You have very few options on how you can help you friend. If I remember correctly they implemented stricter rules on dependents starting in 2005, where they came up with new definitions for Qualifying Child. Dependents must be adopted, related (by blood or marriage, except cousins don't count), or legally designated through guardianship.
There is no way to undo a fraudulent tax return, and the only thing anyone can do it to pay the fine, pay the interest, and pay back the money that they never should have gotten in the first place.
She should have filed as single with no dependents last year, instead of Head of Household and 2 dependents that were not hers to claim. The $6,000 is the extra money she got in her refund for her filing status (the difference between Single & HH), the 2 dependent exemptions, child tax credits, (possibly) Earned Income Credit (EIC), plus the penalty for filing a faudulant tax return and the interest it has been accumulating since April.
An amended return (Form 1040X) will provide an accurate record, but will NOT cancel the $6000 owed to the IRS.
Things are actually a whole lot worse than you and your friend realize, SHE ALSO OWES STATE TAXES and they should send her a similar letter, if they haven't already, unless of course you lucked out and happen to live in a state (like Nevada) that doesn't have state income taxes.
She's in for more misery if part of her refund last year was from EIC (Earned Income Credit) granted by those 2 kids she claimed. Anyone that obtains EIC through fraudulant means is denied EIC for the next 10 years. This means your friend must file additional forms just to TRY and get EIC for her OWN son. From this point on the IRS will review each of her returns and decide whether or not to grant the EIC, otherwise she does NOT recieve EIC and her refund (if any) will be smaller.
Your friend's friend (the mother of the 2 kids she claimed) is unaffected, unless she herself fraudulently claimed EIC with some other kid that wasn't hers either.
When it comes getting out of paying, you have only one hope for your friend and that is if her last year's tax return was PROFESSIONALLY PREPARED. I don't know about Jackson Hewitt or Liberty, but I know that H&R Block will pay (up to a certain amount) a portion of what you owe to the IRS if the mistake was made by the preparer, but in this particular case its going to be hard to prove.
Any competent preparer should have caught on to the fact that those two kids were not hers, and refused to file her return with them on it and her as Head of Household, because of the rules for Qualifying Child.
The only way an honest and competent preparer would have filed her as Head of Household with those 2 kids was if your friend blatently lied to them. In which case the company will pay nothing since they technically made no mistakes while acting on what they thought was accurate and truthful information from your friend.
If the preparer knew that those 2 kids were not hers and still filed the return, then it was clearly NOT a mistake. In which case the prepare is fired, faces IRS penalties, and/or criminal charges with possible prison time. Your friend still has to pay the $6,000 and the company will pay nothing.
The hard part is that it comes down to a whole he-said-she-said match trying to prove something as big as this was the company's fault. and
the odds are not in your friend's favor.
There's really no way out of it, she has to pay that money back. Have your friend go down to the local IRS office with that notice letter ASAP and setup a payment plan, otherwise the IRS can automatically freeze/tap her accounts, and/or garnish any/all paychecks for whatever amount THEY decicide until the debt is paid. If it turns out you she also owes the state, have her go down to the Commissioner of Revenue office for your city and make arrangements for a state payment plan as well, because they can do the same things the IRS can when it come to tapping accounts and garnishing paychecks.
Even with an arranged payment plan, from this point on each time she files her taxes the IRS will automatically take her refund and put it towards paying the back taxes, SHE WON'T GET A REFUND CHECK UNTIL THE $6,000 IS FULLY PAYED. If your friend files her future returns with a professional tax preparer, tell her to pay them in cash and NOT TAKE ANY REFUND ANTICIPATION CHECKS OR REFUND ANTICIPATION LOANS, otherwise she's only going to dig herself deeper into the hole. These early payment options are contingent on the IRS sending the refund to the company. If they don't recieve the money from the IRS, your friend is now legally obligated to pay them back as well.
You're friend may be tempted not to file, but would only be digging herself deeper into the hole, so tell her to always file her taxes. That way the IRS has an updated accounting and can apply those refunds to paying off the debt faster.
Have your friend go to the Human Resources office or Personnel Division where she works and change the exemptions on ther W-4 and state withholdings to "0" exemptions. If she has more than one job, she needs to do this for EACH employer and claim "0" exemptions on the W-4's and state withholdings forms for them as well. Yes, they will be withholding more money from her paycheck, but it will help pay the back taxes faster. Even if she didn't owe the IRS, I'd still advise changing to "0" exemptions, even if married and/or with kids. I explain the reasons why in one of my other answers.
Your friend will need to get a better paying job, or another job. She should find 1-2 roommates, or better yet move in with family. It will be easier to pay a portion of the rent and utilities rather than trying to live on her own. Plus, if the roommates/family members are good and responsible, she will have people to watch her son while she goes to work.
Of course, another option would be that you and her other friends can pitch in and loan her some (or all) of the money to pay the IRS, but I wouldn't advise it since money tends to destroy friendships. I figure $20 is a reasonable loan most people will let slide for a friend, however long it takes to get paid back. So, if you and 49 of her other friends all lent her $20 she can put a decent $1,000 dent into that IRS debt.
I know that the majority of all this is stuff you didn't want to hear, but you and your friend need to know just how deep of a hole she is actually in. I've tried to cover as many aspects I can think of to help keep your friend from digging any deeper, but there is nothing I can advise that will make it all go away.
Rukh · 8 years ago