Form 2441 – Child and Dependent Care Expenses: Digging Holes

Like most guys, I’ve slung many shovelfuls of dirt digging drainage ditches, post holes, and for other reasons I’d like kept unsolved. Lots of hard work and hours can go into digging holes, and in the end all you’ve done is move dirt from here to there. An important thing to remember about digging though is you can dig so deep you can’t get out, which is similar to the fate awaiting a would-be client in the next few years. Sooner if the Internal Revenue Service catches on.

Daisy Daycare, as I’ll call her, contacted me because her husband insisted they have someone new prepare their taxes this year. I guess after they received IRS letters the past two years each stating they owed over $1,000 extra from deductions which they didn’t qualify, he didn’t want her using an online tax product again to self-prepare. She ran a day care and filed a Schedule C while he worked outside the home for a manufacturer, and they really needed to turn things around. So after a short discussion, I thought I could throw them a step stool to help them start climbing out.

Digging through their prior year return, I noticed Daisy filed Form 2441 – Child and Dependent Care Expenses, with their three children listed. What caught my eye however was the name of her daycare business as the entity to which she paid the expenses. In essence, she claimed $4,800 in expenses for paying herself to babysit her own children. There are states that pay you for taking care of your own children (feel free to look them up) but no, you can’t do that in Pennsylvania, or on your federal income tax return. Especially if you don’t claim the income on your daycare’s Schedule C. So after completing the preparation the correct way for the current year, I sat down to give a shoveling lesson.

Calling a spade a spade, I let them know in no uncertain terms they did not qualify to use Form 2441 because they didn’t pay the child care expenses to someone outside their home and not claimed as a dependent. I also stressed that in doing so the prior year, it was illegal and to not be surprised if the IRS sent another letter. I presented the return as I had completed it, which had a smaller refund than they anticipated ($5,000 was spoken and written to me several times to give me a number to shoot for, I suppose). Needless to say my work was rejected in favor of the self-prepared online tax product.

Keep digging, Daisy. Keep digging.