Originally published on Forbes.com.
Married couples and their tax preparers seldom look at the possibility of separate filing, unless they are on the compulsive side. The circumstances under which separate returns will yield a lower total tax are rare while commonly, although not always, the total tax will be lower with a joint return. The sense that filing jointly is the way to go is so strong, that joint filing for the last year of a marriage becomes one more thing that must be negotiated and managed, as if there is not already enough to worry about. There sometimes seems to be an implicit understanding that joint filing is required.
Joint Filing Is An Election
Joint filing is not required. It is an election, an irrevocable election. That means that you can amend to joint filing, but that once it is done you cannot amend to separate filing. Why would you ever want to do that, you might want to ask. How about when your ex-spouse does not pony up his or her share? Because that is where the dark side of joint filing comes in – joint and several liability If the IRS cannot get your ex to pay up, they can come after you for the full amount.
There can be relief from joint and several liability, but the IRS can give a hard time to people requesting the relief and the Tax Court frequently backs them up. I realize being a Monday morning quarterback, can be somewhat obnoxious, but most of my coverage of innocent spouse cases turns into a “What were you thinking?” diatribe about people signing joint returns. I suspect they were mostly thinking there was no alternative.
The Latest Tale Of Woe
The latest sad story is that of Albert Matin Elbe, who was representing himself in Tax Court – understandably given the relatively small stakes. Mr. Elbe went above and beyond in his effort to get a joint return filed. He came to regret it and failed in his attempt to be released from joint and several liability. And he just so should not have filed a joint return. So sad. Here is the story.
Mr. Elbe married Adah Elbe in 2003. Sometime in the first half of 2011, Mrs. Elbe moved out and in with a friend. Around that time she received a social security check for $57,168 which she deposited in a separate account, that Mr. Elbe had no access to. The opinion does not explain the check further, although it does note that she had not worked in ten years, making it seem like it may have been her disability claim finally being allowed.
At the end of 2011, although separated, they were still legally married. So come April 16, 2012, Mr. Elbe fired up his Turbotax and prepared a joint return. The numbers are important for the analysis, so here they are.
Around April 16, 2012, Mr. Elbe used TurboTax to prepare and submit a joint 2011 Federal tax return (joint return). The joint return reported wages of $52,443, taxable interest of $62, a taxable refund of $1,098, and gross and taxable Social Security benefits of $57,168 and $38,459, respectively. The joint return reported total Federal income tax owed of $9,414, tax withheld of $3,550, and tax due of $5,864. All Federal income tax credited and withheld on the joint return was credited or withheld from Mr. Elbe’s wages. No Federal income tax was withheld from the benefits payment, and Mr. Elbe did not include any additional payment with the joint return. Although Mr. Elbe knew that Mrs. Elbe had received the benefits payment and no tax had been withheld, he chose to file jointly because he understood that this would reduce their tax liability.
As it happened the joint return was rejected because Mr. Elbe was unable to arrange for Mrs. Elebe to sign it. He was diligent though.
At a deposition on May 25, 2012, taken as part of the Elbes’ divorce proceedings, Mrs. Elbe signed the joint return. Mr. Elbe then resubmitted the joint return to the Internal Revenue Service (IRS). At the May 25 deposition Mrs. Elbe stated that she did not have money to pay the full tax owed nor did she intend to pay any tax unless Mr. Elbe also paid part of the remaining liability.
That return triggered a balance due notice for $5,846 in tax plus interest and penalties. In November Mr. Elbe filed Form 8857 – Request for Innocent Spouse Relief. The Cincinnati Centralized Innocent Spouse Operation computed that $3,911 of the balance due belonged to Mrs. Elbe. Mr. Elbe paid $1,953 and probably thought that he was done.
Only Mrs. Elbe, who in the decision is referred to as the “intervenor” appealed the determination and the IRS appeals officer reversed CCISO’s initial determination of relief.
Innocent Spouse Relief Is Hard To Get
Generally when the IRS denies relief, the Tax Court backs them up. And that is what happened here. What counted against Mr. Elbe was that he prepared a joint return because he believed filing jointly saved tax and that he knew or should have known that Mrs. Elbe was not planning on paying up and that paying the whole tab would not create economic hardship for him.
I’m not going to go too much into the merits of the decision, which I think produce an unfair result, but that is pretty much the way these things go. What I am going to do is look back to April of 2012 and imagine, that Mr. Elbe checked a different box and sent in a married filing separate return. By my computations, which are a little suspect, because I could not get my software fired up, Mr. Elbe would have owed $2,826 on a separate return and Mrs. Elbe would have owed $3,567 – an aggregate saving of $547.
As it works out, in order to save that $547, Mr. Elbe ends up paying an extra couple of thousand. You cannot tell from the decision, but there is probably a chance that the IRS would have had to write off the $3,911 if Mrs. Elbe did not contrive to stick her ex-husband with the debt.
Filing a joint return for the last year of marriage is a reasonable course, if the couple is going to cooperate with one another. The problem is that couples who are really good at cooperating with one another are not among those likely to be getting divorced. Planners generally assume that the final return of the marriage will be joint. I think the more prudent thing to assume is that filing will be separate unless the case is made that the joint return saves money and, most importantly the balance due is being properly addressed. The respective audit exposure of the spouses also needs to be considered. Bottom line, though, is that you should never feel compelled to file jointly and particularly in a divorce situation should consider the pros and cons very carefully.