MFS issues

[Crnchnmbrs]

This may be more of a legal question than a tax question,
but any help or suggestions from someone who has dealt with
this is appreciated. As I understand it (please correct me
if I am mistaken), in community property states when married
couples are living together, and all funds are co-mingled,
they must split net income and witholding 50/50 on their
respective MFS returns.

SE tax remains to the earner.

1) What happens if one spouse gets hit for more tax in audit?

2) Would half of the adjustment be expected on the other return?

3) Is there any other way to protect the "innocent" spouse
from the other's liability?

4) Is there a way to split withholding without generating a
CP2000 due to the mismatch?

Thanks in advance...

 

[Michael T Wing CPA]

1) What happens if one spouse gets hit for more tax in audit?

Generally, the IRS can seize any "community" asset to
satisfy the debts of either spouse. That would typically
include the wages of the "other" spouse.

2) Would half of the adjustment be expected on the other
return?

I would expect the IRS to make adjustments to both returns
if a community item is involved. But, anything can happen.

3) Is there any other way to protect the "innocent" spouse
from the other's liability?

Probably not, unless they get divorced or otherwise put an
end to their "community" status.

4) Is there a way to split withholding without generating a
CP2000 due to the mismatch?

In spite of IRS instructions to the contrary, I typically
reflect 100% of the withholding on the return of the spouse
to whom it relates. Never (yet!) had a problem with the IRS
when doing this. But, I honestly don't know whether
allocating it will generate a CP2000. This is one of the
many problems/uncertainties with MFS filings in CP states.

Lastly, I should state that I am NOT an attorney and these
answers might vary depending on the circumstances or the
~particular~ CP state in question.

MTW

 

[D. Stussy]

This may be more of a legal question than a tax question,
but any help or suggestions from someone who has dealt with
this is appreciated. As I understand it (please correct me
if I am mistaken), in community property states when married
couples are living together, and all funds are co-mingled,
they must split net income and witholding 50/50 on their
respective MFS returns.

SE tax remains to the earner.

1) What happens if one spouse gets hit for more tax in audit?

It had better not be for income reported by the other
spouse. The IRS has, in some areas, had a habit of NOT
pulling the other spouse's return to have it present at the
examination (even if it's not being examined by itself) just
to see if the income was reported somewhere.

2) Would half of the adjustment be expected on the other return?

No. The FULL adjustment to a community income item should be
expected on the other return. The adjustment that is being
made should be HALF of the unreported item. That means that
the IRS has to open the other spouse's return for
examination, else an "unauthorized examination" has occurred
(cf. "10 deadly sins" from the 1998 law changes).

3) Is there any other way to protect the "innocent" spouse
from the other's liability?

If they filed separately, one spouse is NEVER liable for the
other spouse's liability for that year.

4) Is there a way to split withholding without generating a
CP2000 due to the mismatch?

That is not your problem as a taxpayer, but a problem of the
IRS not complying with the law. Complain to your
representative in Congress about the issue. [Apparently, the
Taxpayer Advocate isn't able to deal with this, else the
problem wouldn't be arising.]

 

[HW \Skip\ Weldon]

3) Is there any other way to protect the "innocent" spouse

Probably not, unless they get divorced or otherwise put an
end to their "community" status.

I understand that you were answering this in the context of
a community property state, but what about non-community
property states?

If couples file separately, are their respective non-marital
assets protected?

And if they were to get divorced, would that protect their
non-marital assets for the period they were married? Or
just going forward?

(By "non-marital" assets, I mean things they brought into
the marriage and that were never commingled.)

-HW "Skip" Weldon
Columbia, SC

 

[Arthur L. Rubin]

This may be more of a legal question than a tax question,
but any help or suggestions from someone who has dealt with
this is appreciated. As I understand it (please correct me
if I am mistaken), in community property states when married
couples are living together, and all funds are co-mingled,
they must split net income and witholding 50/50 on their
respective MFS returns.

Well, it depends on the State definition of "community property".

In general, if spouse A has income, which is not mentioned
to spouse B nor gives any benefit to spouse B, even if it's
technically in a joint account (which, for example, B
believes has been closed), then it is not community income
for tax purposes.

At least that's my understanding. Of course, that may not
be what YOU mean by co-mingling funds.

 

[Michael T Wing CPA]

3) Is there any other way to protect the "innocent" spouse

If they filed separately, one spouse is NEVER liable for the
other spouse's liability for that year.

I assume we're still talking about community property
states. I agree that ~technically~ one spouse is not
"liable" for the other spouse's liability on a separate
return. However, if the couple has any community assets,
those assets (or at least half of them) can generally be
seized to satisfy the debts of EITHER spouse.

So, even though the non-obligated spouse isn't technically
"liable," his/her wages can nevertheless be garnished
(assuming that the wages are community income). In other
words, the ASSET is answerable even if the INDIVIDUAL is
not. If the IRS doesn't routinely pursue this, it is due to
some form of "tolerance policy" on their part. <g>

MTW

 

[Michael T Wing CPA]

I understand that you were answering this in the context of
a community property state, but what about non-community
property states?

I presume that one spouse is generally NOT liable for the
debts of the other in NON community property states.
Nevertheless, I believe that "jointly held" accounts ~can~
be tapped to some extent.

If couples file separately, are their respective non-marital
assets protected?

Probably so in either CP or NON states.

And if they were to get divorced, would that protect their
non-marital assets for the period they were married? Or
just going forward?

Per above, I don't see any "jeopardy" to bona fide separate
assets.

The more difficult question is how quickly can a divorced
couple in a CP state "lose" the attributes of community
property with respect to their assets. I'll defer to the
attorneys on that one. <g> Of course, once the marriage is
over, I believe that an "innocent" spouse can ask for relief
from the IRS based on "equity" (as opposed to strict
application of law).

Note: I am no expert in this area.

MTW

 

[D. Stussy]

3) Is there any other way to protect the "innocent" spouse

I assume we're still talking about community property
states. I agree that ~technically~ one spouse is not
"liable" for the other spouse's liability on a separate
return. However, if the couple has any community assets,
those assets (or at least half of them) can generally be
seized to satisfy the debts of EITHER spouse.

So, even though the non-obligated spouse isn't technically
"liable," his/her wages can nevertheless be garnished
(assuming that the wages are community income). In other
words, the ASSET is answerable even if the INDIVIDUAL is
not. If the IRS doesn't routinely pursue this, it is due to
some form of "tolerance policy" on their part. <g>

Only one HALF of the item can be seized or one half of wages
garnished, etc., ..... (because only half belong to the
spouse that owes). The IRS can run afoul of this if they
accidentally levy an inherited source (since inherited
property or sources are excluded from the community by
default - and require an OVERT declaration to override).