This post was originally published on Forbes April 6th, 2015
It probably would have been a bad idea idea for Maria Sanchez to file a joint return with her estranged spouse for 2006. She didn’t do it and apparently was not required to file a return on her own. Her not quite ex, Francisco A. Sanchez Rodriguez, did file. He claimed to be single. From there it got a bit strange resulting in what is one of the oddest innocent spouse cases I have ever seen. It seemed that the IRS nailed Ms. Sanchez with a Catch-22, but at least one expert has some optimism that she might do better in the next round, if there is one.
Some Background
Most tax practitioners will tell you that it is almost always a better deal to file jointly than married filing separately. I would downgrade that “almost always” to usually. That is because most tax practitioners make an assumption that in many cases turns out to be unwarranted. That assumption is that if there is a balance due, it is going to be paid. Here is the thing. There are two almost entirely distinct areas of tax practice. One is concerned with determining the correct tax and coming up with legitimate means to minimize that tax. That is the area in which filing a joint return is almost always the right answer.
The other area of tax practice is collections. That is where it is determined how much of the correct tax has to actually be paid. If the “correct tax” is significantly more than you can pay, it really doesn’t matter how much more it is. (See
Reilly’s Tenth Law of Tax Planning) What becomes relevant than is what your “reasonable collection potential” (RCP). RCP is how much blood they think they can get from the stone – the blood being money and you being the stone.
Let’s say that married filing separately you owe $100,000. Assume that a joint return would produce a joint liability of $80,000. Should you file jointly? It all depends on whether there will be a check for $80,000 going in with that joint return. If all you can come up with is $20,000, then filing a joint return will probably hurt you, because now both your income and assets and your spouse’s income and assets will be considered in determining RCP. I should mention that it is a different ball game if you live in a community property state, but don’t get me started on community property, it gives me a headache.
The Helpful Auditor
Mr. Rodriguez’s 2006 return ended up getting audited. The revenue agent who conducted the audit must have wanted to be a mensch. He realized that if Mr. Rodriguez had filed jointly the resulting deficiency would have been lower. So he prepared
Form 4549, Income Tax Examination Changes (consent) as if Mr. Rodriguez and Ms. Sanchez had filed a joint return.
So of course now in order to close the case the signature of Ms. Sanchez is required, which she provided. The case does not indicate whether she asked anybody for advice on whether going from a larger tax for which she had no responsibility to a lower tax for which she was jointly and severally liable was good for her. It was good for her ex and it was good for the IRS. For her not so much. It would only make sense for her to sign that form if a check from Mr. Rodriguez for the full amount was going to be forthcoming. Apparently it was not.
I suspect that that is what the revenue agent expected. That division between tax determination and collection appears to be even stronger in the IRS. Once you consent to the assessment, the examining agent is done.
Innocent Spouse Relief
If joint and several liability is the dark side of joint returns, the light at the end of the tunnel is innocent spouse relief. It seems like Ms. Sanchez would have a pretty good innocent spouse case. She didn’t have a clue as to what went on the original return and she and Mr. Rodriguez were no longer married. Here is where the Catch-22 came in. One of the requirements of innocent spouse relief is that you have filed a joint return. Of course, you only need innocent spouse relief if you have signed a joint return, except in this possible sui generis circumstance of a helpful examining agent. Ms. Sanchez had not filed a joint return, so she was not eligible for innocent spouse relief.
Subject to a variety of limitations and conditions, spouses may elect to file a joint return after separate returns have been filed. See sec. 6013(b). According to petitioner, the consent should be treated as a joint return for purposes of section 6015. Considering that the consent was, in effect, treated as a joint return by the revenue agent who examined Mr. Rodriguez’ return, petitioner’s argument has more than a little attraction. Nevertheless, we are unable to fit the round peg of her argument into the square hole of technical requirements.
Generally, pursuant to section 6011(a) a taxpayer obligated to file a Federal tax return must conform to the forms and regulations prescribed by respondent. Even though signed by petitioner and Mr. Rodriguez, the consent is hardly a form described in section 6011 or section 1.6011-1, Income Tax Regs. Furthermore, a Form 4549 is not signed by the taxpayer under penalties of perjury, one of the critical requirements for a document to be treated as a Federal income tax return. Petitioner’s argument that the consent should be treated as a joint return is rejected.
Some Catch That Catch-22
In closing we think it is appropriate to state that nothing in this Summary Opinion should be taken as a comment as to the validity of the assessment made against petitioner on the basis of the consent. Otherwise, because the tax liability to which petitioner’s request for section 6015 relief relates was not assessed pursuant to a joint return, she is not entitled to the relief she seeks in this proceeding.
Essentially his view is that the assessment is flawed.
If the IRS stubbornly continues to pursue collection, it seems to me that the taxpayer could file a petition in Tax Court alleging that the IRS had not followed the deficiency procedures and was collecting the tax based upon an illegal assessment. The Tax Court would almost certainly rule in the taxpayer’s favor.
At the end of the day, it turns out that the taxpayer in Sanchez, not the IRS, may be the ultimate winner in this dispute.
I sure hope that is how it turns out.
About The Government Helping
Lew’s title is drawn from an old joke about what are the three greatest lies. In the version I remember the other two are “The check is in the mail” and “Of course, I’ll respect you in the morning”. (The latter represents the sensibilities of a bygone era, I believe). It turns out that there are actually quite a few other possibilities, some not reproducible in a respectable tax blog like this one. Here is a
link in case you are interested.
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