Before I get to the big issue I need to include some background info. My wife and.her ex husband have 2 children, and they share equal custody and visitation. Therefore each of them have custody for both children 50% of the year. So, the way they claim dependents is that she claims the daughter and he claims the son. This is written into their divorce decree(which the IRS does not recognize because it was issued by the state of Kentucky). So, 2011 was their first year divorced and there was some miscommunication and they both claimed the same child. His return was accepted because he got his finished first. Hers was denied. She completed an amended return with the correct child as dependent. It was later that she found out that her identity was stolen, and someone had collected her tax refund. So her case went to the identity theft division of the IRS where it sat for 7 months, and no one looked at it. Finally whenever they released it it was pulled for an audit. Also her 2012 return is being held till her 2011 taxes have been resolved. So, the IRS is holding around $10,000 of her money. She has been fighting this for almost 2 year's, she has faxed around 300 pages of paperwork to the IRS, she has been working with a taxpayer advocate for several months and it is getting nowhere. No w they have ruled on her case that she was entitled to a $400 tax refund for 2011 a nd now they want to review 2012. They say she can't claim the girl as a dependent because she doesn't have proof that the girl lived with her for more than 6 months. She has statements from the school principal, the daycare, and the landlord that say the girl lived with her. She has a calender with the days the girl was at her house(190 days in 2011), along with everything else the IRS has asked for. Then when she does send it to them they reject it. I just want to know how to prove it to them that she is a dependent, and that my wife can claim her and the head of household(we weren't married at the time). This has almost become a full time job dealing with this mess. Should we get an attorney or is this just a hopeless cause?

There are as many tax issues as there are taxpayers. Everyone's situation is unique. But taxpayers who find themselves disagreeing with the IRS share a common bond. Each has the right to appeal the agency's findings. In some cases, an appeal of a tax decision can begin and be settled immediately. If examination of your return is at an IRS office, you can request an on-the-spot meeting with the examiner's supervisor to explain your position. If an agreement is reached, your case will be closed.If that fails or the examination took place outside of an IRS office, the tax examiner will write up the case explaining your and the IRS' positions and send the report to the district office for processing. Within a few weeks, you should receive the IRS' findings on your case. If you don't agree with this, your next step is to go to an IRS Appeals Office. A local Appeals Office is a separate and independent IRS office. Its tax-dispute conferences are informal, and can be conducted by correspondence, telephone or in person. Get in touch with an appeals office when you:Need help in determining that the IRS made an incorrect decision due to misinterpreting the law; Believe the IRS did not properly apply the law due to a misunderstanding of the facts(You need to be prepared to clarify and support your position.). Always refer to specific IRS decisions, usually cited on the examination notice. In each case where you believe the facts used by the IRS are incorrect, make sure you have records or other support available to back up your position.Most tax differences are settled at the Appeals Office level. But in the instances where you still are unhappy, you can take your cases to the independent Taxpayer Advocate for help. Finally, you who've exhausted all other tax-dispute avenues have the right to head to federal court.

Further information on taxpayer appeals is available in IRS Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don't Agree;

Keep in mind that during all levels of appeals you must have valid legal reasons based on current tax law for disagreeing with the IRS. You cannot appeal your case based only on moral, religious, political, constitutional or conscientious grounds.If a conference is requested the examiner will send the conference request letter to the appeals office to arrange for a conference at a convenient time and place. The taxpayer or its qualified representative should be prepared to discuss all disputed issues at the conference. Most differences are settled at this level.
You don't have to have legal representation at an Appeals Office meeting, but if you wish you can be joined by an attorney, certified public accountant or an enrolled agent. If you prefer to go it alone, you can get more information from the IRS Web page dedicated to appeals issues.Only attorneys, certified public accountants or enrolled agents are allowed to represent a taxpayer before Appeals.