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Annette Nellen
Annette Nellen

Recent developments may affect individuals’ filing status

2014 rulings and cases highlight filing status opportunities and traps.

December 11, 2014
by Annette Nellen, Esq., CPA, CGMA

Recent court decisions and IRS rulings bring up issues about determining the correct filing status before filing and when and how taxpayers can change that status. These issues are important because using an incorrect filing status can result not only in tax deficiencies, but also may prevent taxpayers from getting certain tax benefits, such as the earned income tax credit (EITC). Here’s a discussion of those developments.

Can you change from head of household to married filing jointly?

Ibrahim, T.C. Memo. 2014-8, involved a family of six. The wife is the widow of her husband’s half-brother (the deceased husband was the father of the four children). The taxpayers, who do not speak English, hired a preparer for their 2011 return. The husband filed Form 1040A, using head-of-household status and claiming two of the children as dependents and the EITC. The wife filed a return, using a single (unmarried) filing status. After the IRS sent a notice of deficiency, the husband filed a petition in Tax Court. Before receiving the notice and filing the petition, the husband did not elect to amend his 2011 return to file jointly with his wife.

The IRS argued that the proper filing status for the husband was married filing separately because he was married at the end of 2011 and it was too late to file jointly. The husband argued that the preparer improperly advised him and he should be able to amend his 2011 return to use the joint-filing status.

Under Sec. 6013(b)(1), if an individual files a separate return when he could have filed jointly, he may amend that return unless any of the four limitations of Sec. 6013(b)(2) apply. In the husband’s case, he could not elect to file a joint return after a separate return had been filed because the IRS had mailed him a notice of deficiency and he had filed a petition with the Tax Court within the time specified in Sec. 6213 (Ibrahim, slip op. at 5, citing Sec. 6013(b)(2)(B)).

The husband next argued that he had not filed a separate return under Sec. 6013(b) because head-of-household status is not the same as married filing separately. On this issue, the appeals courts disagree, and the circuit that would hear any appeal of the husband’s case, the Eighth Circuit, had not addressed this question. The Tax Court had previously ruled that Sec. 6013(b)(2) “applies to married taxpayers who file returns with an incorrect status, such as head of household or single filer” (Ibrahim, slip op. at 6, citations omitted). Also, the IRS and the Office of Chief Counsel have indicated they will not follow Glaze, 641 F.2d 339 (5th Cir. 1981), which had held that “separate return” as used in Sec. 6013(b) refers only to married-filing-separately status (Rev. Rul. 83-183 and AOD 1981-140). The Glaze decision is not binding in the Eighth Circuit.

Although noting it was “an unfortunate result,” the court ruled that the husband could not change his filing status to file jointly. The court also found he was ineligible for the EITC because he filed separately and was married. The court allowed the dependency exemptions and child tax credit for the two children claimed on the husband’s return, but it denied an exemption or credit for the other two children because there was not enough evidence that they were qualifying children for 2011. Also, it appeared that his wife had claimed one of the children on her tax return.

Lesson learned: The filing statuses used seem odd given the facts. Perhaps the language barrier led to the problems. Non-English-speaking taxpayers and their preparers should seek assistance of an interpreter before having tax returns prepared.

Can you change from married-filing-jointly to head-of-household status?

Chief Counsel Advice (CCA) 201411017 involved spouses who originally filed as married filing jointly. After the return’s due date, but before the statute of limitation expired, the husband amended the return to report additional tax due and changed his filing status to head of household. Under Regs. Sec. 1.6013-1(a)(1), after the return’s due date, an election to file jointly is irrevocable, and the husband could not change his filing status.

The IRS also raised the question whether the wife is liable for the additional tax due when she did not sign the amended return, because the husband filed using head-of-household status. The IRS stated that an assessment against the husband is valid, but it did not explain whether the wife was liable for additional tax. (The CCA is heavily redacted.)

Lesson learned: Perhaps the filing status change was due to separation or divorce. If a couple are contemplating divorce or living apart before filing, filing separate returns may be wise because unforeseeable issues might arise later.

Changing filing status before the original due date

Bruce, T.C. Summ. 2014-46, involved a couple who married in 2008. They had two children, including the wife’s child from a prior relationship. The husband sometimes worked away from home. Divorce proceedings began in early 2010 and were completed in February 2011. In December 2010, the husband moved out of the home where he lived with his wife. He e-filed their 2010 return using a married-filing-jointly status in February 2011 and told his wife he would split the $4,581 refund with her. The wife gave her husband her bank account information and told him she would talk to a friend of hers who did tax work. Despite this, before April 15, 2011, the wife filed a return using head-of-household status, claiming the children as dependents. The husband did not know about this filing until the IRS notified him of the deficiency that resulted from its disallowance of married-filing-jointly status.

When the IRS sent the husband a deficiency notice changing his filing status to married filing separately, it also denied the child credit, dependency exemption deduction, and EITC. The Tax Court agreed with the IRS. Under Regs. Sec. 1.6013-1(a)(1), it is permissible to change from joint to separate if the change is made before the return’s due date. The wife filed her return claiming head-of-household status in March 2011.

The court held that the wife was entitled to the dependency exemptions because the children lived a slightly longer time with her after the husband moved out in December 2010. (The court also noted that the time the husband was away for military service did not affect the residency test for claiming the dependency exemptions, but that did not change the result.) Once it was determined that the wife was entitled to claim the two children, the husband could not qualify for the child credit, dependency exemption, or EITC. The court did not uphold accuracy-related penalties against the husband because it was reasonable for the husband to assume his wife agreed to filing the joint return and his wife even gave him her bank account information so he could give her half of the refund.

Lesson learned: The couple would have both benefited from filing jointly. Their joint income was low enough to qualify for the EITC. Also, since it does not appear that the husband lived out of the home for the last six months of 2010 (Sec. 7703(b)), the wife should have filed separately, not as head of household. When both used married-filing-separately status, neither could claim the EITC. Of course, divorcing spouses have additional factors to consider and, to avoid joint liability, separate filing is often warranted.

Yet one more 2014 case involved a change of filing status before April 15. Kososki, T.C. Summ. 2014-28, involved a husband and wife who were married for eight years and had two children. They had always filed their returns jointly, and the husband’s mother usually prepared the returns and filed them electronically with the consent of both spouses. The 2010 return was filed electronically in February 2011, showing an overpayment of $7,768. Soon after filing, the wife moved out, but she told her husband she expected to get part of the refund from their 2010 return.

In March 2011, after learning that her husband had kept the refund, she filed a return using married-filing-separately status and claimed the children as dependents. As a result, of the conflicting filing statuses, the IRS examined the husband’s 2010 return and disallowed joint filing and his claim of the dependency exemptions. The IRS also assessed an accuracy-related penalty under Sec. 6662.

The court held that the wife’s return using a married-filing-separately status was valid because it was filed before April 15 (Regs. Sec. 1.6013-1(a)(1)). Thus, the IRS’s changing the husband’s filing status to married filing separately on his 2010 return was proper. Because the couple lived together with their children for all of 2010, the children were qualifying children for both spouses. In the case of a tie, the parent with the higher income is entitled to claim the children as dependents, which, for 2010, was the wife. The husband was also denied the EITC because it cannot be claimed when married taxpayers file separately, and the additional child tax credit, which goes to the parent who gets the dependency exemption.

The court held that the husband was not liable for the Sec. 6662 penalty because when he filed his return, it was reasonable to assume that his wife had agreed to file jointly.

Lesson learned: Contemplation of divorce before April 15 can raise a dispute over filing status, particularly if the couple qualify for the EITC, which may be claimed by a married couple only if they file jointly. Other factors may make it wise to avoid filing jointly, including that it makes the couple jointly and severally liable. If the couple had filed their joint return on or after April 15, it would have been too late for either to change that status. In a community property state, the separate filing status still requires each spouse to report half of the community property income, but filing separately removes the liability of one spouse to pay the other spouse’s taxes should the other spouse not pay.

Filing status if only one spouse signs the return

Salzer, T.C. Summ. 2014-59, involved a couple married since 1985. For the years at issue, 2008 and 2009, they lived together with their two children as a family. In each year, the husband had about $140,000 of wage income, and the wife had no income.

For 1985 through 2007, the couple filed jointly. For 2008 and 2009, the wife refused to sign the return. According to the court, the husband testified: “[M]y wife would not sign any forms from the federal government starting in that year * * * [because] * * * she has had issues with the federal government ever since the activity that happened in the summer of 2008 with President Bush, and she refuses to sign any forms however related to the government” (Salzer, slip op. at 4). Neither spouse filed returns for 2008 and 2009.

The IRS filed substitutes for return for the husband using the married-filing-separately status and allowing the standard deduction, which the court agreed with. The husband’s argument that he had a history of filing jointly was deemed irrelevant. “However much one might sympathize with [the husband], who faces much higher tax liabilities than those that would otherwise be required, the fact remains that joint filing status cannot be imputed. Taxpayers can secure such status only by filing a joint return” (Salzer, slip op. at 6).

The IRS also assessed, and the court upheld, failure-to-file and failure-to-pay penalties, as well as estimated tax penalties. The court noted that the wife’s refusal to sign a return was not reasonable cause to waive the penalties. The court observed that the penalties might be lowered once the IRS factored in exemptions for the wife and the two children and the child credit, as well as wage withholding. As for the estimated tax penalties, these items might bring down the tax owed to under $1,000, which would eliminate the estimated tax penalty under Sec. 6654(e).

Lessons learned: In footnote 2, the court noted that the husband could claim an exemption for his wife because she had no income (see Sec. 151(b) and IRS Tax Tip 2011-07). If this couple resided in a community property state, the IRS would have had to file a return for her as well (to report half of her community income). If she refused to sign it, they would likely either end up in court or be in receipt of a lien from the IRS.

What can one spouse do if the other refuses to sign the return? It seems he or she is relegated to filing separately. In a community property state, that seems to leave the other spouse to be approached by the IRS for an assessment. Generally, if the husband files jointly without the wife’s signature, the return is invalid (Olpin, 270 F.3d 1297 (10th Cir. 2001)).

Sec. 6061 states that, except as provided in Sec. 6061(b) on electronic signatures, Sec. 6062 on corporate returns, or Sec. 6063 on partnership returns, any return “shall be signed in accordance with forms or regulations prescribed by the Secretary.” Regs. Sec. 1.6061-1(a) allows a signature by an agent under Regs. Sec. 1.6012-1(a)(5). That regulation allows for a return to be made by an agent if there is a Form 2848, Power of Attorney and Declaration of Representative, and the taxpayer cannot make the return due to disease or injury.

Regs. Sec. 1.6013-1(a)(2) provides that “[a] joint return of a husband and wife (if not made by an agent of one or both spouses) shall be signed by both spouses. The provisions of paragraph (a)(5) of §1.6012-1, relating to returns made by agents, shall apply where one spouse signs a return as agent for the other, or where a third party signs a return as agent for one or both spouses.”

Assuming the spouse would not sign the Form 2848 and is not ill or injured, the other spouse still ends up filing separately.

Same-sex marriage and state filings

Whether same-sex married couples are considered to be legally married has changed in some states since 2013. Practitioners should not assume that a couple denied joint filing status for 2013 will be treated the same in 2014. For example, the Wisconsin Department of Revenue (DOR) modified its position on the effect of Windsor, 133 S. Ct. 2675 (2013)). After Windsor was decided, Wisconsin still did not recognize same-sex marriage. But, after the U.S. Supreme Court denied cert. in Wisconsin’s petition in Walker v. Wolf, the state now recognizes a same-sex married couple as married. According to the DOR, any tax return filings by same-sex married couples on or after Oct. 16, 2014, should be filed as married. For returns that were filed before Oct. 16, 2014, couples may, but are not required to, amend their returns to change their filing status. See the DOR’s Q&As on this topic.

Looking forward

As evidenced by the rulings and state actions above, determination of a married couple’s federal and state filing status should not be taken lightly. Couples should be reminded of the effect of  joint filing status in terms of both joint liability and that filing separately often prohibits couples from claiming favorable tax provisions, such as the EITC. Any evidence that a couple are contemplating divorce should warrant further discussion of filing status in addition to the preparer’s analysis of any conflict of interest that warrants no longer representing both spouses. A new twist starting in 2014 will be considering how provisions of the Patient Protection and Affordable Care Act, P.L. 111-148, such as the premium tax credit (Sec. 36B) and the individual mandate (Sec. 5000A) apply for a family contemplating filing jointly vs. filing separately. Determining filing status is not as simple as just asking a couple if they are married.

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Annette Nellen, Esq., CPA, CGMA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is a member of the AICPA Tax Executive Committee and Tax Reform Task Force. She has several reports on tax policy and reform and a blog.