Joint Tax Return Problematic for Innocent Spouse

By Stephen J. Dunn

As the tax filing deadline fast approaches, you should pause before signing a joint income tax return.  You are not liable for income tax on your spouse’s income―unless you file a joint return.  A joint income tax return is deemed an irrevocable election by each spouse to be jointly and severally liable for the tax reported, or properly reportable, on the return.

Suppose that for 2010 Wife earned $70,000 and that she had income tax of $11,000 withheld from her wages and paid over to the IRS—more than enough to cover income tax on her wages for the year.  Husband, on the other hand, is an entrepreneur.  For 2010 he earned $400,000 and paid no tax.  The couple has $50,000 in itemized deductions for 2010.  They have no children.

If the couple files a joint Federal income tax return for 2010, their tax is $114,753, $103,753 of which they owe (after credit for the $11,000 in income tax withheld from Wife’s wages and paid over to the IRS).  Husband and Wife are jointly and severally liable for the $103,753 tax balance, meaning that each of them is liable for up to the full amount of it, though the IRS can collect it only once.

If instead each spouse files a Federal income tax return as married filing separately, husband’s tax is $108,983, and he owes all of it.  Wife’s Federal income tax is $10,913, and, after credit of the $11,000 in tax withheld from her wages and paid to the IRS, she is due a refund of $87.  Wife is not liable for any of the tax on Husband’s income.  By filing a joint Federal income tax return, the couple can save $5,193 in their combined tax, but Wife thereby assumes liability for $108,983 in tax on Husband’s income for she would not otherwise have liability.  Wife may be willing to assume joint and several liability for tax on Husband’s income for the sake of lowering the couple’s combined tax liability, but she needs to understand that she is not required to assume it.

When tax due on a joint return goes unpaid, the IRS issues a Notice of Federal Tax Lien (“NFTL”) against both spouses and records it in the Register of Deeds’ office in their county of residence.  This disables both of them and each of them from selling or mortgaging an interest in real property.  Recorded NFTLs are also picked up and reported by credit reporting agencies, thereby impairing each spouse’s credit, and possibly his or her ability to secure employment.

Relief from liability on a joint tax return may be available to a spouse by completing a Form 8857, Request for Innocent Spouse Relief, and filing it with the IRS.  But these are tough cases, and to have any chance of success a spouse needs to enlist tax counsel experienced in this area.

Relief may also be available by way of a malpractice action against the accountant who prepared the joint tax return.

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