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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2882
Experience:  Over 20 Years experience
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Hi there, I have a friend and coworker who has stumped me

Customer Question

Hi there,

I have a friend and coworker who has stumped me with a tax question. I think I have the answer but don't want to give him bad advice. He just went through a messy divorce (they really do happen, it's not just a cliche). It was not final until this year. They both filed 2012 extensions and now she wants him to file jointly for last year. He has a regular W-2 wage job and if he filed as a single person with standard deduction (which he can't, of course) he'd get a small refund. She is self-employed and hasn't paid adequate estimated taxes. We live in a community property state so he is joint and severally liable for those taxes, even though they have lived apart since March, 2012. I think he can qualify for innocent spouse relief, but my understanding is that he must wait until the IRS begins collection procedures to do so. Also, I am not sure whether he should sign a joint return or file separately. If he files separately he will be signing a return agreeing to his half of the taxes, which seems like a bad idea. So, my recommendation to him would be to file jointly, try to get her to sign an agreement to pay the tax due, and then file an innocent spouse form requesting equitable treatment. What do you think?
Submitted: 11 months ago.
Category: Tax
Expert:  R. Klein, EA replied 11 months ago.

R. Klein, EA :

Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.

Customer:

Thank you.

R. Klein, EA :

Since your friend lives in a community property state, certain rules apply, as you know. Also, since the divorce was not final until 2013, they are considered married for all of 2012 and for none of 2013.

R. Klein, EA :

Under community property rules, half of what one person earns is legally consider the other spouse's income, and vice versa. The exception to this is the allocation for self employment tax where the person who earned the income is responsible for his/her own tax.

R. Klein, EA :

There are two ways to handle the allocation for 2012 since they lived apart for 3/4ths of the year. They could either count the whole year and split all income in half for the entire year OR, if they have adequate written evidence, could split the income for the first quarter and have separate income for the last three-quarters, although that could get really messy accounting really quick.

R. Klein, EA :

I prefer the split the whole year better, only because it's simple.

R. Klein, EA :

I am surprised that the judge granting the divorce did not require these folks to file their 2012 return before finalizing the divorce or at least put specific split information in the decree. Or did he?....

R. Klein, EA :

In any case, another consideration is that even though INCOME is allocated 50/50, tax withholding is NOT.

R. Klein, EA :

So, just for example, let's say he earned $50k and and 10K income tax withheld and she earned 50K self employment, Nothing withheld.

R. Klein, EA :

In this case, they would each have $50K income, but his return, if filed separately, would should the 10K tax withheld, while hers shows none.

R. Klein, EA :

BTW, they could choose to file MFJoint or MFSeparate. That's a choice they have.

R. Klein, EA :

If they choose to file a joint return, an Innocent Spouse claim form can be included with the original return.

R. Klein, EA :

The IRS will process the InnSpouse claim about 8-12 weeks after the original return is filed, but at the current time, EVERYTHING is on hold except the due date of the return.

R. Klein, EA :

Does this clarify the issues for you & your friend?

Customer:

Yes, mostly. Thank you. A few clarifying questions:

Customer:

Everything is on hold because of the government shut-down?

R. Klein, EA :

The IRS is closed except to receive tax returns!

R. Klein, EA :

Can't ask them any questions. Can't get a refund. And the IRS won't try to collect its debts.

Customer:

That's funny, given that that IS the source of funding the governement!In mediation they agreed that he could take his half of the home interest and mortgage fees for the fi

Customer:

Sorry, didn't meant to hit ENTER

R. Klein, EA :

If they file separately, and one itemizes, the other person MUST itemize.

Customer:

Right. He agreed to only that his half of the expenses for the first three months of last year when he was in the home. If he filed separately and took the standard deduction, wouldn't the IRS go back and impose the standard deduction on her?

R. Klein, EA :

The IRS forces the standard deduction if they don't agree. In other words, if one picks itemized and one picks standard, they both GET standard.

Customer:

That's what I thought. So, to clarify:

Customer:

He can file separately, split the income 50/50 but apply all of his withholding to his tax liablility and he is not liable for her underpayment of estimated tax? In that case, should he still file the innocent spouse form with his MFS return?

R. Klein, EA :

Yes, he can file separately and split income and report his withholding only . He may not have a tax liability to worry about

Customer:

Right -- it depends on how much she earned vs. him. I am not sure of the numbers. If he does end up with a tax liablity, should he file for innocent spouse relief (assuming I rework the numbers and am sure he would have no tax liability based on his own income?)

R. Klein, EA :

If he files separately he has no need to file for innocent spouse relief. He will be denied.

R. Klein, EA :

His withholdings and tax are already separate.

R. Klein, EA :

Along with his income

Customer:

OK. This is the crux of my question. If he wants innocent spouse treatment (or a shot at it) he has to file jointly. If MFS yields no liability (or a tolerable one, for him), he files no innocent spouse form, he just pays it and moves on with his life.

R. Klein, EA :

In this case, whether he files jointly or not, the result will essentially be the same.

R. Klein, EA :

I'm not sure what you/he are trying to accomplish by filing an innocent spouse claim in this circumstance. It really would only apply to past taxes in this situation

R. Klein, EA :

You don't even know if he has a liability yet, do you?

Customer:

No, you have supplied that missing piece -- he is already not liable for her withholding failure -- so he doesn't have to go the innocent spouse route.

R. Klein, EA :

there ya go!

Customer:

OK, think we're good. Thanks for your hep!

Customer:

help

Customer:

Do I just select a smiley face and sign off?

R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2882
Experience: Over 20 Years experience
R. Klein, EA and 3 other Tax Specialists are ready to help you
Customer: replied 11 months ago.

Hi again, I have one more quick question on this issue. I downloaded the form 8958 "Allocation of Tax Amounts Between Certain Individuals in a Community Property State." As you told me, it is very clear that self-employment tax is the responsibility of the individual who earned the income. However, regarding Federal Tax Withholding, it says, "if you and your spouse file separate returns on which each of you reports half the community wages, each of you is entitled to credit for half of the income tax withheld on those wages." Doesn't that mean that if he had withholding and she paid no estimated tax, he can only claim half of the withholding on his taxes?


 


It's Saturday, don't know if you are online, but I found this confusing.

Expert:  R. Klein, EA replied 11 months ago.
This has been an issue that has been decided differently over time. Technically, if income is divided, so should expenses of said income, and by extension, that would mean tax withheld is split evenly. However, in practice, I have seen the IRS allocate based upon whose account the taxes were withheld.

In addition, if the income is "shared" before the 50/50 split for only one quarter of the year, so would be the taxes withheld, just the same.

Even if the taxes are split 50/50 as the income, the only "innocent spouse" relief would be for the interest and penalties of underpayment of tax. Since the tax was still due, then both parties will end up with a balance due of part of the tax bill.

In all cases like this, the IRS manually reviews the proposed split by the taxpayer. This part of the process is never automated since it can be complex. This is one of those situations where we won't have a definitive answer until the tax return is filed and the IRS makes any adjustments.
Customer: replied 11 months ago.

Thank you again. This makes sense. It does seem like a very difficult set-up. I think I am all set!


 

Expert:  R. Klein, EA replied 11 months ago.
OK. To close out this question, just provide a rating on the smiley faces. Thank you and have a great day!
Customer: replied 11 months ago.

Since it looks like I have to pay again, I am going to keep this thread open in case I have another related question. I will give a smiley face in the next couple of days.

Expert:  R. Klein, EA replied 11 months ago.
You only pay once per question.

New topics will require you to open a new question, but followups on topic are part of the original question.

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