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.