Originally published on Forbes.com.
Divorce is probably the main reason that ordinary people end up in Tax Court. I try to extract practical lessons from those cases. A recent opinion TCS 2017-52 serves as a reminder that when you are divorcing, you should not assume the status quo with respect to your tax filing.
Summary opinions are not precedent, but that does not prevent them from being instructive. The parties have made their troubles public and you will find out their names if you go to the decision, but I figure they don’t need my help to become famous so I will refer to them as Robin and Terry, the generic married couple of this blog. Here is the story.
The Story
Robin and Terry were married in 1986. They adopted two minor children in 1997 and 1998. In 2013 Robin filed for divorce, but the couple lived together for almost all of 2013 and were still married on December 31. On February 8, 2014 Robin texted Terry about the possibility of filing a joint return. Terry texted back that it was something to discuss.
Being proactive, Robin met with their longtime tax preparer(TP). TP who had been doing the couple’s tax returns for several years had never met Terry. As was their practice in the past Robin provided TP with a copy of Terry’s W-2 that had come to the house by mail. Terry would not review the return, but would sign an authorization form allowing TP to file it. That would probably be Form 8879, I’m thinking.
2013 was different. Terry did not sign an authorization, but the return was filed anyway. That had Judge Wherry referring to it as a “purported return”. I have to tell you when you see any variation of the word “purport” in a Tax Court decision, you can be pretty sure things are not going to go well for the taxpayer. Anyway, the purported return had wages of $26,777 attributable to Robin and $3,937 attributable to Terry. Robin took the $6,240 “refund” check and put it into an individual account without mentioning the matter to Terry. In Robin’s view Terry had not been keeping up with Terry’s share of the expenses.
The quotes around “refund” are because by my back of the envelope reckoning about $4,000 of it would have been the refundable earned income credit.
Terry checked in with Robin by text in early April about filing a joint return. Robin responded that Terry should check with the judge. Terry sent in a married filing separate extension and figured that Robin must have decided to file separately. The divorce decree in September 2014 did not mention 2013 tax filings.
Terry filed married filing separately in October claiming both children as dependents. Things got messy and complicated as the IRS told Terry there was already a return and asked why Terry was filing twice leading to Form 14039- Identity Theft Affidavit. That ultimately led to the IRS redoing Robin as married filing separately with no dependents and issuing a deficiency notice of $6,244 along with an accuracy penalty pf $1,256.
The Decision
It was Robin that went to Tax Court.
Things did not go very well for Robin as you might expect. Robin insisted that Terry had consented to the joint return in April, but Terry’s subsequent conduct did not support that contention. Judge Wherry did cut Robin a pretty good break on the accuracy penalty. Looking at the facts as they were in February of 2014 and past practice Judge Wherry ruled that it was reasonable for Robin to think Terry had consented to a joint filing in February. So no accuracy penalty.
Lessons
The main tax principle, in this case, is that even though many people think otherwise joint returns are not mandatory. Filing jointly is something to which both halves of the couple must consent. There is a body of case law that will recognize tacit consent by a passive spouse, but proactively filing a separate return is a pretty clear sign that there was no consent to a joint return.
The practical lesson is that Robin made a really big mistake in trying to get an edge in the marital disputes by grabbing the refund. Filing separately is extremely expensive when you are in Earned Income Credit territory.
Another observation I have is that of the preparer and electronic filing. Back in the day, the preparer gave the return to the couple or one of the couple or mailed it to their address and it was up to each of them to sign it. Absent forgery or coercion, it was pretty clear that they had each consented. Now it is the preparer pressing a button that signifies consent to the IRS. Many preparers need to step up their act when it comes to recognizing that with joint returns they really have two clients.
Maybe when they are looking at tax reform, it might be worth considering making the individual income tax an actual tax on individuals rather than a tax on families. That would cut out a good piece of the complexity that affects many taxpayers and contributes to messy litigation.
Other Coverage
I could not find any other coverage of this decision. When I asked Lew Taishoff who covers the Tax Court more thoroughly than anyone, he told me that he had said all he had to say on these issues in 2015 in a post titled The Scarlet Letter.