When I filed my 2018 taxes this year, I included, as a dependent, my wife's granddaughter. She had lived with us for 10 months during 2018. We provided for all medical, dental, and day care expenses for her while she lived with us. I received advice from the TT forums that it was perfectly legal to do so since the child's mother didn't provide any support. Further research also confirmed this was legal to do. Last December, we had to bring the child back to her mother. Again, the child lived with us from mid-February 2018 until Dec 8, 2018. The child's father, my wife's son, was not part of the discussion since he did not work last year and, in the case in Florida where they lived, all parental rights belong to the mother. Additionally, he is now deceased. We live in Washington State
The mother, despite having her daughter live with her less than two months, declared the child as a dependent and collected a refund for child care credit, etc. Recently, we were contacted by the mother asking us if we claimed her daughter as our dependent. We told her "yes". The IRS had sent her a letter informing her that the child was claimed as a dependent on another tax form and that she needed to correct her forms or that's what we were led to believe.
Here's where it gets sticky. The mother, being who she is, has threatened that we will never be able to talk to or see the child again unless we do something. Since the child is the only child of her deceased son, my wife wants to make things right and not lose contact with her. She has asked me to possibly amend our tax form instead and pay back any benefit we gained from declaring the child as our dependent. In this way, the mother wouldn't lose the refund and possible state benefits.
My question, after that long-winded intro, is what are the ramifications of my filing an amended return? Should I amend my return? Is there a penalty involved? What would the proper procedure be? I have no idea what the child's mother is doing or what she has told the IRS. I'm looking for ideas or advice. There was no written agreement as to who could claim the child. The only written agreement we had was the mother agreeing to let us have custody until such time as she wanted us to return the child to her.
Thanks in advance for any advice or information.
