John R. Bullis: Innocent spouse relief isn’t always granted
Mindy Lessard was married to Mr. Tomko in 2013 and they filed a joint tax return. However, two items of income weren’t reported on the return. There was $14,936 of cancellation of debt income that was his and $20,502 of distributions to him from his retirement plan. They were divorced in 2014. It seems they didn’t live in a community property state.
On Nov. 7, 2013, Mindy signed a waiver at the bank (custodian of the retirement plan) that allowed him to withdraw money at any time without her consent. She didn’t know of the retirement plan distributions until form 1099-R was received around February 2014. She also learned of the cancellation of debt income when that form 1099-C was received about the same time.
On the night of April 14, 2014, he presented her with their 2013 joint income tax return he prepared. She glanced at it and saw it was showing a refund. She signed the return because “she trusted him” since he took care of the returns and financial matters in earlier years. He had a banking and finance background.
IRS sent a deficiency notice since the return didn’t report the cancellation of debt income or his retirement plan distributions.
She filed for relief from paying the IRS since she “did not know or had no reason to know the return was not accurate and complete.” She didn’t file for innocent spouse relief within two years after IRS began collection actions from her as required.
Revenue Procedure 2013-34 says the burden of proving she didn’t know and had no reason to know of the items that caused the tax deficiency was on her. The court found she didn’t show proof she didn’t know of the income that was not reported on the tax return. She saw the forms 1099.
The Tax Court examined the facts and circumstances and ruled she was aware of the retirement plan distributions and she was aware of the cancellation of debt income because of her receipt of the forms 1099-R and 1099-C. The court found her failure to “fully understand the tax consequences of those items did not provide her a basis for relief.” She was liable for the tax as much as he was.
At the trial it became clear they shared the household expenses until the June 2014 divorce.
The lesson is to become involved and ask questions before signing the joint tax return. Especially in a community property state like Nevada, it’s best for both spouses to at least generally understand what the tax return reports and claims.
Did you hear? “It is amazing how quickly kids learn to drive a car, yet are unable to understand the lawn mower, snowblower and vacuum cleaner,” by Ben Bergor.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.