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Filing status disallowance leads to a tax deficiency

The rules that determine proper filing status need to be reviewed closely or you could receive a letter assessing an unexpected tax liability. Married filing joint (MFJ) verses married filing separately (MFS) status was the subject of a recent tax court case.

These two options for married people often lead to significantly different tax obligations. MFS provides a benefit when you want to separate your tax liabilities, however, and may avoid needing to request innocent spouse relief down the road. In this post, we will discuss the rules and why the tax court sided with the IRS in the recent case.

 

Mental illness and a separate return

In Moss v. Commissioner, T.C. Memo 2017-30, the husband filed a joint tax return for 2008. His wife would not sign, so he sent a letter explaining that she suffered from mental illness and to disregard any tax return she later filed.

The husband did not have power of attorney to act on her behalf though. And his wife did file her own MFS tax return. On her return, she claimed a loss of $350,000 based on a delusion that she had been defrauded by Bernie Madoff.

After changing the husband’s status from MFJ to MFS, the IRS issued a notice of deficiency. The husband appealed to the tax court.

To file a joint return, each spouse must sign the return. If that is not possible there are two alternates:

  • Act as an authorized agent for a spouse (generally, through a power of attorney if a spouse is out of the country or incapacitated and unable to make financial decisions)
  • Provide evidence that regardless of a missing signature the spouse consented to MFJ status.

In this case, the husband didn’t have anything to show he could act as an agent of his wife even though he asserted she was incapable of making competent decisions. And then she filed her own tax return MFS, which indicated she had not consented to MFJ status on the return.

Because he could not use her personal exemption or the more preferable MFJ status, the tax deficiency along with fines and interest was upheld.

This case is a good example of how important it can be to get on the same page with a spouse prior to filing taxes. This can easily become an issue after separating and while going through the divorce process.

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