messy divorce

[taxbrewster]

I have a new client that came to me today.

She has not filed since 2005, however Husband filled MFS for all those years. They are in the middle of a very messy divorce. Her lawyer thinks they can get a court mandate to go back and file those years MFJ because it would help the wife because she is SE, the husband has pension income and small SE from selling real estate, (they have 1 kid) I believe he also took all the write offs for the year, house, taxes, etc. Basically, he behind her back in a lot of areas, including taxes..

The thought is they would get some refund money and that would be used to help pay the wife the large amount of $$ she will be receiving when the divorce is final..as well as get her caught up on taxes. 2 birds with one stone.

Is this a good play? Is it possible just to go back and amend his returns with now his wife on the return?

Any help or ideas would be nice, thanks...

[jainen]

>>behind her back in a lot of areas, including taxes<<

Why do I have this prickly feeling that "would be used to help pay the wife the large amount of $$" actually refers to paying the lawyer a large amount of $$?

Well, the IRS won't have any objection, so it's fair game for negotiations. Maybe it would generate a refund, though that's not my experience when one adds SE income to a pension (presumably without ES payments because she is a non-filer). What does her lawyer say about becoming jointly liable for whatever the bum did behind her back?

[mcb39]

I have a lot of questions going through my mind for this lady. Why hasn't she been filing taxes? How much is she going to owe? Is she going to pay you (since she apparently doesn't want to pay the IRS)? And, yes, as Jainen points out, the lawyer?????????? Who lived in the house and paid the taxes, etc and who did the child live with? Do you actually have any facts about the husband or are you just going by what she say....I believe you said she was a new client so you probably don't know a lot about her. I wouldn't really want her walking into my office at this late date.

[kcjenkins]

Is this a good play? Is it possible just to go back and amend his returns with now his wife on the return?

Any help or ideas would be nice, thanks...

Yes, it is possible, for 06 and 07, but too late for 05. However, the court can NOT just 'mandate' that he change his filing status, if he is unwilling to do so. The court might hit him with higher settlement costs, if he refuses, but if he is smart, he will probably refuse. Filing jointly would make him liable for her taxes, and if her records are not good, and she's audited, as many 'divorce' returns are, and she ends up owing more, he would suddenly find himself on the hook.

As for him taking the mortgage and RE Tax deductions, if he was the one who paid the mortgage, he's legally entitled to take them. Be careful, Brewster, when hearing only one side in a "messy divorce", usually they both 'slant' the story in their favor. Plus the fact that he has filed, but she has not, makes me tend to trust him a bit more than her, in a he said, she said, situation.

[taxbrewster]

wow, lots of questions, i know, I have them as well...

He "told" her they were filling joint, then when the divorce hit, she figured out he had been filing MFS...He was lying and signing her name left and right...

They lived in the house together, and did so till about 6 months ago. He took all sch A deductions.

Going back and filing MFJ, of course helps her and her tax liability, screws him because he has already filed and collected refunds. If she were to file the back years (MFS), would owe at least 3-4k a year, based on quick numbers by me....

She has $$ to pay me and pay her lawyer...She has just been kept in the dark for a long time and now is just seeing the light.

I know, my gut says let them walk...

I am more curious for future clients...Would going back and filing the years open up a IRS audit box I would want no part of.

Thanks again, it is a very sticky situation...This woman has been screwed by her husband and just thinking I might lend a helping hand because she came as a referral.

[joelgilb]

Currently it looks like your only option is to file her MFS. So may be best to just file her returns as MFS and then tell her to get her divorce attorney to deal with Court orders or getting him to agree to amend and then file MFJ.

Of course as others have indicated its to late for 2005 as this is now a closed year.

Generally, the Court will not force either of them to file jointly, especially if there was a reason not to. Even when I got divorced I couldn't force this issue and my ex (to my detriment I might add) lied and through her attorney swore she would sign the joint returns and he even sugested she filed them (I had presigned). Of course she filed MFS as well, causing me to be late on one return. And of course we had increased her WH to cover any shortage on my taxes. Judges answer (short version) "To Bad"!

As an attorney, I have filed 2 divorces and now find I want no further part of this business. I can also say you want to stay out of this battle. They have attorneys, so let the attorneys deal with it and then direct you on how to amend if necessary.

[taxbrewster]

Thanks for the thoughts. Yeah, I agree.

The lawyer is just making this a sticking point saying they want to file MFJ (of course because it helps her client) The ex husband is not and will not be happy with this decision...

I am just making sure I don't get myself into a bad situation. This is my first experience with this type of case and just want to be careful...

Thanks again.

[jainen]

>>The ex husband is not and will not be happy with this decision.<<

Oh, really? Did she tell you that? I'll bet the guy is delighted to see the opposition make "a sticking point" about something they can't control.

Wait, there's more! The lawyer is proposing the gentleman (who has complied with the tax laws) cover the wife's back taxes (which will carry over 50% surcharge for penalties and interest) as part of the property division. HIS lawyer is going to call that bad faith, and the judge will probably agree.

Can't you see her lies? He wasn't "signing her name left and right." He made a point of separating his own finances, knowing (as we all do) that a Schedule C non-filer is understating net income. This businesswoman's claim that she just now "figured out" about MFS -- well, she knew she had not signed a joint return, so is she saying she didn't object while she thought he was forging her name? Which by the way he wasn't?

I admit I'm reaching out beyond the stated facts of the original post, but I wouldn't be surprised if he can indeed prove each of his Schedule A deductions. He sounds like the responsible half of the family.

[TAXBILLY]

If you are going to take this on (I wouldn't) the only possible way to proceed at this point to keep you and your client out of trouble is to file her MFS for all the open years (including 2005) and use your usual due diligience as to the information she provides to you. MFS to MFJ would not be a decision you would make.

taxbilly

[kcjenkins]

Listen to Bill. And Jainen. They are both right. In fact, this potential tarbaby, er, client, does not make sense. Ir might make sense that he was 'signing her name right and left' IF he had filed MFJ. But he would not have needed to sign her name to file MFS.

Also, if he was the one who was paying the bills, it is not unfair that he took the deductions for what he paid. Whether she was living in the house has nothing at all to do with it. It is who paid the deductible expense, unless they both agree to split them. And unless he agrees, there will be no MFJ amendment. No competent Judge would order it, because it's not something within their power. And what kind of 'businessperson' just 'assumes' that her taxes were filed, without even seeing the return, much less signing it. BTW, it is legal, under IRS rules, for a spouse to sign for the other spouse, if that spouse is agreeable to it.

But to answer the other question, the IRS would probably look at auditing these amended returns, simply because of the facts involved. First, a higher number of returns are audited when divorce is an issue. Then. you have a non-filer for 4 years suddenly filing, and that by itself can trigger an audit, because she owes for each of these years, and in such circumstances, the IRS knows that the filer often did not file because they owed, so when they finally do file, they often fudge the numbers. At least, that is the result that often appears when they are audited. So if you take it on, you want to do it it more carefully than normal. You want to see the records, not just take her 'list' at face value. You want, at a minimum, to compare her cash flow to her reported income.

[TAXBILLY]

Agree with KC and want to add one more important item ... be sure you get a retainer up front for the work you are going to do.

taxbilly

[taxbrewster]

Thanks for all the input...it is awesome weather here in Michigan...OFF the golf course!

[TAXBILLY]

I played today too. It was beautiful and in the 70s. No high humidity yet but it's comng soon.

taxbilly

[Julie]

Listen to Bill. And Jainen. They are both right. In fact, this potential tarbaby, er, client, does not make sense. Ir might make sense that he was 'signing her name right and left' IF he had filed MFJ. But he would not have needed to sign her name to file MFS.

Also, if he was the one who was paying the bills, it is not unfair that he took the deductions for what he paid. Whether she was living in the house has nothing at all to do with it. It is who paid the deductible expense, unless they both agree to split them. And unless he agrees, there will be no MFJ amendment. No competent Judge would order it, because it's not something within their power. And what kind of 'businessperson' just 'assumes' that her taxes were filed, without even seeing the return, much less signing it. BTW, it is legal, under IRS rules, for a spouse to sign for the other spouse, if that spouse is agreeable to it.

But to answer the other question, the IRS would probably look at auditing these amended returns, simply because of the facts involved. First, a higher number of returns are audited when divorce is an issue. Then. you have a non-filer for 4 years suddenly filing, and that by itself can trigger an audit, because she owes for each of these years, and in such circumstances, the IRS knows that the filer often did not file because they owed, so when they finally do file, they often fudge the numbers. At least, that is the result that often appears when they are audited. So if you take it on, you want to do it it more carefully than normal. You want to see the records, not just take her 'list' at face value. You want, at a minimum, to compare her cash flow to her reported income.

Lacking further information, I would expect that the person who filed his own tax returns probably took care of the house payments, property taxes, etc. too. If she's competent to have a business, she knew that her taxes could not be filed without the business information, and she could have looked at the tax returns herself at any time.

It seems like the client is taking advantage of having you all to herself, to tell her sob story to. I'm not strongly inclined to believe it.

But, K.C., you said something intereting here: Can you give me a cite for the comment that it is legal for one spouse to sign for the other?

[jainen]

>>it is legal for one spouse to sign for the other<<

The limited circumstances when a spouse can sign, and the way it must be done, are explained on page 6 of Pub 501 at http://www.irs.gov/pub/irs-pdf/p501.pdf.

[kcjenkins]

But, K.C., you said something interesting here: Can you give me a cite for the comment that it is legal for one spouse to sign for the other?

I was referring to what is called the "tacit consent doctrine", Jainen. Whether or not a valid joint return has been filed depends upon a determination of the intent of the taxpayer. Heim v. Commissioner, 251 F.2d 44, 46 (8th Cir. 1958). There can be a binding joint return even though one of the spouses failed to sign the return. Kann v. Commissioner, 3 Cir., 210 F.2d 247, 251; Howell v. Commissioner, 6 Cir., 175 F.2d 240, 241; Lane v. Commissioner, 26 T.C. 405, 408; Stone v. Commissioner, 22 T.C. 893, 901 and Carroro v. Commissioner, 29 B.T.A. 646, 650 (1933).

Also see Walsh v. United States, KTC 1985-208 (D.Minn. 1985) for another discussion of it, as the courts have applied it.

[Julie]

Thanks. I knew the stuff jainen referred to, but I knew you meant something beyond that. This is new to me.

Doesn't apply directly to the problem I have now (because the tax preparer apparently forged BOTH signatures) but it seems like something I ought to know about.

I was referring to what is called the "tacit consent doctrine", Jainen. Whether or not a valid joint return has been filed depends upon a determination of the intent of the taxpayer. Heim v. Commissioner, 251 F.2d 44, 46 (8th Cir. 1958). There can be a binding joint return even though one of the spouses failed to sign the return. Kann v. Commissioner, 3 Cir., 210 F.2d 247, 251; Howell v. Commissioner, 6 Cir., 175 F.2d 240, 241; Lane v. Commissioner, 26 T.C. 405, 408; Stone v. Commissioner, 22 T.C. 893, 901 and Carroro v. Commissioner, 29 B.T.A. 646, 650 (1933).

Also see Walsh v. United States, KTC 1985-208 (D.Minn. 1985) for another discussion of it, as the courts have applied it.

[jainen]

>>"tacit consent doctrine"<<

That's good to keep in mind, but I don't think I would ever rely on those cases. The poor taxpayers always seem to lose under that doctrine, and it seems to carry a heavy connotation of fraud with it. Does it only work for the IRS holding the taxpayer liable, or do you have an example of a taxpayer putting forth the argument as a defense?

[kcjenkins]

As a defense to what? Forgery? For that, you would have to look not at tax court but the federal Courts.

I was talking only about Tax Court rulings, which are pretty clear on it. Look at what was said in Evans v. Commissioner.

When a spouse signs the taxpayer's name to a purported joint return, the burden of proof is on the taxpayer to show that this signature was not authorized and that the taxpayer did not intend to file a joint return. When a spouse files a joint return without the taxpayer's objection and no separate return is filed it is presumed that the joint return was filed with the tacit consent of the taxpayer. Kann v. Commissioner, supra; Carroro v. Commissioner, 29 B.T.A. 646, 650 (1933).

Or in Walsh v. United States.

The rule is applicable in circumstances where the existence of certain factors indicate that the spouse has tacitly provided consent to the filing of a joint return. The spouse's conduct rather than the signature establishes the necessary intent. Relevant factors include a failure to object, a lack of a valid reason to refuse to file jointly, the delivery of tax data to the other spouse, and an apparent advantage in filing a joint return.

But the Shea case was one where it did work as a defense, sort of.

[kcjenkins]

Doesn't apply directly to the problem I have now (because the tax preparer apparently forged BOTH signatures) but it seems like something I ought to know about.

The Shea case involved a return where neither taxpayer signed, the preparer signed both names. You might want to check that one out. Shea v. C.I.R., 780 F.2d at 561

Here's a link to it. http://bulk.resource.org/courts.gov/c/F2/7...61.85-1087.html

[jainen]

>>As a defense to what?<<

In the original post, the taxpayer wants to defend against non-filing penalties of 25% (though this is not the main issue in the thread). Is there any authority she can rely on in claiming she thought she HAD filed because she did not object to her husband signing a joint return for her? In all of your citations the spouse was trying to claim she had NOT filed a joint return, and this rule let the IRS win all those.

[kcjenkins]

OK, I see where you are coming from. Yes, possibly, she could argue that she THOUGHT they had filed jointly, even tho she did not sign any returns. Clearly, where the IRS has for years taken the position that such joint returns are binding, they would have to grant her that, IF in fact, her income was disclosed to her husband, and they had, in the past, a pattern of filing jointly, with him in charge of preparing, or getting prepared, the returns. But she would have to establish that she had, in fact, gave him her income and expenses, and all these cases say the rule must be construed narrowly.

So her problem would be proving that in fact she did give him the information, and reasonably believed that joint returns had been filed. I'd hate to have to argue that one, wouldn't you? Hard to do even if you believe her, and somehow I have a bad feeling about her, from what was told to us so far.

[Julie]

Thanks. I think this is the relevant quote:

Although the tax code regulations provide that one spouse may sign for another spouse in the case of injury or disease when oral consent has been given, 26 C.F.R. Sec. 1.6012-1(a)(5), an agent can prepare a tax return for one or both spouses only when a power of attorney has been executed. Id. No power of attorney was executed in this case, and the tax preparer lacked petitioner's authorization to sign for her.

I may need that one, if it comes to that. In my case, the wife, although separated, would probably have given her husband the okay to sign for her, but not the tax preparer, whom she said she never trusted. Yes, lots of "I told him.....!!!!"

The Shea case involved a return where neither taxpayer signed, the preparer signed both names. You might want to check that one out. Shea v. C.I.R., 780 F.2d at 561

Here's a link to it. http://bulk.resource.org/courts.gov/c/F2/7...61.85-1087.html

[kcjenkins]

I thought that one sounded like it might be just what you wanted.