IRS wants proof of residency when that is a grey area. Need Help

[FlamingTP]

What is the name of your state? Colorado

Under IRS notice 2014-7, all in-home medicaid care providers are tax exempt for that medicaid waiver income, as long as they also live with their client. The IRS sent me a letter with the following I am expecting more letters for future years as well:

"Please provide substantiation that the wages you are excluding were received under a state Medicaid program, (why? my W2 is sent to me by an employer that works exclusively through medicaid, they should already have this information.) and that yourself and the individual receiving care resided in the same home."

The notice allows amendment for all prior years normally amendable (In my case up to 2010) for a refund. After consulting with the IRS *beforehand* and with local law enforcement to pin down the legal definition of residency, in addition to the H&R block people who filed my amendments and last years return in January, I was told to do it for all years in their entirety. (the IRS agent said he didn't know, so file and keep the money in case we want it back.) I have done so, and the money is sitting there. (around 5 grand so far, total of 12 when all is said and done if they give me the money). But I might also have to take them/get dragged to, court. or end up getting fined more money than I can ever pay for trying to be Mr law abiding.

Here is my situation:

In 2010 I lived with the client 100% of the time
In 2011 I lived with the client 100% of the time until July, at which point I got my own apartment and lived there between 0 and 3 days out of the week, depending on when I worked. 100% of all work hours put in were when living with the client.
For all subsequent years, the same arrangement of 4-7 days living with the client and 0-3 days living alone has remained constant.
My mail goes to one or the other depending on nothing really. Drivers license and W2 etc goes to the client and I's home. The IRS sends letters to my apartment, because I put in that address in TurboTax. I consider my primary residence to be the clients home, and I was told that the address you put on returns *does not translate to where you live*, only to where you get your mail. I mean what if you are a trucker and live out of your truck and have a PO box?

Anyway the client and the rest of the family agree I live there too and most of the time. What sort of documentation do they want? the client's tax returns? a notarized signature? receipts for rent I don't pay? What should I do. The IRS has no documentation on what constitutes residency that I know of. What should I do?

 

[LdiJ]

What is the name of your state? Colorado

Under IRS notice 2014-7, all in-home medicaid care providers are tax exempt for that medicaid waiver income, as long as they also live with their client. The IRS sent me a letter with the following I am expecting more letters for future years as well:

"Please provide substantiation that the wages you are excluding were received under a state Medicaid program, (why? my W2 is sent to me by an employer that works exclusively through medicaid, they should already have this information.) and that yourself and the individual receiving care resided in the same home."

The notice allows amendment for all prior years normally amendable (In my case up to 2010) for a refund. After consulting with the IRS *beforehand* and with local law enforcement to pin down the legal definition of residency, in addition to the H&R block people who filed my amendments and last years return in January, I was told to do it for all years in their entirety. (the IRS agent said he didn't know, so file and keep the money in case we want it back.) I have done so, and the money is sitting there. (around 5 grand so far, total of 12 when all is said and done if they give me the money). But I might also have to take them/get dragged to, court. or end up getting fined more money than I can ever pay for trying to be Mr law abiding.

Here is my situation:

In 2010 I lived with the client 100% of the time
In 2011 I lived with the client 100% of the time until July, at which point I got my own apartment and lived there between 0 and 3 days out of the week, depending on when I worked. 100% of all work hours put in were when living with the client.
For all subsequent years, the same arrangement of 4-7 days living with the client and 0-3 days living alone has remained constant.
My mail goes to one or the other depending on nothing really. Drivers license and W2 etc goes to the client and I's home. The IRS sends letters to my apartment, because I put in that address in TurboTax. I consider my primary residence to be the clients home, and I was told that the address you put on returns *does not translate to where you live*, only to where you get your mail. I mean what if you are a trucker and live out of your truck and have a PO box?

Anyway the client and the rest of the family agree I live there too and most of the time. What sort of documentation do they want? the client's tax returns? a notarized signature? receipts for rent I don't pay? What should I do. The IRS has no documentation on what constitutes residency that I know of. What should I do?

You have two problems here:

1) You are not paid directly by Medicaid, you are paid by an employer.

2) You have a separate residence.

The income exclusion is intended for family members/significant others/friends who cannot work outside the home because they need to care for a family member, and they are paid for that care by a specific state Medicaid program designed for that. Yes, Medicaid is paying for your client's care but not under one of those kinds of programs and you are paid not by Medicaid, but by a for profit, employer. Its also quite possible that the amount you are being paid is different than what you would be paid under that kind of program. I see this issue as your biggest problem.

I also do not see how you are going to prove that you live with your patient when you maintain a separate residence.

Who initially suggested to you that you could do this? Was it your employer, H and R Block or someone else?

 

[FlamingTP]

You have two problems here:

1) You are not paid directly by Medicaid, you are paid by an employer.

2) You have a separate residence.

The income exclusion is intended for family members/significant others/friends who cannot work outside the home because they need to care for a family member, and they are paid for that care by a specific state Medicaid program designed for that. Yes, Medicaid is paying for your client's care but not under one of those kinds of programs and you are paid not by Medicaid, but by a for profit, employer. Its also quite possible that the amount you are being paid is different than what you would be paid under that kind of program. I see this issue as your biggest problem.

I also do not see how you are going to prove that you live with your patient when you maintain a separate residence.

Who initially suggested to you that you could do this? Was it your employer, H and R Block or someone else?

My employer informed me of the IRS notice and said I qualify because they pay me through Medicaid. Essentially it works like this: Medicaid grants the client a certain amount of money every month to pay a care provider, I then send the client and his power of attorney a timesheet, and then the employer sends me a check. According to my employer, the IRS told them their employees qualify under the notice. My employer is a national care provider system, so I don't think that's the issue here.

As for residency I did live there for at least a year and a half full time. So if my employer is correct the IRS still owes me for at least 2010 and half of 2011. Secondly it is possible to live in multiple places, many people don't have a permanent address, others spend their time between places and don't particularly care where their mail goes as long as they get it. Minors in joint custody routinely live in a two household situation. Bottom line is as far as I'm concerned I still live there in addition to living elsewhere part time. It's been that way for years, long before I cared which address is on my returns. It is due to this grey area that I called the IRS, H&R block, and talked to local law enforcement to figure out where the law says I live. I got three different answers:

H&R block asked where I live more than 50% of the time, I said with the client, this is true.
The local Police asked me a few questions: Do you stay overnight? (yes) Do you own property/pets there (yes) do you have a key (yes) Do you get mail there (yes).
The IRS agent/rep said essentially: We don't have a rule for that beyond the mail/50/50 rule that H&R Block asked you. Don't know, go ahead and file if you believe it's true, keep the money so you can pay us back if we say no.

Needless to say I was none-too-happy with the IRS rep's response. The letter does not say I don't qualify, It simply asks to prove that I lived somewhere. For one thing, the burden of proof should be on them since they are trying to claim a negative. For another, outside of signed documentation from the home owner that I live there, (which is not in any a grey area for 2010 and half of 2012) and my paycheck stubs,

 

[LdiJ]

My employer informed me of the IRS notice and said I qualify because they pay me through Medicaid. Essentially it works like this: Medicaid grants the client a certain amount of money every month to pay a care provider, I then send the client and his power of attorney a timesheet, and then the employer sends me a check. According to my employer, the IRS told them their employees qualify under the notice. My employer is a national care provider system, so I don't think that's the issue here.

As for residency I did live there for at least a year and a half full time. So if my employer is correct the IRS still owes me for at least 2010 and half of 2011. Secondly it is possible to live in multiple places, many people don't have a permanent address, others spend their time between places and don't particularly care where their mail goes as long as they get it. Minors in joint custody routinely live in a two household situation. Bottom line is as far as I'm concerned I still live there in addition to living elsewhere part time. It's been that way for years, long before I cared which address is on my returns. It is due to this grey area that I called the IRS, H&R block, and talked to local law enforcement to figure out where the law says I live. I got three different answers:

H&R block asked where I live more than 50% of the time, I said with the client, this is true.
The local Police asked me a few questions: Do you stay overnight? (yes) Do you own property/pets there (yes) do you have a key (yes) Do you get mail there (yes).
The IRS agent/rep said essentially: We don't have a rule for that beyond the mail/50/50 rule that H&R Block asked you. Don't know, go ahead and file if you believe it's true, keep the money so you can pay us back if we say no.

Needless to say I was none-too-happy with the IRS rep's response. The letter does not say I don't qualify, It simply asks to prove that I lived somewhere. For one thing, the burden of proof should be on them since they are trying to claim a negative. For another, outside of signed documentation from the home owner that I live there, (which is not in any a grey area for 2010 and half of 2012) and my paycheck stubs,

Tell your employer that the IRS has challenged you and ask for the documentation to prove that you qualify for the program so that you can provide that to the IRS.

As far as the residency is concerned, you are going to have to provide the IRS with as much documentation as you can to prove that you live with your patient. A copy of your driver's license showing that address, a copy of your car registration showing that address, copies of medical records showing that address, copies of bills showing that address, etc., etc.

Provide that information for as many years as they are challenging at this point. They are unlikely to challenge more years if you can convince them for the year(s) they are challenging now.

I do hope that your employer can provide you good documentation that you are eligible...because in my 30 years of tax practice you are the first I have encountered who is attempting to exclude income when they are paid by a for profit, employer. I am not saying that your employer is wrong, but I hope that they have good documentation to provide to you.

 

[FlamingTP]

Tell your employer that the IRS has challenged you and ask for the documentation to prove that you qualify for the program so that you can provide that to the IRS.

As far as the residency is concerned, you are going to have to provide the IRS with as much documentation as you can to prove that you live with your patient. A copy of your driver's license showing that address, a copy of your car registration showing that address, copies of medical records showing that address, copies of bills showing that address, etc., etc.

Provide that information for as many years as they are challenging at this point. They are unlikely to challenge more years if you can convince them for the year(s) they are challenging now.

I do hope that your employer can provide you good documentation that you are eligible...because in my 30 years of tax practice you are the first I have encountered who is attempting to exclude income when they are paid by a for profit, employer. I am not saying that your employer is wrong, but I hope that they have good documentation to provide to you.

OK, so worst case scenario here? lets say I have to give the money back do I have to also deal with a fine? should I get in touch with a lawyer? In a decent world the IRS would be like your bad, give back the money, no fine its all good. I just have this feeling that might not be true. Hopefully though I end up with at least the years that I know for a fact I'm owed all of it.

 

[LdiJ]

OK, so worst case scenario here? lets say I have to give the money back do I have to also deal with a fine? should I get in touch with a lawyer? In a decent world the IRS would be like your bad, give back the money, no fine its all good. I just have this feeling that might not be true. Hopefully though I end up with at least the years that I know for a fact I'm owed all of it.

You will definitely have interest and penalties on top of paying it back. The accuracy penalty is 20%. Hopefully they would not attempt to take it further than the accuracy related penalty.

Have you received the refund for the years they are challenging now? If not, and it does not go beyond those years there won't be any penalty because you would not have actually received any refund for those years.

 

[FlamingTP]

You will definitely have interest and penalties on top of paying it back. The accuracy penalty is 20%. Hopefully they would not attempt to take it further than the accuracy related penalty.

Have you received the refund for the years they are challenging now? If not, and it does not go beyond those years there won't be any penalty because you would not have actually received any refund for those years.

They've payed me for 2014 because that wasn't an amendment. Colorado has paid me for all years except 2013. I have not received any money for 2010-2013 from my federal return.

 

[justalayman]

Secondly it is possible to live in multiple places, many people don't have a permanent address, others spend their time between places and don't particularly care where their mail goes as long as they get it. Minors in joint custody routinely live in a two household situation. Bottom line is as far as I'm concerned I still live there in addition to living elsewhere part time. It's been that way for years, long before I cared which address is on my returns. It is due to this grey area that I called the IRS, H&R block, and talked to local law enforcement to figure out where the law says I live.

wow. just wow.



sorry but that does not define a gray area. It describes an attempt to avoid the proper application of the law which the IRS may see as an intentional act to avoid taxes. Gets pretty serious real quick.




and I sure look forward to the result of claiming you are paid by medicaid which entitles you to claim the exemption of income. I know dozens of people that work for a company where the money used to pay employees comes from medicaid that would love to be able to utilize such a ruling. I really don't expect it will be in your favor though.

Ya see, this statement right here proves the income does not qualify:

"Please provide substantiation that the wages you are excluding were received under a state Medicaid program, (why? my W2 is sent to me by an employer that works exclusively through medicaid, they should already have this information.) and that yourself and the individual receiving care resided in the same home."

You have an employer. You are not paid by medicaid regardless of whether the funds used to pay you were paid by medicaid.

Oh, and since you are not considered a tenant of the clients home but an actual resident, your income can affect the benefits of the household as all income of a household is often used to calculate government benefits.

 

[I'mTheFather]

This should be helpful:

http://www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income

Q11. I received wage payments that are excludable from gross income under Notice 2014-7. However, the agency that pays me treats me as an employee and continued to withhold federal income tax on the payments and reported the payments as wages in box 1 of Form W-2, Wage and Tax Statement. How should I report to the Service that the payments are excludable from gross income?
A11. If you are not able to obtain a Form W-2c, Corrected Wage and Tax Statement, from the agency reporting the correct amount in box 1 of Form W-2, you should include the full amount of the payments reported in box 1 of Form W-2 as wages on line 7 of Form 1040. You should then subtract the excludable portion of the amount in box 1 on line 21 “Other income,” of Form 1040. If you have other income reportable on line 21, you should enter the net amount after subtracting the amount excludable from gross income under Notice 2014-7 from the other amounts reportable on line 21. You may need to enter a negative amount on line 21 if you have no other income reportable on line 21, or if the amount of other income you must report on line 21 is less than the amount excludable from gross income. You should write “Notice 2014-7” on the dotted line for line 21 if you file a paper return, or enter “Notice 2014-7” on line 21 for an electronically filed return.

Q3. I am an individual who cares for an unrelated elderly person five days a week in her home, and I have a room in the care recipient’s home where I sleep four nights a week. I receive Medicaid waiver payments for this care. On weekends and holidays, I reside with my family in our separate home. May I exclude these payments from gross income?
A3. No. In this situation, the provider works in the care recipient’s home, but the provider has a separate home where the provider resides and regularly performs the routines of the provider’s private life, such as shared meals and holidays with family. Therefore, the provider does not provide care for the care recipient in the provider’s home, and the provider may not exclude the Medicaid waiver payments from gross income.

If the agency is a certified medicaid provider, then the question of OP's entitlement isn't an issue. The living arrangement may disqualify OP though.

 

[LdiJ]

This should be helpful:

http://www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income





If the agency is a certified medicaid provider, then the question of OP's entitlement isn't an issue. The living arrangement may disqualify OP though.

The first question leads to the wages themselves as being potentially excludable, and again, hopefully his employer could provide such documentation. However, the second question tends to rule out the OP anyway, as it specifically pertains to someone who has their own separate residence where they reside part of the time.

Both elements have to be met in order for the income to be excluded.

 

[LdiJ]

They've payed me for 2014 because that wasn't an amendment. Colorado has paid me for all years except 2013. I have not received any money for 2010-2013 from my federal return.

You did not answer an important question. What year(s) are being challenged? Does the letter you received states what years are being challenged, or did you inadvertently bring all of them to the agent's attention by your phone calls?

Also, unless you started the process of the amendments before April 15th 2014, 2010 would be rejected anyway as you were past the three year deadline to file an amended return and receive a refund. 2011 expired on April 15th of this year.

 

[I'mTheFather]

The first question leads to the wages themselves as being potentially excludable, and again, hopefully his employer could provide such documentation. However, the second question tends to rule out the OP anyway, as it specifically pertains to someone who has their own separate residence where they reside part of the time.

Both elements have to be met in order for the income to be excluded.

I quoted the first question to clarify for respondents who claimed OP cannot qualify if he works for a for-profit agency.

I quoted the second for the residential part. There may be some wiggle room for OP since he doesn't have a regular schedule and sometimes spends entire weeks in patient's home. He does not seem to perform "the routines of provider's private life," so there's no reason he shouldn't try for the exclusion.

 

[LdiJ]

I quoted the first question to clarify for respondents who claimed OP cannot qualify if he works for a for-profit agency.

I quoted the second for the residential part. There may be some wiggle room for OP since he doesn't have a regular schedule and sometimes spends entire weeks in patient's home. He does not seem to perform "the routines of provider's private life," so there's no reason he shouldn't try for the exclusion.

He has already "tried for" the exclusion and his attempt is being challenged by the IRS. Now he needs to prove, beyond a shadow of a doubt, that he DOES qualify.

Do you realize how many hundreds of thousands of care providers work for companies that are paid via Medicaid?

Once again, he is going to have to PROVE both elements...and in a very thorough fashion.

 

[justalayman]

This should be helpful:

http://www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-From-Income





If the agency is a certified medicaid provider, then the question of OP's entitlement isn't an issue. The living arrangement may disqualify OP though.

I see nothing stating the payments are excludable automatically. It says IF they are excludable you do this. It appears there are requirements of the state involved as well as the specific provider to meet for the payments to fall under the waiver program and that is one point the OP is being required to prove.

 

[FlamingTP]

You did not answer an important question. What year(s) are being challenged? Does the letter you received states what years are being challenged, or did you inadvertently bring all of them to the agent's attention by your phone calls?

Also, unless you started the process of the amendments before April 15th 2014, 2010 would be rejected anyway as you were past the three year deadline to file an amended return and receive a refund. 2011 expired on April 15th of this year.

Alright I looked at the letters again. they appear to be two copies of the same letter that challenges tax period Dec 31, 2011. (so just 2011 then so far). According to the letter I started the process in January. I did not get a letter for 2010, so I'm assuming I missed the deadline there.

The only issue remaining is residency for part of 2012 and later years. It sounds like the consensus here is it doesn't matter if I only live at the apartment =<30 of the time. but the agent I spoke to before I filed, and H&R told me time is generally decided as 51% or greater for tax purposes. The only caveat here is the IRS agent told me he wasn't sure if that's true in terms of residency or not, but he saw no reason I couldn't file if I still considered the client's home my primary residence beyond July 2012, which is true. Because he wasn't concrete he said keep the money in case you have to give it back. but it looks like if he's wrong I wont get paid so I would only face a penalty for 2014, which would be covered by H&R Block since it was a current return and not an amendment.