Joint Return versus Separate Returns for Spouses

Joint Return versus Separate Returns for Spouses

In an ever evolving environment of professional liability, some recent conversations with tax preparers have raised the question of what is the duty of a tax preparer in discussing with spouses the pros and cons of filing jointly or separately. Historically, a brief statement to the taxpayers that the tax will be lower if you file jointly was all that was stated and usually proved to be all that they wanted to know.

However, things have changed. The legal definition of spouse has recently changed in light of court rulings saying that gay marriage is legal. Also, more and more women work and many are professionals or have their own businesses and assets. These may generate income and losses. They may also generate non-dischargeable trust fund penalties for non-payment of withholding tax that, in addition to any income tax liabilities, will create liens resulting in any tax refunds being seized by the IRS and encumbering those separately held assets. Many individuals are coming forward to disclose foreign bank accounts and foreign assets that generate income tax issues and other significant penalties for not filing a host of different information returns related to those foreign assets. Frequently, only one spouse owns the account, but the other may be aware of it. Sometimes the other spouse is in the dark.

The tradeoff for filing jointly and receiving a lower tax bill is that, if any adjustments are made by the IRS or if the tax is not paid, then both spouses are liable. While there are innocent spouse and separation of liability provisions available in post filing proceedings, the former requires lack of knowledge and no benefit from any unreported income, while the latter requires some disintegration of the spousal relationship, whether divorce, legal separation and or physical separation of the parties. They also require time and, frequently, money for professional assistance. While the IRS has greatly expanded these relief provisions, there is no guarantee they will succeed in a given fact situation.

In this environment, some practitioners are suggesting that more than just a passing statement that you will save by filing jointly is required. Their recommendations? Prepare both separate and joint returns. Then meet with the taxpayers and explain the differences between and the consequences of the two returns. Explain that if a joint return is filed, both will be liable to pay the amount on the return, but, just as importantly, any future additions in taxes, penalties, and interest due. These may come from places not contemplated by either the taxpayers or the preparer at the time of preparation of a return. Definitely, food for thought.

Joint Return versus Separate Returns for Spouses

Beware Tax Scammers Pretending to be the IRS

In a recent statement, the IRS advises that over 4000 people have been cheated to the tune of 20 million dollars by various tax schemes currently in vogue. These scammers operate by scaring people into believing that they must act immediately to avoid arrest, deportation and other frightening consequences unless they send money immediately. They even have the ability to cause your call scanner to reflect that the call is from the IRS. They also use official looking letters and emails.

The IRS warns that the only official website for the IRS is www.irs.gov. They also advise that they would never do any of the following, which scammers often do:

  1. Demand payment immediately over the phone in a first contact initiated by them. They would first send you a bill.
  2. Threaten to have local police arrest you for not paying them.
  3. Demand payment without providing an opportunity to challenge the amount claimed. (However, be aware that if you move and don’t notify the IRS of your new address, that notice may never reach you).
  4. Specify that payment must be by credit card or debit card.
  5. Ask for credit card or debit card information over the phone.

If you have been targeted by a scammer, call the IRS. If you owe taxes, call 1-800- 829-1040. If you don’t owe taxes, call 1-800-366-4484. Remember not to panic. If you receive a call and don’t know what to do, think about these warnings and seek help.

Joint Return versus Separate Returns for Spouses

15 Red Flags for an Audit

  1. Income. If you make more than $200+ thousand dollars a year your chance of an audit jumps from .86% or 1 out 116 up to 2.701% which is 1 out of 37. If you make over a million dollars it is 1 in 13 chances. If you make less than $200 thousand then your chance of being audited is .78%.
  2. Information Returns. A miss match between information returns such as 1099s, W-2s, etc. and your personal return.
  3. Personal Deductions. Higher than average deductions for your income bracket.
  4. You run a small business and you are filing a Schedule C. The Schedule C reflects higher or lower gross sales than most sole proprietors, especially, if your business is cash intensive such as taxis, car washes, bars, salons, restaurants, and so forth. As opposed to C-Corps, the IRS is shifting its emphasis to S-Corps, small LLCs, and small partnerships.
  5. Taking large charitable deductions. IRS has statistical averages based on income brackets.
  6. Claiming rental losses. IRS is aggressively scrutinizing these, especially, where people are claiming to be real estate professionals and showing lots of income from non-real estate activities. There is a special audit project just for this.
  7. Taking alimony deductions. The IRS knows that court orders frequently do not meet the requirements to qualify as alimony, so they are looking at this issue frequently. They also want to make sure that the paid spouse is reporting the alimony as income.
  8. Writing off losses for a hobby. You must make money three out of five years, or the IRS will challenge your so-called “business” as a hobby.
  9. Business meals, travel, and entertainment. Large amounts set off alarm bells, especially, if they are too high for the type of business or profession. Documentation of this area is critical and, if it is not there, you will lose the deduction.
  10. Failure to report foreign bank accounts. IRS has received billions in this recent area and wants more.
  11. Claiming 100% business usage of a vehicle. IRS does not like this. Make sure you document with mileage logs and precise calendar entries as to usage. If you are buying a vehicle late in the year and writing it off, this is a red flag. If you are taking both depreciation and standard mileage rates this is incorrect and a red flag.
  12. Claiming day trader losses on a Schedule C. Investor losses are subject to a 2% cap of adjusted gross income. People trying to avoid this try to qualify as traders and get ordinary losses and avoid the 2% limitation.
  13. Gambling. First, is the failure to report winning or claiming big losses. Also, people frequently attempt to be classified as professional gamblers so they can take the cost of their lodging, meals and so forth.
  14. Claiming a home office deduction. Here there is an exclusive use issue. In other words, are you using the portion of your home exclusively for work? Also, it must be the principal place of the business.
  15. Engaging in currency transactions. If you are dealing with large cash deposits you may be triggering suspicious transaction reports by banks or any other financial institutions, and this can result in an audit.
Joint Return versus Separate Returns for Spouses

Anticipate Stronger IRS Trust Fund Penalty Activity

Recently, in report number 2014-30-034, the office of TIGTA reported on an audit that it conducted in which it determined that the IRS was not acting timely on trust fund recovery penalty actions. In particular, TIGTA found untimely actions relating to trust fund recovery procedures including expired assessment statutes, unsupported collection determinations, and incomplete trust fund recovery penalty investigations associated with currently non-collectable cases. According to this study, the actions were either untimely or inadequate in 99 out of 265 cases that were viewed in a statistical sampling. For fifty-nine of these 99 cases, untimely actions were more than 500 days to review and process the trust fund penalty assessment. The report went on that when these assessments are not timely made, the taxpayer’s ability to pay declines, thereby decreasing the probability of collecting the trust fund taxes. In addition, the report states that the government’s interests is not protected if these assessments are overlooked or not timely made. As a result, TIGTA recommended that the IRS emphasize to group managers their responsibilities to better monitor these cases and to insure that revenue officers take timely actions, enhancing communication, and training, and insuring timely completion and adequacy of the systems to take appropriate actions, and to revise the guidance regarding the accuracy of collection determination. In response to the report, IRS officials agreed with all of these recommendations and plan to take compliant action. Therefore, you can anticipate more frequent and more difficult interactions with revenue officers who are now under the gun to see to it that trust fund penalty determinations are finished sooner and are more detailed and accurate.

Joint Return versus Separate Returns for Spouses

Time is Running Out on Offshore Accounts Consider an Offshore Voluntary Disclosure Now

According to the principal deputy attorney general for policy and planning at the Department of Justice (DOJ) Tax Division, Caroline D. Ciraolo, the DOJ is preparing for an intense crackdown on offshore tax evaders and people hiding assets overseas. Stating that taxpayers should come forward as soon as possible, Ms. Ciraolo said that “Time is of the essence” and “come in now, or face the consequences”.

Ms. Ciraola, a featured speaker at the Federal Bar Association Tax Advice & Controversy Conference, stated that the government’s investigations has extended far beyond Switzerland to several other countries including Barbados, Israel, India, Liechtenstein, Luxembourg and others. She stated that just because there may not yet be any public disclosures should not be interpreted as inaction on the part of the Government. She continued that information is being received and analyzed from a large number of sources. This includes information being turned over by several Swiss banks to avoid prosecution for their roles in the offshore activities. This, in turn, is being used to start new investigations and to target new taxpayer “misconduct”. They are “looking at everything they receive”.

Our experience in preparing offshore voluntary disclosures has shown us that the required forms contain questions about who assisted in setting up accounts both here in the United States and abroad, the advice given, the dates and places of meetings, any “facilitators” and so forth. This also is being reviewed by the IRS for “leads” as to other banks and persons of interest.

To avoid possible criminal penalties and civil fraud penalties, taxpayers should consider participating in one of the different offshore voluntary disclosure programs and to do so sooner than later. As more time passes, the penalties are becoming stiffer. Last July, the IRS announced that anyone with an account at or with so-called “listed” banks or persons, such as UBS (the list can be viewed at the IRS website), would now have to pay a 50% offshore penalty instead of the usual 27 ½% penalty. To make things worse, this 50% penalty would apply to all of the taxpayer’s offshore accounts even if the others were at non-listed banks. Prior to the 27 1/2 %, the penalty was 25%. So as time passes, the sanctions are getting potentially worse.