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Her gross income is about $2000 per month and taxes taken out are $200. So I will have to come up with $2400 to pay her taxes. This doesn't make sense. Help!

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For starters the Medicaid person knows squat about taxes. Do not pay any attention to them. If you have questions about taxes go to the IRS or a reputable tax professional. Did you do her taxes or have them done for her? Then you know if she will owe taxes again in the coming year and adjust her withholding now for the future. I don't see any reason here for you personally to pay her taxes for her unless you are talking about using her money. If you have POA, respond to IRS correspondence with a complete explanation, ask for an abatement of penalties due to her incapacitated state, and ask for a payment agreement that is stretched out for as many years as you can get for her. The amount of money you're talking about is peanuts to the IRS but needs to be addressed. If she should pass away before it's completely paid, oh well.
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Her expenses for medical care basically wipe out her income so she will have no taxable income and won't have to pay any taxes. Get a profrssional tax preparer to do her professional and have them explain this to you. You don't have to come up with $2400 for taxes. Now with more info it sounds like it will be -0-.
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Medicaid says her share of the NH cost is $2200 or her gross income plus $200 because Medicaid says her assets were too high. The NH wants their money of course. Should the IRS answer take care of the matter or should I get an elder attorney.
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You don't need an attorney to handle this. Are you saying there are two entities vying for her money? The nursing home wants $200/month and the IRS wants $2400? Sounds now like she assets, and if they're liquid, just pay her bills. All of them. Are you sure her taxes were done right?
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It may be because nursing home care is deductible as a medical expense.
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To clarify Medicaid said she needs to stop having her taxes withheld because she doesn't have to pay taxes now that she is in an NH. So they say her share of the NH monthly cost is her gross monthly income plus another $200 because her assets were too high when we applied. We did spend them down by paying for a substantial portion of her NH cost until Medicaid was approved.
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