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Laura Brady (TC Summary Opinion 2010-107)
Sometimes when I advise taxpayers, I have to preface my advice with a warning that it is a minority opinion. One of those minority opinions is on the subject of filing joint returns in the final year of a marriage. Generally, it is viewed as a simple numbers exercise. Figure out what the individual returns would be. Figure out what the joint return would be. If the joint return produces a saving spend about half of it having the attorneys argue about how to split the saving. That makes four winners, maybe five if the returns are really complicated and the accountant can get paid too. If you have read enough “innocent spouse” cases in which the purportedly innocent spouse loses, you have to ask a preliminary question – ” Do you have any reason to think that your soon to be ex might be less than thorough in reporting gross income ?”
When you file a joint return you are signing it under “pains and penalties of perjury” and asserting that “to the best of your knowledge” the information is true and complete. There are two other things about a joint return. One is that it is an irrevocable election. In other words, you can’t decide that it would have been a better idea to file separately and amend. (You can, however, amend from a separate return to a joint return). The other is that you are jointly and severally liable for the entire tax. So they can collect the whole thing from either one of you. My experience advising in this area, however, is that most advisers don’t even consider this issue. I know of one instance where someone was ordered by a probate judge to sign a joint return that he had reason to believe was less than accurate. Hopefully, he would qualify as a truly innocent spouse, but I’m not certain.
Th sad case of Laura Brady (TC Summary Opinion 2010-107) has inspired me to add a little addendum to my advice about being cautious in signing a joint return. Ms. Brady’s marriage to Gregory Harris was her third. The tax court noted that in this case, the third time did not prove to be a charm. They met in early 2002, were married in March of 2003, separated in early 2004 and were divorced in July of 2004. All told they lived together for less than a year.
At some point, before October of 2004 Ms. Brady gave Mr. Harris her social security number and that of her child from one of her previous marriages. On October 18, 2004, the IRS received a tax return signed, apparently, by Mr. Harris and Ms. Brady. The tax was not fully paid. Ms. Brady first learned about this return when the IRS withheld her $28 refund from her 2004 return to apply to her 2003 liability. “What 2003 liability ?” she may have exclaimed. She did not work and had no other income during 2003 and was not required to file a return.
Here is where things start getting complicated. The Court noted :
According to petitioner, the 2003 return Mr. Harris prepared should not be treated as her return because she neither signed it nor consented to its being signed on her behalf. Respondent now agrees that petitioner did not sign the return. Nevertheless, according to respondent, Mr. Harris prepared the 2003 return with the implicit consent of petitioner, and it would not be inequitable to hold her liable for the income tax liability arising from that return. See secs. 6013(a), 6015(f).
We recognize that if both spouses intend and consent to file a joint Federal income tax return for any given year, then the failure of one spouse to sign the return for that year will not necessarily preclude its treatment as a joint return.
In order to treat the return as a joint return, there must evidence that the non-signing spouse consented. The consent can be inferred from behavior. There are eight factors to consider:
(1) Whether the returns were prepared pursuant to an established practice of preparing and filing joint returns;
(2) whether the nonsigning spouse failed to object to the filing of a joint return;
(3) whether an affirmative act was taken indicating an intention to file other than jointly;
(4) whether one spouse entirely relied on the other spouse to file returns;
(5) whether the spouse examined returns presented for a signature;
(6) whether separate returns were filed;
(7) whether the returns included the income and deductions of the nonsigning spouse;
(8) whether the nonsigning spouse was aware of the contents of the purported joint returns.
IRS argued that providing the social security numbers was evidence that she had consented to a joint return. The court noted that her former husband would have needed the numbers if he were claiming her and her child as dependents.
So the tax court determined that she had not consented to the joint return. Therefore she doesn’t owe anything on 2003 and the IRS should cough up her $28 right? Not so fast. She had asked the tax court for innocent spouse relief and :
We find that the 2003 return Mr. Harris prepared that gave rise to the 2003 income tax liability from which petitioner seeks relief is neither a joint return as contemplated by section 6013(a) nor petitioner’s return. Accordingly, because petitioner did not file a joint return with Mr. Harris for 2003, relief from her outstanding 2003 Federal income tax liability, if otherwise available, is not available in this proceeding.
Hopefully, the mess will be straightened out administratively.
The lesson that I take away from this is that a divorcing spouse who does not intend to sign a joint return should file a separate return even if he or she is not otherwise required to file. That should send a pretty clear message to the IRS as to their intent.
One further note. Another reason not to file a joint return is that you or your soon to be ex, though he or she might be honest as the day as long, may have a high audit potential. One of you might, for example, be involved in a lot of flow-through entities or family businesses. If you are the one being audited, you probably don’t want your ex-spouse involved in the audit and you probably wouldn’t want to get sucked into an audit triggered by your ex-spouse’s activities. Granted this is an amorphous concern which would be weighed against real dollar savings from filing a joint return. Remember, though, filing jointly is irrevocable while filing separately is not. You could consider amending to a joint return when the statute is close to having run out on separate returns. Like a few of my clever ideas, I have not seen this one played out in practice, so I offer it with caution.