the actual irs law. i could prove the documentation, but it did not matter. it’s up to the auditors interpretation of your return. Hire a tax attorney and make sure your records are in order. the above case is missing information for anyone to make judgement. how would you feel to be invaded with an audit, and find your charitable deductions no longer qualify? or that the education credit you took for your continuing education credits required by your job are invalid because you don’t have something in writing on letter head from your company?

I feel for anyone who experiences an IRS audit, its horrifying to be told you are too poor or you can’t do this or that, when they can not prove to you in the booklets made available to the public that what they are telling you is correct! You have to take the word of the auditor!

28 Andrew Pelt May 29, 2010 at 6:02 am

Good post, thanks for it!

29 car lease guide June 6, 2010 at 1:37 pm

Wow…this is definitely a story that I’ve never heard before. But I agree with your final paragraph; the IRS needs money.

30 ellny September 2, 2010 at 10:04 pm

I just had the same problem. I do not live with my sister. My daughter lives with me in a one bed room apartment. She also goes to college a graduate now still unemployed. The IRS was looking at a IRA I had and said I owed them $5000 but the bank records cleared that up. The IRS agent started asking me were dose your daughter live. I told her that she lives with me and we both use my sister address as a mailing address. After we moved back to our home state we lived two month at my sister house and then moved into the same apartment and have been their for 5 years. I lived out of state with my daughter for 10 year and have always claimed head of house hold. My apartment complex have no record of occupancy and will not give me a letter because they do not want to get involved. I am not rich but I am intelligent and I do my own taxes. But boy I miss this one! I never in my life expected some one to question my daughter’s occupancy. Some one has to write a web site for single moms who pay taxes. I have appealed.

31 Ms. Haila February 15, 2012 at 8:45 pm

I was reading this story, and was blown away with the similarities we are facing. My husband and I were audited by the IRS last year. Because we have a common-law marriage (recognized by the state we came from, but not the one we moved to) we were not able to file a joint return. I didn’t work last year anyways, so it wasn’t really a big deal. I am a widow with two children from a previous marriage, and we have three children together. So, they told him he had to file as “head of household” this year, three children qualify for the EIC, and two as exemptions (depending on our income the next year.) We had one hell of a 2011. My husband got laid-off in the summer, and worked at a “labor-ready” for 1/4 the pay throughout the summer. (The company he worked for told him if he filed for unemployment, he would not be back on the list for work in the winter). So, we struggled through. Our children are home-schooled, (Yes, to all of those screaming foul play over low-income families) and although we received food stamps for three months out of the year, we didn’t qualify for more than that. (it was an emergency Snaps program).
We live modestly. We moved to this state due to our sons illness, and none of my teaching certifications would not transfer over to this state without paying for more college courses, and paying for the exams through this state (at $140.00 a pop on top of more college courses, and licensing fees with no promise of a job, no thank you.) I decided to stay home with our children until we can move back to our home state. We have an old vehicle, when I buy clothing it is second-hand, and what I cannot buy, I make. (Thank goodness we had health insurance through my old district.) We just received another notice saying we are being audited again. They also want to see proof of expenses showing that he provided support for our children. (Since my ex-husband is dead, and our three children together have us both in the same household I have a unique perspective on the IRS.) It doesn’t make any sense. I paid out the nose my entire teaching career in taxes. (10+ years) Now, that we are officially a low-income family, we get kicked while we’re down. (Who in the world would save their good-will receipts for clothes etc.?) On top of everything, we are at the exact same address, same dependents, same everything as last year.
The IRS is a failing system, and I am an advocate for fair tax implementation (not FLAT tax, FAIR tax). How disgusting it is that not only does the middle class workers (what’s left of them) bear the brunt of the tax burden, the wealthy is able to evade taxes altogether. I wouldn’t mind forfeiting the EITC and other programs for the low-income, but not with the tax system the way it is today.

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