In Theresa M. Karam v. Commissioner, 2011 TC Memo 230, the Tax Court http://www.ustaxcourt.gov/InOpHistoric/karammemo.TCM.WPD.pdf considers the familiar issue whether the petitioner, Theresa M. Karam is entitled to equitable relief under Section 6015(f) of the Internal Revenue Code (all section references are to IRC unless otherwise stated). The case is rather usual with the court considering the facts and whether IRS erred in allowing relief from joint and several liability, for taxes owed on joint returns filed for the years in question.
The court noted that IRS has authority under Section 6015(f) and Reg. Sec. 1.6015-4 to relieve a spouse from joint liability on a joint return if, taking into account all of the facts and circumstances, it would be inequitable to hold the spouse liable for any deficiency or unpaid tax.
The court then reviews the procedures established by IRS in determining whether a requesting spouse qualifies for equitable relief under Section 6015(f). These procedures are outlined in Rev. Proc. 2003-61, 2003-2 C.B. 296. http://www.irs.gov/irb/2003-32_IRB/ar16.html. The court found that Theresa did not qualify for relief and I shall not bore you with the reasons. You can read the short case if interested.
I state only some of the facts discussed by the court pertinent here: Theresa filed joint returns with her husband Dr. James Karam for all years from 1980, when they were married, through 2001. Thereafter Theresa filed separately. Dr. Karam hired the preparer Theodore C. Schumann, P.C. CPA who prepared all their returns including the joint returns for the deficiency years under consideration by the court: 1999 through 2001. Dr. Karam was a self-employed dentist. The joint returns for 1999, 2000 and 2001 were all prepared and submitted to taxpayers for filing in 2002. Theresa had no contact with the preparer. The preparer delivered the returns for filing with a Post-it noting where to sign. Theresa signed. The 1999 return reported a balance of tax due of $69,833; the 2000 return reported a balance of tax due of $64,907 and the 2001 joint return reported a balance of tax due of $62,562.
What is unusual and important about this case is mentioned in the court’s discussion of the facts, the court stating:
“Petitioner sued the Schumann firm for malpractice for failing to disclose the consequences of filing a joint tax return and obtained a judgment for $150,000.”
Theresa remained married to Dr. Karam yet still successfully sued the return preparer for failing to inform her of the consequences of filing a joint return. Innocent Spouse requests arise most often following divorce of the spouses. The malpractice lawsuit filed in this case would seem yet more likely from a spouse following divorce. CPA preparers should be forewarned that they represent both spouses in filing a joint return. Even had Mr. Shumann discussed with Dr. Karam the possibility of Theresa filing separately, he would not have fulfilled his obligation to her. Thus, CPAs may want to include a paragraph in their return engagement letter or return transmittal letter stating:
You are electing to file your income taxes on a joint return. Filing a joint return requires an affirmative election indicated by your signing this return with the intent to file jointly with your spouse. Filing jointly generally results in a lower tax than if you each filed separately. Filing a joint return, however, renders each spouse both individually and jointly liable to IRS for the entire tax liability reported on the return or later determined by audit. This joint and several liability may be avoided only if you qualify for very restrictive so called “innocent spouse” relief. You may if you choose file a separate return reporting only your own income, deductions, tax-credits and withholding. Thus, you should sign this return only if you are certain it is accurate, intend to file a joint return and thereby assume all of the benefits and burdens of the joint return election.
At a minimum the CPA should discuss the implication of filing jointly with each spouse and document in his or her file that discussion.
Copyright 2011 by Robert S. Steinberg, Esquire
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