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California initiates program to investigate child care tax credit

Estimates of the average cost to raise a child are an exercise in sticker shock. U.S. government figures from the Department of Agriculture conservatively put the number in six figures for expenses such as food and clothing up to age 17. And the cost of day care and other dependent care expenses only add to parents' considerable financial responsibilities.

Understandably, then, state and federal tax codes try to accommodate these financial burdens on parents. In California, for example, taxpayers may be eligible for the child and dependent care (CDC). This tax credit can reduce the amount of personal income tax that California parents of dependent children have to pay.

To be sure, as with any tax deduction or tax credit, there is a chance that the CDC credit may be misused. And so the California Franchise Tax Board has recently launched a pilot program to investigate whether the taxpayers who are taking it really are eligible for it.

The investigations will be done by the Tax Board's Fraud and Discovery Section (FADS) for returns starting with the 2011 tax year. Once returns are processed, the FADS will review returns that claimed the CDC credit.

If the FADS believes the credit was not claimed correctly, it may adjust or even disallow it. In those cases, the FADS will provide a Notice of Proposed Assessment (NPA). This notice will inform taxpayers regarding the action taken by the FADS regarding disallowing or adjusting the child care credit.

Before an NPA is even issued, however, the FADS must take at least one of two steps. It must request additional documentation from the taxpayer regarding the credit and/or request information directly from the child care provider.

Source: "Nonrefundable Child and Dependent Care (CDC) Expenses Credit," State of California Franchise Tax Board

Our firm handles situations similar to those discussed in this post. To learn more about our practice, please visit our California tax litigation page.

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