@opram I’m not sure what you are trying to add here. A parent is automatically disqualified from being claimed as a dependent if they have more than $4300 in taxable income, regardless of who pays it.
it’s certainly possible that the IRS might see such an arrangement as a sham transaction. But if all the appropriate forms and paperwork is provided, such as paying household employee tax if the parent lives with family, then there is nothing on paper that bars this treatment.
As far as penalties are concerned, the IRS places the burden of compliance for dependent care FSAs on the employer or on the company that the employer selects to administer the benefit. If the employer is found in an audit to be allowing improper reimbursements from an FSA, then the employer can be subject to additional taxes and penalties. I would expect that if the employee knowingly signs a false reimbursement claim, they could also be subject to tax and penalty from the IRS as well as action by their employer, but I am not 100% clear on this.
There is also no need for anyone to pay a penalty or to forfeit money in a dependent care account this year due to the coronavirus. The IRS has issued guidance that if a persons child care circumstances have changed due to the coronavirus, they may cancel or amend their dependent care election during the year, which is not normally allowed. Therefore, if you know you won’t be able to spend the money you can cancel the account for the year.
