Advisers often have the “is Junior still a dependent” conversation with clients when a child approaches or reaches adulthood.  Parents often insist that they have met the requirements to claim the child, presuming that doing so will give them a significant tax break. 

In the case of Gibson v. Commissioner, TC Memo 2017-187, the taxpayers discovered that there are now additional risks beyond simply losing a dependency exemption on exam when a parent claims a child as a dependent—a potential need to repay advance premium credits under IRC  §36B when the IRS doesn’t decide to challenge the exemption.

In 2014 the taxpayer’s son (“Junior”) worked at ADT, LLC and did not live with his parents.  However, the parents claimed Junior as a dependent on their 2014 income tax return.  All was well until the IRS came calling.

It turned out the IRS had received a Form 1095-A for Junior which showed he had obtained health insurance from the Health Insurance Marketplace for 11 months in 2014.  The records of the Marketplace showed that Junior had filed an application for insurance, and there was a policy issued by the insurance carrier covering Junior.

The entire $4,628.80 in premiums due on that policy had been paid for via advance credits under IRC §36B, presumably based on the information Junior had given about this income.  Junior claimed that he had not obtained insurance from the Marketplace and that he was covered by his employer’s health policy for the entirety of 2014.

Junior’s parents had not seen the Form 1095-A and were not aware of any coverage that Junior had from the Marketplace when they filed their 2014 income tax return.  The taxpayer’s income was well in excess of the maximum level for which any credit could be obtained under IRC §36B, but they insisted that, as Junior insisted, their son had not obtained coverage from the Marketplace.  Junior signed an affidavit asserting that he only had employer-provided insurance for 2014 and had never received a Form 1095-A.

Unfortunately, as the Court noted, the evidence indicated otherwise.  His employer’s records showed that he was not covered under their policy until January 1, 2015.  The records of the insurer showed that Junior had been issued an individual policy in 2014 and that they had received all payments via the advance premium credit.

Some might be wondering just how Junior could be a dependent when he maintained a separate residence and had a job with sufficient hours that he believed he would receive health care coverage.  While it might very well be the case that the parent’s claim of Junior as a dependent may or may not have survived scrutiny, the IRS specifically did not raise that issue at trial. 

We might reasonably assume the agency noted that the balance due to them from a refund of the credit ($4,628.80) would be well in excess of the amount of tax increase that would result if the dependency exemption was disallowed.  In that case, the agency simply accepted that Junior qualified as a dependent—the agency simply accepted the parent’s claim they met the requirements.