Two Situations Where Spouses Were Not On The Same Wave Length

William Delaney, EA
Westwood, MA

When is a jointly filed income tax return not a jointly filed income tax return?  Answer:  When one signs the return and the other does not.  Sounds simple enough, but the devil is always in the details

Reg. 1.6012-1(a)(5) proscribes the way in which one spouse may sign for both and the requirement for an attachment regarding same to the tax return.  In Bradley C. & Nancy Reifler v. Comm., TC Memo 2015-199 (10/13/2015), the Reiflers had their 2000 income tax return prepared by their accountant.  It was then signed by Mr. Reifler and left somewhere for Mrs. Reifler to sign.  So far, so good.

Now comes Oct. 15th, and Mr. Reifler awakens to the fact that he needs to do something with this paper return (yes, you win a prize---he must mail it to the IRS and today’s the deadline).  So, that’s what he did.  But, what he didn’t do is get it signed by his spouse!  Believe it or not, it gets worse…

The IRS “bounced” the return because of the missing signature.  Mr. Reifler received the original return with some red marks on it and nothing else as to why the return had not been processed.  So, what’s a taxpayer to do?  In Mr. Reifler’s case, he did nothing, as if that were an option.  He just set aside the return (you can’t make up this stuff).

In 2002, the IRS sent the taxpayers a delinquency notice (where is that 2000 tax return which you did not file?), so the taxpayers (this time both of them) signed a second Form 1040 and mailed it in.  However, the IRS knew nothing about a “bounced” return, and the taxpayers did not make mention of it when sending the second return, so the IRS considered the “second” return to be the “original” return filed quite late and imposed the Sec. 6651(a) failure-to file penalty (maximum of 25% of the tax shown on the return).

But, not to worry, the taxpayers have some strong (?) arguments.  First, they argued the substantial compliance doctrine---the original return need not be perfect in order to be valid.  However, the Court held that signing (or not signing) a tax return is a different set of circumstances from substantial completion of a return.  Furthermore, an unsigned return does not start the running of the statute of limitations.

Again, not to worry.  The taxpayers have another argument.  In the White decision – Daniel Joseph White v. Comm., TC Summary Opinion 2002-101 (8/5/2002), Mr. White signed and submitted a joint income tax return which was not signed by Mrs. White.  The return “bounced” and the White’s resubmitted a signed return within the time period provided by the IRS for correcting the original return (a departure from what Mr. Reifler did not do).  The initial return was deemed to be timely filed and the late filing penalty was not imposed.  But, the Reiflers did not have a valid argument because they chose not to do what the Whites did---fix the problem.  The Reiflers did nothing until contacted by the IRS more than one year later.  There was no evidence that the taxpayers attempted to consult with or inquire of anyone when their tax return “bounced.”

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In Mark A. Williams v. Comm., TC Memo 2015-198 (10/17/2015) we have some very clever tax planning.  Let’s suppose that your employer tells you that he will stop writing paychecks and deducting all of those taxes.  Instead, he will write a check for your gross pay and deposit it in a bank account for you each week.  It won’t appear on payroll (i.e. won’t be reported anywhere) and you can take the money each week tax-free and use it as you will.  (Now, why didn’t my accountant tell me about this great deal?).  Anyhow, the employee (Mrs. Williams) discussed it with her husband, and he told her not to do it, and she didn’t for two years (while other people apparently were not so fussy and enjoying their no-tax windfall).  However, the husband eventually gave in and agreed to it when the employer assured him that it was legal (free legal advice is only worth what you pay for it, didn’t he know?).  The paychecks stopped; the tax-free money commenced, and all was happiness until a few years later when the scheme imploded and the taxpayers pleaded guilty to willfully filing false tax returns which omitted Mrs. Williams’ income.

Now comes Mr. Williams asking for relief under the Innocent Spouse provision of the Code, specifically Sec. 6015(f) – Equitable Relief.  There are multiple factors set out in Rev. Proc. 2013-34 for consideration in such circumstances.  For most of them, the analysis was neutral---neither favorable nor unfavorable to Mr. Williams.  What cooked his goose, however, was the “knowledge or reason to know” test.  Why are you not surprised?  He was not an uninvolved and uninformed person.  He checked it out, if you recall.  Not only that, he signed a Form 4549 for each year (that’s the form which sets out the audit adjustments) and agreed that he was liable for a fraud penalty.  He did not dispute that he was aware of the omissions from income at the time that they occurred.

And, finally, it was shown that Mrs. Williams did not sign-up for the tax avoidance scheme until Mr. Williams said that it was OK to do so (remember he initially said no and she remained outside looking in).  So, Mr. Williams was a “contributing cause” of the income omissions on the tax returns.