Peter J Reilly is a Contributor to Forbes Magazine. He writes about taxes and business. He wrote an article entitled; “Take Care If Filing Jointly With A Financially Irresponsible Spouse” and I have seen some “doozies”. As a located minister for 18 years and now a mentor for Tennessee Prison Outreach Ministry, I have performed many weddings. I try to counsel the bride and groom about the biblical nature of marriage an, when necessary, about tax matters. I will be the first to agree that some people should not be married, at least to each other. But Peter suggests that there are some married people who should just not be filing joint tax returns. He references a recent Tax Court Memorandum decision – TCM 2017-144 suggesting that an irresponsible spouse can cause a lot of grief for the conscientious spouse. His story reminded me of some of my clients.
Peter tells the story of a married couple who are not equally endowed with desire pay debts and to file taxes according to the law. In his article, the husband is a risk taker. Peter says that the husband has a “long history of failing to pay his debts when due”. His wife became aware of this when, they purchased a home before marrying. She did not know the specifics of her mate’s financial past, but she was aware that he had a low credit score and outstanding student loans. To compensate for the variance in their commitment to debt payment, and the low credit scores, they had separate credit cards and the mortgage on the house was exclusively in the wife’s name.
After they were married tax filing time came along and with the filing came a measure of angst. The husband compiled the documents and gave them to an accountant who prepared the return. When the return came back both spouses signed the jointly prepared return. The wife was an employee with withholding that had been paid to the IRS but hubby was self-employed and guess what, he paid no estimated taxes. There was a balance due on the return. The wife thought hubby was sending a check in payment of the taxes due. But he did not. Three years later, the Service send a letter and the wife discovered that the tax had not been paid. They received a notice from the Service and with penalty and interest the amount was greatly increased. What a rude awakening! She paid the tax and thought it was done. Then she learned the details of subsequent year’s tax liabilities (three years after filing the return on which the tax was due). Okay, after consulting a CPA, she has been filing a separate tax return and will never file a joint tax return with her husband again. Though they are still married with four children, there will never be another joint tax return filed by them.
The wife sought relief in Tax Court, pro se, on an innocent spouse claim for the outstanding taxes that remained unpaid. She was not successful. She was not entitled to “streamlined relief” because she and hubby were still married. That led to a “fact-specific inquiry” on whether it “is inequitable to hold an individual liable for all or part of any unpaid tax or deficiency arising from a joint return”. There is a seven factor test to answer that question. “The factors “are the requesting spouse’s (1) marital status; (2) economic hardship if relief is not granted; (3) knowledge or reason to know that the tax liability would not be paid; (4) legal obligation to pay the outstanding income tax liability; (5) receipt of a significant benefit from the unpaid income tax liability; (6) compliance with income tax laws; and (7) mental and physical health.” Bummer, no luck.
Why would I write an article like this? Well, because I see this all too often. It would seem that the courts would be sympathetic with the conscientious spouse. Not so! Therefore, take heed. If you are married and your spouse is not dedicated to paying debts, especially taxes, DO NOT FILE A JOINT TAX RETURN. A word to the wise, I hope.
For more information, call Wilson & Wilson, PC, CPA, CFE at 615-673-1330 or email jim@ wilsonandwilsoncpa.com