I believe whoever provides 51% of the child's support is entitled to claim the child- according to the IRS...and that would be the grandparents
Well...there is a good chance that its the grandparents, but that is not 100% guaranteed.
This is one area where state court orders do NOT prevail and everyone needs to be aware of that.
As far as the IRS is concerned, the IRS rules prevail, ALWAYS. When the issues are between two parents, and the two parents combined provide more than 50% of the child's support, then the parent with primary custody always prevails unless that parent signs a form 8332 releasing the exemption to the other parent. A state court can order the CP to sign form 8332 and punish the CP if they do not, but the CP will prevail with the IRS.
However, if someone else, ie a grandparent, provides more than 50% of the child's support, then the matter is completely taken out of the hands of a state court judge. A state court judge could try to punish the parent whose parents validly claimed the exemption under the state court orders, but it would be a slam dunk to be overturned on appeal.
Everyone should also be ware that there is a push on to get rid of form 8332, so that the CP (under the IRS definition of who is CP) could never release the exemption to the other parent.
The theory behind that is to force the state courts to take the tax exemption into consideration when calculating child support. and therefore save the taxpayers billions of dollars in enforcement costs and billions of dollars in false EIC claims.
EIC fraud for 2007 was almost 12 billion. The vast majority if it was either non-custodial parents who did not primarily live with their children who claimed EIC or married couples who claimed not to be married for tax purposes, in order for one of them to claim EIC. The secondary tier was other relatives who claimed EIC for a child when they did not legally qualify, and the third level were people who "bought" the right to claim children from their parents or who simply got ahold of SS numbers for children.
It would not surprise me at all if there wasn't at least one regular poster on these forums, who was married, who filed their taxes separately and claimed head of household and EIC for their children, while still living with their spouse. It also wouldn't surprise me if some of them didn't even realize that they were committing EIC fraud.
I have had half a dozen clients in the last year who were either applying for federal student aid for their children for college, or who were filing bankruptcy, who discovered that they had to amend their tax returns for several years, and pay back thousands of dollars to the IRS in order to rectify past "mistakes".
