This post was originally published on Forbes April 14th, 2015
Are you the half of a married couple whose entire role in the family’s tax drama is to “sign here” in a last minute April 15 fire drill? Particularly if your relationship is in rocky phase and especially if the joint return you are being told, not asked, to sign is the last one of the marriage, you need to read this. The advice I give in this area is something of a minority view and a little against the grain, but it is at least worth considering. To illustrate the point I am going to reintroduce my favorite hypothetical married couple, Robin and Terry, who were invented to help me with awkward pronoun problems.
Robin is a teacher, who receives a W-2 in January which is handed to Terry to be given to their accountant. Terry’s accountant really. Terry is a partner in a law firm and has a host of business interests making for a joint return that weighs several pounds. Once a year, Robin is summoned to sign – quickly, quickly, because we have to get it in the mail right away. Robin and Terry are splitting, but they were still married on December 31, 2014. Marital status for tax filing is determined as of the last day of the year.
Even in a pretty toxic marriage, each of the parties will have had some of their needs met. One of Robin’s needs that has been met in the marriage with Terry was worrying at all about tax compliance. As the marriage comes apart, there is a temptation to continue having some of those needs met even as you live apart. This can extend even to those needs as this article by Kristen Houghton title “Is Sex With Your Ex the New From of Monogamy?” indicates. Whatever the pros and cons of a post-marital roll in the hay might be, beginning with that last return of the marriage, Robin probably needs to take responsibility for tax compliance.
The Problem With Joint Returns
Most regular tax practitioners don’t ever give much thought to the possibility of a couple filing separately. This is because, except in very rare circumstances, married filing separately will create a larger aggregate tax than that on a joint return, even if two single returns would have created a lower tax. Filing as single, if you are still legally married at the end of the tax year is generally not permitted.
The dark side of joint returns is “joint and several liability”. This means that if there is a deficiency, either from the entire balance due not going in with the return or a subsequent audit, the IRS can collect the entire amount from either of the signers. In those cases where the amount of the deficiency is beyond the means of either party, the amount of the “correct tax” becomes something of purely academic interest. What the IRS ends up getting is something called “Reasonable Collection Potential”. There is an entire parallel due process system in the collections area that most tax practitioners don’t understand very well.
So even though the tax on a joint return is lower than the sum of two married filing separate returns, Robin should be very cautious about signing that joint return. Even if Terry is altogether upright, there may be many tax bombs in Terry’s empire of enterprises. If it all falls apart and Terry can’t pay anything, the few thousand dollars that Robin lowered the total tab by will be meaningless. It may end up that the IRS will get nothing from Terry and end up levying Robin’s salary or at least grabbing any future refunds Robin might be entitled to. Had Robin filed separately, the IRS would get nothing from Terry and nothing from Robin. Robin might be able to qualify for “innocent spouse” status, but it is not easy.
There Is More
Well there is more, but its April 14th and I just got back from a trip to Appomattox for the sesquicentennial and now have to finish my return, so I will leave it at that and some of my other articles on the subject of joint filing. The bottom line is that Robin needs to be prepared to file separately if there are any concerns about Terry’s situation and the preparer of the joint return should keep in mind that they have two clients.
My civil war readers will have to check my other blog for coverage of the trip. I do have to say that the final stacking of the arms ceremony, which included public participation was very moving.