You have prepared tax returns for Christine and Henry Chang for several years. This year, they emailed you, stating that they have finalized their divorce but they "remained friendly" and want you to prepare each of their individual tax returns. They did insist, however, that each's financial affairs be kept confidential from the other.
When Christine brought in her tax records, she listed all three of her children as dependents and provided information which shows that they attended school in her neighborhood, which is about 40 miles from where Henry lives. Christine's oldest son John is 17 years old. Christine provided you with a photocopy of his driver's license which shows his address as being Christine's residence. Accordingly, you filed Christine's tax return, claiming all three children as her dependents.
When Henry brought in his tax records, he also listed all three children as his dependents. He brought in a copy of their divorce decree. In a signed document incorporated into this decree, Christine expressly waived her right to claim their children as dependents on her tax return, in exchange for her receiving increased alimony.
Based on your online research, the custodial parent who has physical custody of the children a majority of the time generally is entitled to claim children as dependents unless the right to this dependency exemption has been transferred in writing to the noncustodial parent.
a. When you prepare Henry's tax return, may he claim the three children as dependents on his individual tax return?
b. What, if anything, should you tell Christine?
c. What, if anything, should you tell the IRS?