WHEN NOT TO REQUEST INNOCENT SPOUSE TREATMENT

The case of Kimberly A. Sorentino v Commissioner (Summary Opinion 2014-99, September 24, 2014) illustrates what can happen when a taxpayer doesn’t get the relief she needs because she’d asked for the wrong relief. Although the Court’s Summary Opinion may not be cited as precedent, it is instructive.

The case involved taxes owned on a putative joint return filed for the year 2007. The joint return filed had reported an overpayment and requested a refund. IRS determined that to the contrary taxes were owing on the joint return and sought to collect from Kimberly. Some of the facts are summarized as follows:

Kimberly and her husband George, who intervened in the case in opposition to her innocent spouse request, were divorced in 2008. Their marriage had been dysfunctional and volatile. They were married in 2005 after having met the year before. They separated in 2006 and initiated divorce proceedings then but later reconciled.  Kimberly testified that George had:

  • Physically assaulted, offended and humiliated her on numerous occasions.
  • Objected to her work-related travel.
  • Harassed her at work by calling frequently and showing up unannounced.
  • Caused her work performance to suffer resulting in her losing her job.
  • Caused her to lose two successive jobs with the same harassing behaviors.

Further, she testified that following a heated argument she packed up her belongings and left George. Her sister had to rush to pick her up after receiving a phone call from her that she was contemplating suicide.  As a result, Kimberly was admitted to a mental health facility for treatment which lasted from March 15 to March 20, 2008 and as an outpatient from March 21 to March 29, 2008.

On March 24, 2008 George sent a draft of a Marital Dissolution Agreement to Kimberly. Kimberly did not take part in drafting the agreement, was not represented by counsel, but signed the agreement on April 9, 2008.  The dissolution agreement did not address the 2007 tax but did state that the parties would file separate tax returns for 2008 and later years.

The case does not summarize all of the income items of each spouse for 2007 but states that during 2007 Kimberly received retirement plan distributions of $79,114 and $15,970 which she deposited into her bank account. George apparently had little income because he was a former police officer with failing health.

Kimberly did not file a separate return for 2007 and believed (albeit erroneously) she had sufficient withholding tax taken out of her retirement distributions to cover the tax liability. Before 2007 Kimberly and George had filed jointly for each year of their marriage. Still, Kimberly testified that she did not know that George intended to file a joint return and did not meet with the return preparer regarding the filing of a joint return or otherwise authorize the filing of a joint return.

The joint return was e-filed by the return preparer even though only George had signed Form 8879, IRS e-File Signature Authorization, which the preparer is required to obtain before transmitting an e-filed return.

When IRS assessed and attempted to collect taxes due from Kimberly, she retained counsel and filed Form 8857, Request for Innocent Spouse Relief. She claimed that she’d been a victim of spousal abuse in 2007, was not involved in preparing the joint return or in handling household finances, did not sign the joint return, and, was filed she was suffering a mental breakdown at the time the joint return was filed.

George’s testimony at trial disputed Kimberly’s.   He testified that he did not abuse or harass her and that she’d visited the return preparer with him and intended to file jointly. Strangely, the return preparer did not testify at trial.

Tax Court Decision

The Court denied innocent spouse status to Kimberly because it found that no valid joint return had been filed. One of the requirements for obtaining innocent spouse relief from a joint return liability is that a joint return was indeed filed.

Generally, one must sign a joint return to be held jointly and severally liable for the tax liability related to that return. This is so because each spouse must indicate his or her affirmative election to file jointly.  But a signature of both spouses is not always required.  A joint filing will be found to have been made when the facts indicate that both spouses intended to file jointly.  Intent will be gleaned from the surrounding facts and circumstances including a history of filing jointly. In finding that no joint return had been filed, the court was influenced by evidence that showed:

  • Form 8879 was not signed by Kimberly.
  • An extremely dysfunctional marriage.
  • The absence of objective evidence contradicting Kimberly’s testimony.
  • The lack of credibility of George’s testimony which was inconsistent.
  • That the preparer did not testify.
  • That Kimberly was contemplating suicide near the time for filing the 2007 return and had been hospitalized.
  • That these facts made credible Kimberly’s testimony, that she’d decided to abandon filing jointly and did not intent to file jointly with George for 2007.

So, Kimberly was found not to have filed a joint return but was denied innocent spouse relief. Well, where does that leave her?   On the IRS books of account, she is still listed as jointly liable for a tax due on a return the Tax Court says was not a return.

An American Bar Association Tax Section practitioner forum discussed what Kimberly should do next procedurally. My suggestion was:

The mistake made in this case was asking for innocent spouse relief which the court denied as it had to since no joint return was found to have been filed. Interestingly, the tax could be higher on a MFS return. A MFS return filed now will probably be rejected by the IRS computer since a return has already been recorded under client’s SSN. You can request, as has been suggested, that IRS abate the joint assessment against client. If IRS is not cooperative, the Taxpayer Advocate should be able to help clear up the client’s account since you have the Tax Court decision that no joint return was filed. Alternatively, if client has already received her due process collection notice on this assessment Appeals consideration can still be requested.

This is not a forgery case, by the way. The former husband submitted an unauthorized putative joint return, which the court rejected. He did not forge the client’s signature, however. Another question: Why did the return preparer transmit the joint return without having in her possession a Form 8879 signed by the wife? She has a malpractice issue.

Also, I would not be surprised if the former husband goes back into family court alleging that the former wife breached the dissolution agreement, arguing that the agreement’s statement that the parties would file separate returns in 2008 implicitly means that they would file jointly in 2007. He cannot compel her to file jointly, but would seek damages for her refusal to file jointly. I don’t suggest he would be successful, only that he might try.

Conclusion:

  • The Martial Dissolution Agreement should have explicitly covered whether a joint return would be filed for 2007.
  • Ideally, Kimberly would have been advised (not the case here) about how much money filing jointly would save her over filing separately.
  • Then she could have (again, not the case here due to her mental condition) weighed the dollar savings against not being party to a joint return with violence prone George. She might have wanted to have nothing to do with him and just pay the toll charge for filing separately. Sometimes personal considerations outweigh financial ones.
  • Kimberly should have filed a married filing separately return if she did not want to file jointly. That would have prevented George from being able to claim she’d intended to file jointly.
  • Not having done that, she should have based her appeal of collection activity against her by arguing that no joint return had been filed because she did not sign the return, consent to file jointly or intend to file jointly; and, submitted a MFS return to appeals.
  • Still, the Tax Court decision will be helpful in obtaining an abatement of the joint return liability. But, she’ll have to file a separate return.
  • From a strictly financial position, Kimberly may have been misguided in objecting to the joint return liability to begin with, since it appears that most of the income was attributable to her retirement distributions and she will likely owe more tax on an MFS return.
  • Thus, it is important to understand your best option to minimize the tax liability before claiming innocent spouse status. For, in this case, even if a joint return had been found to have been filed, Kimberly would not have been relieved of most of the joint return liability, as most of the income items on the joint return were her own income items.

© 2014 by Robert S. Steinberg, Esquire
All rights reserved

This entry was posted in DIVORCE, INNOCENT SPOUSE, JOINT RETURNS, TAX and tagged , , , , , . Bookmark the permalink.

One Response to WHEN NOT TO REQUEST INNOCENT SPOUSE TREATMENT

  1. Robert,
    Thank you for your insightful comments. I was counsel in this case, having been brought in after the CPA filed an S Tax Court case. We were hoping that, despite the fact that much of the income was Kimberley’s, the abuse exception would allow her to escape liability. Once the decision came out, I requested Area Counsel to abate the assessment against her. He agreed, contingent upon her filing her own separate return. The draft has now been completed, and it is lower than the challenged assessment, but not by much. It might end up that utilizing the CSED for the original filing will be her best bet in getting some relief.

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