If a person can’t be claimed as a dependent, they are eligible for the recovery rebate unless they received a previous stimulus payment. If your child answers “no, I can’t be claimed as a dependent“ then she would qualify for a stimulus rebate. However, this would probably be considered tax fraud.
If she can be claimed as a dependent, she must check the box that says “yes, I can be claimed as a dependent“ even if this increases her tax liability. Answering “no” to decrease her tax liability is tax fraud.
In 2020, there are two new situations that will drastically affect her tax return. First is the stimulus credit. If she can be claimed as a dependent, she is not eligible for a credit.
Second is the “kiddie tax” and unemployment compensation. The kiddie tax taxes unearned income in a child’s name at the parent‘s tax rate. This is to prevent parents from putting investments in their child‘s name in order to get a lower tax rate as a tax dodge. However, unearned income includes unemployment compensation, and the enhanced unemployment compensation during the coronavirus pandemic means that many children who would never have been eligible for unemployment compensation before have received it this year. And that results in children paying a much higher tax rate on their unemployment compensation than they would have normally expected. Your child is subject to the kiddie tax as long as at least one of her parents is alive, even if you do not claim her as a dependent, unless she can prove that she provided more than half her own living support.
If your child were to answer that no one else can claim her as a dependent and that she did provide more than half her living support (if those facts are untrue), that would be considered tax fraud, and she would be subject to penalties and interest if the IRS audited the situation.
However, regarding the penalty, I do not recommend calculating a penalty or including a penalty payment with her tax return. Simply pay the tax she owes. If the IRS assesses a penalty, you can appeal on the grounds of it being her first time. The IRS should not assess a penalty if this is the first year she has owed income taxes.
