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My mother has dementia and is in assisted living. Her total assets right now are $11,000. I had to do a spend down to get her Medicaid. Two years ago she liquidated some investments. She gave me the money to purchase a home she could live in with me. Now she’s going to assisted living. She only provided the tax preparer part of the documents regarding the distribution. I got a letter today saying there is a $177,000 discrepancy! If she owes 15% capital gains that about $25,000! There is no way she can pay that. What should I do?

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Brandee, it is my understanding that gift amounts over $18K must be reported by the giver but taxes are still not owed as there is a lifetime exclusion amount of around $13 million. The excess gift amount is applied to this lifetime exclusion is my understanding, so there may not be any taxes owed for this.
Sounds like the taxes are for capital gains whatever investments she liquidated. See a good qualified CPA who will deal with the IRS for you, preferably the one who did her taxes previously.
The IRS contacted my Mom onetime because her CPA rounded up an amount on her return causing a discrepancy between a end of year pension statement and her return! Guess they kicked it out because there was a discrepancy between the statement and the return. The CPA had rounded up an amount to the next dollar amount as per tax form instructions. The amount was less than $1.00! CPA said he had seen it all, now! He straightened it out with the IRS for us.
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Is the tax preparer a CPA? If so they should be able to negotiate a deal with the IRS for you.
They have a phone number in which they can set up a meeting between you, the CPA and yourself. A good CPA will meet with you and the IRS.

The IRS does not care that Mom has dementia. The laws are the laws. Ignorance of tax requirements does not mean you escape from paying taxes.

You really want to take this seriously. IRS imposes pretty hefty interest and penalties. My FIL owed back taxes of around $20,000. It snowballed to over $150,000 pretty quickly due to penalties and interest.

Alternative you can get a tax lawyer to meet with you and the IRS but that will be a bit more costly than using your CPA.

Mern no one is saying you cheated the government/IRS. The reality is it looks like Mom underpaid her taxes with her securities/house deal to you. The complexity is beyond the scope of an internet forum but the CPA who did the taxes should be able to figure out what you underpaid and negotiate a deal with the IRS. I'd start with the person who has been doing Mom's taxes and your taxes for the last several years.

Mom can only "gift" you up to $18,000 per year tax free. If Mom "gifted" you over $18,000 in any given year, yes, taxes are owed to the IRS.

The IRS has a lot of power. They will dog you and your Mom until you resolve this. You may need to sell the house, get a reverse mortgage, or get a loan or work out a payment plan.

I'd talk to a CPA, and/or a tax attorney, and possibly an elder law attorney.

The IRS will work with you on a payment plan over a number of years to get the overdue taxes paid.
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Yes the IRS can come after your mom. They are a super creditor. Ignorance of the law is not an excuse.
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You pay capital gains on taxable investments that have appreciated as well as on houses.

You need an Elder Law attorney firm that has a tax specialist.
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AlvaDeer Oct 2024
But the problem I see here is the gifting of her giving the money to buy a home?
Or am I mistaken.
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You might have another problem when you go to apply for Medicaid.
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She didn’t cheat people. She has dementia. And had it two years ago. As I said this happened before I took over everything. She got the letter not me. I see people are saying we cheated but that’s not what happened.
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AlvaDeer Oct 2024
I find this all very confusing as well.
Merv needs an attorney here, I am thinking.
This is way out of my league.
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She didn’t intentionally defraud the IRS. She has dementia and this happened right before I took over. There’s no way I’m selling a 450,000 house for 25k. She has no tie to the house on paper. The 5 year look back is for skilled nursing not assisted living in my state (yet). She was approved on the up and up.
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lealonnie1 Oct 2024
If your mother gave you $177k to buy a house with, and the IRS is telling her she needs to pay taxes on that money, then don't you think you need to cough up the funds, whether you sell said house or not?? Even though she "has no tie to the house on paper"?? Why would the IRS not expect their money? Because mom has dementia? She was lucid enough to liquidate funds, so the IRS will expect their cut, as they do everyone. And if mom liquidated investments 2 years ago to the tune of $177k or more, do you not feel that Medicaid will find out about that and it will affect her eligibility for long term care? How was she approved "on the up and up" having $177k in funds only 2 years ago? That makes no sense either. Savings and investments must be divulged to Medicaid in order to get approved.

Your post is very confusing, talking about "capital gains" which is paid on the sale of a home, vs normal taxes paid on income and interest.

You need a lawyer to guide you now, not random folks on an internet forum.
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Here's a financial forum on which you can better pose your question: bogleheads.org Crowdsourcing, like this one, but regarding all things money, assets, financial, etc. The first attoreny I would hire is a tax attorney, then after that it may require an elder law attorney versed in Medicaid.
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I agree with Lea. I would see an attorney at once.
This is complicated legal problem.
Your mother has no assets and she may need to apply for government help from Medicaid. My worry is that she may not be able to get it.
She has no money. She has no income. They will not take SS.
You, however may stand to lose your home, be accused of some sort of fraudulent behavior if you were aware of this transaction, or sustain other problems.

You say YOU got a letter today.
Can you tell me why YOU got a letter, and not your mother?

Do see an attorney and take an honest and complete document about what occurred on what date if you are able.
I wish you best of luck.
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Sorry, I don't see how Capital gains are involved. She has not sold a house, correct? Did she sell to buy the new house she bought? I hope it was put in her name, otherwise, its considered a gift. She pulled enough investments she owes 177K in taxes or just 177k is unaccounted for?

I agree, we are layman and I think an elder lawyer is needed.

Just a question, I know things have changed but it used to be if you sold a house and bought another one within 2 years, you paid no capital gains tax?
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Medicaid does a 5 year look back on finances in most states to make sure funds aren't being hidden in order to qualify for government assistance. If your mother defrauded the IRS and only provided the tax preparer with part of the paperwork necessary to do her taxes, yet you bought a house with the money and now owe the IRS, you may have to sell the house to pay them. You also may face a penalty from Medicaid whereby they won't pay her long term care bills for a period of time.

Hire a Certified Elder Care attorney who's versed in Medicaid and IRS matters to guide you thru how to handle this situation. It's unfortunate you didn't hire an attorney before buying and selling homes!

Good luck to you.
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