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Joint Tax Returns May Be Hazardous, Unfair

Wednesday, April 11, 2001

The perils of joint tax returns may far outweigh any short-term advantage for married taxpayers, a tax expert argues, and the hazards are more significant to women than the "marriage penalty" and "marriage bonus" in the current tax rules.

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The perils of joint tax returns may far outweigh any short-term advantage for married taxpayers, a tax expert argues, and the hazards are more significant to women than the "marriage penalty" and "marriage bonus" in the current tax rules.
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Marilyn Barrett, legal expert, author

(WOMENSENEWS)--At last, Stephanie Toth thought, she and her young son were free to put their lives back together. That was the day in 1998 when her husband began a 30-year prison sentence, ending years of beatings, rape and forced prostitution. Then the IRS showed up.

Stephanie, it turns out, had filed a joint income tax return for 1993, a year in which she lived with her abusive husband for only about three months. After he was in jail, the Internal Revenue Service came to her looking for $10,000 of unpaid taxes. Even though the IRS was aware of the abuse Stephanie had suffered at the hands of her former husband and even though the divorce judge ruled that her former husband was entirely responsible for the tax debts, the IRS said Stephanie had to pay.

Margaret, who asked not to be identified further, also had to pay taxes really owed by her abusive husband David because she filed a 1994 joint tax return with him. At trial, her daughter testified that she saw David throw Margaret across the room, grab her hair and slam her against the wall.

Nevertheless, the judge decided that, although Margaret was a victim of abuse, she had not proved that she was being abused at the precise time she signed the return. She was, the judge said, liable for any unpaid taxes for 1994 even though she and David were now divorced.

Stephanie Toth and Margaret became just two more of the women knocked off their feet by joint return liability. These are extreme examples, but the risk of liability holds true for all women who file joint tax returns.

This is the type of marriage penalty President George Bush should address, not the small adjustments to the current income tax rules he is advocating.

The "marriage penalty," Bush is referring to is the one that results from the fact that there are different tax brackets that apply to married persons and single persons. In some tax brackets, if two married persons earn about the same amount of money, they pay more taxes--the "marriage penalty"--than they would pay if they were not married and paid taxes as single individuals.

If only one spouse works, however, the married couple will pay less tax than if they were not married--a "marriage bonus." President Bush's recent tax proposal does not solve these problems.

Under his proposal, the marriage penalty would be reduced by at most $990 and, for many married couples, it would be considerably less. The marriage bonus would not be changed.

Moreover, Bush's proposal doesn't do anything for the biggest "marriage penalty" of them all: joint return liability--a penalty that is particularly appalling when the woman is the victim of domestic violence.

Filing Joint Returns, Women Can Be Liable for 100 Percent of Unpaid Taxes

Joint return liability will continue to be a major problem for divorced men and women for years to come as the divorce rate continues to hover around 50 percent. It is particularly onerous in cases like those of Stephanie Toth and Margaret who are first victimized by their husbands and then victimized again by a tax system that makes them pay their abusers' tax debts.

If a woman files a joint return with her husband and the IRS later claims that they didn't report all of their income or took improper deductions, the IRS can collect 100 percent of the unpaid taxes from her (and vice versa, of course). And she must pay--even if she has been long divorced from her husband and even if the unpaid taxes are attributable to money he made or expenses he took.

Sometimes a taxpayer can escape joint return liability if she can prove to the IRS that she is an "innocent spouse." She has to demonstrate to the IRS that she didn't know that the taxes were not properly paid, that she had no reason to know of the impropriety and that she didn't financially benefit from the underpayment of tax.

In 1998, Congress passed a law that purported to make it easier to qualify as an innocent spouse. This law also allows taxpayers to retroactively file a separate return if they are divorced from the spouse with whom they filed a joint return and they didn't know that taxes were underpaid. To do so, taxpayers must be able to prove how much tax they would have paid if they had filed separately in the first place. This can be hard to do when many years have gone by and records needed to prove their separate income and expenses are lost.

More than 99,000 taxpayers have asked the IRS to relieve them of joint return liability since the 1998 changes. But even under the new law, it is very hard to qualify as an innocent spouse or qualify for the separate return filing.

For example, for a spouse to prove that she didn't know about the underpayment of tax, the IRS and the courts hold that, as long as the woman knew about the underlying transaction, she is deemed to have known that taxes weren't properly paid. That is, if she knew that the couple received cash from an exotic investment that wasn't reported properly on their tax return, the IRS and the courts hold that she then knew that taxes related to the investment were underpaid. And they hold her liable for these taxes even if she didn't understand how the investment worked, she didn't know how it ought to be taxed and she didn't know that it wasn't taxed correctly.

'Married, Filing Separately' Avoids Joint Return Liability--But Taxes Higher

Joint return liability can be avoided by married couples filing tax returns as "married, filing separately," and married couples increasingly are doing so as they become aware of the risk of joint return liability. However, married couples who file separately lose other benefits and pay more tax than if they filed joint returns and joint returns are still more common.

Sometimes, an abused woman can escape joint return liability by proving that she signed the joint return under duress, but perceptions about what constitutes duress vary greatly among IRS agents and judges.

The IRS recognizes that special handling is required for joint return cases in which the woman has been abused. The IRS recently announced that victims of domestic violence who want to claim that they are "innocent spouses" can note that their case is a "potential domestic abuse case" on Form 8857. This is the form they submit to claim innocent spouse relief, and the IRS is bound not to reveal their current addresses and other confidential information to their abusive husbands.

However, this does not prevent the IRS from making victims of abuse pick up the tax tab for their abusers.

Joint return liability could be eliminated by simply converting to a separate return filing system. All individuals--single and married persons alike--would file their own individual returns, be subject to the same tax rates and brackets and be separately responsible for their own tax liabilities. Other democratic countries, including England in 1990, have already done so.

Instituting Separate Return System Would Eliminate the 'Marriage Penalty'

A separate return system would be consistent with today's family economics.

More married women enter the workforce everyday and the government should finally acknowledge that the Ozzie and Harriet days are over and change the tax system to conform to that reality. One-earner couples would lose the marriage bonus under a separate return system, but, as more women work, fewer couples qualify for the bonus.

A separate return system would eliminate the marriage penalty and equalize the taxes paid by unmarried and married taxpayers. It would allow the IRS to use the resources it currently uses to sort through the vast number of claims for joint return relief to pursue true tax cheats. It would eliminate the financial hardship and emotional devastation suffered by divorced taxpayers who become faced with massive and unforeseen taxes owed on a joint return on tax items they didn't even know about.

And it would eliminate the further victimization of women who have already suffered intolerable abuse at the hands of their former husbands.

Marilyn Barrett is the author of "The Ten Biggest Legal Mistakes Women Can Avoid." She is a corporate and tax partner at the Los Angeles law firm Alschuler Grossman Stein and Kahan LLP. She is a former chair of the taxation sections of the California State Bar and the Los Angeles County Bar Association.

For more information, visit "The Ten Biggest Legal Mistakes Women Can Avoid": http://www.legalmistakes.com/