Should Divorcing Spouses file Joint Returns?
Settling The Financial Issues In Divorce
Filing a joint income tax return is not a statutory requirement. A married individual may file a separate return if he or she wants to. When a divorcing party does not trust his or her soon to be ex-spouse or does not fully understand the complexities of a joint return, filing a separate income tax return should be seriously considered.
When filing joint income tax returns, spouses are considered equals. This means, among other things, that each spouse is jointly liable for 100% of any taxes due on the joint return. Federal tax law takes neither side in a divorce controversy. State law governs property settlements, alimony, child support, and other divorce matters and agreements. The IRS does not care whether Federal tax matters are equitably apportioned between divorcing spouses. They are only in the business of collecting as much income tax as possible. If spouses can't resolve tax matters between themselves, the IRS will come down hard on both parties and in many circumstances try to collect the same joint tax liability from both parties.
Joint Filing Dangers with a Dishonest Spouse
A dishonest spouse filing a joint return can damage his or her spouse
by any of the following:
The Safest Option
The safest and simplest option for a divorcing person who does not trust his or her spouse is to file a “married filing separate” return by the April 15th due date. Filing “married filing separately” after April 15th, even if properly extended, can be dangerous.
In the Tax Court case of H.J. Crew, the wife learned some hard and expensive lessons. In this case the self-employed husband, not subject to withholdings overstated his business expenses, intercepted his wife's W-2 with $3,000 in withholdings, attached it to a joint return, forged her signature, and mailed the return to the IRS. The Husband then forged the wife's signature on the $3,000 refund of the wife's withholdings and spent the refund. The wife carefully warned the husband that she was going to file separately but failed to file a tax return. Three years later, the IRS audited the joint return and a $5,000 deficiency was assessed, plus $4,000 in penalties and interest.
Who do you think the IRS collected the $9,000 from?
If you said the wife, you are right! The wife in this case paid the $9,000 balance due, plus lost the $3,000 original refund. The Court said she could not now file a separate return because she “tacitly consented and acquiesced to” the joint return.
What is the moral of this story?
Divorcing parties cannot ignore the complex income tax issues associated with divorce without exposing themselves to substantial risks and unintended consequences. The tax situation of a divorcing spouse should be reviewed by a tax professional knowledgeable in the complex tax issues encountered in divorce.