Tax court & SS income

[Kea]

My client sent me a CP 3219A for his 2011 tax return. He did not report his Social Security income he received as a disabled veteran (hit by an IED in Operation Enduring Freedom & paralyzed). He filed as MFS because his wife left him after the injury. The divorce was not final until 2012. The notice says that he owes around $1400. But since he did not live with his wife in 2011, he should only owe around $300.

I am verifying with him that they did not live together AT ALL in 2011 (waiting for his e-mail - I did ask when preparing original return, but verifying again). However, I'm not sure about the time he was in the hospital. What would qualify as living apart? Also, the wife was military & not sure dates she was deployed. Would his being in the hospital and / or her being deployed still count as living together? Would that keep him from being able to say he did not live with her at all during that year?

This was apparently not his first notice because it states that if you do not agree with the changes, the last date to petition tax court is June 16, 2014. At this point is it better to just pay the full amount due? Is it worth the time, effort & cost to petition the tax court to reduce the liability by over $1100? I have never had anything get to that point before (although it got close last year). Clients usually notify me of IRS letters fairly quickly.

I also noticed that that CP3219A did not include interest or penalties in the amount owed. Not sure how that happened.

Thanks!

[BulldogTom]

I am not sure how the MFS comes into play here, unless there are children involved. You always have the choice to file MFS, but just watch for the itemized rule (if spouse itemized, you must also itemize).

Generally, filing a tax court petition does not get you to tax court. What you get is a very advanced auditor who will review the case and try to settle. I have had 4 of my clients file a tax court petition and none of them went to court. Everything settled out in the tax payer's favor every time. However, I did have rock solid documentation every time and the issue was that the the clients did not respond in time to other notices, and the tax amount due was really not in question.

I would definately preserve the ability to go to tax court by having the client file the petition. It is only a $60 fee and you preserve all of his rights.

But first, make sure that the tax return as filed is correct. This is the most important thing. The IRS cannot arbitrarily change his filing status, so if the return is correct and filed as MFS, this should be a no change review that will save him $1,100, minus the filing fee and your bill.

But something is bothering me about the facts as you have laid them out. I would look very carefully at the 2011 return. It doesn't sound right that the IRS only changed his filing status.

Good Luck.

Tom

Hollister, CA

[Jack from Ohio]

Another point:

SS income, whether for disability or not, will be taxed at 85% if he does MFS. All SS income is subject to tax if other taxable income is high enough.

On the other hand, Veterans Disability (not Social Security) income is not taxed.

Be sure you know the difference, and be sure he knows what he is telling you.

[taxtrio]

I believe the question has to do with the taxability of the social security benefits received.

If filing MFS and lived with spouse then social security is automatically taxable (at maximum percentage)

If did not live together during the year then only under usual rules.

[Kea]

The Social Security income was not originally reported because he did not receive a 1099 SSA. He was under the impression that it wasn't taxable & since some disability payments aren't taxable (as Jack just mentioned) I prepared the return without the Social Security. IRS did have the 1099 SSA & a 1099 INT and sent the notice.

If he did not live with his (now ex) wife AT ALL in 2011, his Social Security is taxed at a lower rate (using Code D). IRS letter does assume 85% rate.

At this point the original return is wrong and needs to be amended. But if being in the hospital & / or his wife being deployed does not prevent him from stating he did not live with his wife at all in 2011, then he won't owe as much as the IRS says he owes. I have not yet told him that he may owe less because I wanted to make sure I could do this.

Edit -- I guess I'm really just trying to make sure I know the proper definition of "live together" so I know what questions I need to ask.

And it sounds like the tax court petition will be "worth it."

[Jack from Ohio]

His wife being deployed, or him being in the hospital does NOT qualify as not living with his spouse. Plain and simple. Must be a separation agreement or abandonment.

MFS or MFJ are his only options and he did live with his wife for 2011.

Sounds like the notice is correct and he owes the taxes.

He can amend and file MFJ and may reduce the tax burden.

[BulldogTom]

Disagree with Jack. If you intended to be unmarried, and did not sleep under the same roof as your spouse for ANY night of the year, you were separated all year. Millitary deployment, hospital stays, etc do not count for anything in this situation. Did he spend 1 night under thse same roof as her is the only question.

Tom

Hollister, CA

[Gail in Virginia]

I think this is one of those cases where intent actually matters, as Tom pointed out. And being military, there out to be some evidence that they were separated as well as under separate roofs. For example, while his wife was deployed was he the emergency contact for her, and while he was in the hospital was she the emergency contact for him? Did they actually agree to separate in 2010, and the deployment and hospitalization in 2011 were irrelevant to actual living arrangements? Or were they living together until circumstances separated them and they decided that they liked it that way? Facts and circuses matter.

[Kea]

Thanks, that helps me determine questions. I actually agree with all answers and why I had the question. I know that - in general - deployments and hospital stays count as temporary absences. But if she left him after the explosion (but I don't know any of the dates), I would hate for the lack of paperwork to "cost" him in this particular circumstance. He had more important things to worry about at that time. I think he was in a coma for some of the time, but again not sure of dates. So I'll see if I can get a date that she left him.

[Jack from Ohio]

I think this is one of those cases where intent actually matters, as Tom pointed out. And being military, there out to be some evidence that they were separated as well as under separate roofs. For example, while his wife was deployed was he the emergency contact for her, and while he was in the hospital was she the emergency contact for him? Did they actually agree to separate in 2010, and the deployment and hospitalization in 2011 were irrelevant to actual living arrangements? Or were they living together until circumstances separated them and they decided that they liked it that way? Facts and circuses matter.

Very well stated!!!