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Tax Trap for Separated Spouses

I'm seeing more people these days who live apart from their spouses but aren't getting divorced because they say they can't afford a divorce.  And then, partly out of habit maybe and because of a desire to minimize taxes, they file their income taxes as married filing jointly. What could go wrong?

This true story will shed some light on the dangers:

In 2004, Jane and John Doe sold their home in Minneapolis and went their separate ways.  John moved to a townhome in Farmington with their son and Jane moved to Oklahoma with their daughter, where she snagged a good job.  In 2005 they filed a joint return and reported the sale of their home, which didn't result in any taxable gain.

In 2006, Jane didn't want to file jointly with John, but she had never done her own taxes and felt comfortable with the tax preparer that she and John had used in the past.  She  mailed her W-2 to John and asked him to send it on to the tax preparer, and ask him to file her 2005 returns married filing separately.  She knew that she'd had more than enough taxes withheld from her salary, and she told John to use the refund for their son.  Jane knew John had never closed their joint checking account, so he would be able to deposit her refund check into the joint account.  She didn't think anything more of it.  She assumed that the tax preparer filed her returns electronically, and that's why she didn't receive tax returns to sign and file.

She continued to do this for two more years.

Early in 2009, Jane received a notice from the IRS telling her that her wages would be taken to pay the joint tax liability for 2005 and 2006, in the amount of $23,532.23.  She read it five times and it still didn't make any sense.  She'd never received anything in the mail before this about owing taxes for those years, and why hadn't anybody told her about this before now?

After endless phone calls with the IRS, she learned that her husband had filed those returns married filing jointly, and even though taxes had been withheld from her paycheck, her husband must not have done the same.  And now the IRS was going to take part of her paycheck to pay his taxes.  Because when you file jointly, both spouses become separately liable for the whole amount of the tax.

Jane filed a request for Innocent Spouse Relief and it was denied.

She filed a request for a hearing and it was denied because it had been more than one year from the time the IRS had mailed its Collection Due Process Notice -- to her husband's address, which was the address on the joint return he had filed.

It's unfair to take someone's assets without prior notice and an opportunity to challenge it.  Federal tax rules do require that a notice be sent before the IRS starts taking a taxpayer's assets, and there is a short window of time during which the taxpayer has the legal right to challenge the asserted tax liability.  After that, the IRS gives you a year to request what it calls an "equivalent hearing," which gives you the right to challenge the tax liability, but not the right to appeal an adverse decision if you've missed the 30 day deadline.  Once you've missed the one year deadline, you don't even get the right to a hearing.

And here's Jane's problem:  because her husband, without her consent, filed joint returns without her consent, his address on the returns became her "last known address" for the IRS.  So that's where her notices were sent.

How does Jane get out of this nightmare?  Well, she can hire an attorney, who has a few different options to try, none of which is guaranteed to succeed.  In the meantime, the money in her bank accounts, as well as part of her salary, is fair game to the IRS.

Moral of the story:  don't file joint returns with a separated spouse and don't send your W-2 or 1099's to your separated spouse and expect him or her to see that a married filing separately return is filed.

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