Expert: Richard Stolp - 1/19/2011

Question
QUESTION: Hi.  I have a question.  My father-in-law is 91 with COPD and sleeps about 20 hours a day.  My mother-in-law has severe dementia.  My sister-in-law has gotten power of attorney over my father-in-law.  She is paying herself (out of their bank account) by the hour as their caregiver.  She should be paying income tax on these earnings and her parents should be filing a Schedule H.  If she fails to file the Schedule H and pay the employment taxes, will she have to pay the taxes herself if they are caught?  Thanks!

ANSWER: Hi Audrey,
In theory your father-in-law needs to fill out the schedule H if he has paid over $1400 for your sister-in-laws' in-house services #sorry, initially I said $1700#. That means he will be liable for paying the social security/medicare/etc. taxes on the amount paid. Your sister-in-law will also have to pay tax on the income she receives just as if received that income from a "regular" employer. So, you are correct, the in-laws will be paying tax on her services and she will also be paying tax on the income.  Of course, if she is caught not paying the taxes she will be changed interest and penalties on the balance due. The tax will have to be paid whether the correct forms are issued by the in-laws or not - as long as your sister-in-law received the income.

---------- FOLLOW-UP ----------

QUESTION: Hi.  I just wondered if as the Attorney-in-Fact, she would be responsible for any delinquent employment taxes since she is the one who refuses to file a Schedule H for her parents.  It is sad to say, but they may even be dead by the time an audit would happen.  She is also supposed to be the executrix of the estate.

Answer
Here is my take on the reality of the situation. The IRS operates mostly on the honor system, so if a family has internal dealings that are relatively small it's doubtful they would come to the attention of the IRS. So, your sister-in-law may have the responsibility for filing the schedule and the related taxes(including her own), but that doesn't mean the IRS would demand those actions. The IRS maintains a hotline if you ever feel the need to discuss the situation with someone.