The impact of federal tax law has evolved into an important aspect of my matrimonial practice. This is the first of three blogs which will discuss how the divorce process can affect your taxes, as well as the difference between the need for joint and individual tax return filings during a divorce.

Most married persons file joint returns because it saves them money. The quid pro quo for lower taxes is joint and several liability on the return. Since joint tax returns are favored, the parties are permitted to amend filed tax returns to joint tax returns within three years from the due date of the original returns.

The marital status of the parties at the end of the tax year determines their federal filing options.  If a couple is divorced at any time during the year, including December 31, they are considered single.

Although same sex couples are legally entitled to marry in a growing number of states, these marriage are not recognized under federal law pursuant to the Defense of Marriage Act. Thus, federal benefits, including application of the tax laws, are available only to spouses in heterosexual marriages.  As a result, legally married same sex couples are not entitled to file joint tax returns.  Other federal tax benefits, including alimony treatment of post-dissolution payments are also unavailable to same sex couples. 

Whether a joint tax return is accepted by the Internal Revenue Services is determined by the intent of the parties in the context of the circumstances.  When a couple has historically filed joint tax returns and one party withholds his or her signature, a joint tax return filed by the spouse may be accepted.  For example, in Federbush v. Commissioner, (1960), it was determined that the tax return was a joint filing even though Mrs. Federbush refused to sign it, since her refusal had nothing to do with the contents of the return, but was related to other marital problems. 

In Anderson v. Commissioner, (1984), it was determined that Mrs. Anderson did not intend to file a joint tax return but signed it only when ordered to do so by the divorce court. 
Mrs. Anderson had no income and was not even required to file a tax return.  She resisted signing the joint return because she had concerns about the propriety of her husband’s deductions. Such concerns proved to be justified when a deficiency resulted from the IRS disallowing the losses. The determination that Mrs. Anderson did not intend to file jointly return relieves her of any liability for the deficiency. 

When the issue of intent is driven by threats of abuse or duress, such facts operate as a defense to joint liability, provided that the conduct is directly related to the signing or the refusal to sign the tax return.

An exception to the rule of joint and several liability is known as the “Innocent Spouse Doctrine”, which was introduced in 1971.  Initially, to qualify as an innocent spouse, a taxpayer was required to prove not only that he or she did not know the item on the return was incorrectly reported but also that he or she did not benefit from the underpayment of taxes. 

In response to criticism, the Tax Code was revised to afford broader protection for innocent spouses.  Under the new law, a party could seek relief from joint liability by establishing a lack of knowledge of the understatement of the taxes and that it would inequitable under the circumstances to hold him or her liable for the deficiency.

Joint tax refunds can also involve substantial funds.  Federal tax law often dictates a different result from State divorce laws.  Although a federal tax refund check is drawn to the order of both parties, they do not necessarily have equal joint ownership rights to it.  Instead, it is the source of the overpayment which determines ownership of the refund. Overpayment by a married couple filing a joint tax return is owned by each spouse separately to the extent that he or she contributed to the overpayment.

One of the potential hazards of filing jointly that one of the joint filers may appropriate a tax refund to which the other is entitled.  In United States v. MacPhail, a 1997 Separation Agreement contained a provision requiring the parties to file joint tax returns for the previous year but made no mention as to the payment of any taxes due or entitlement to any refund.  As a factual matter, the taxes due were almost entirely attributable to Mrs. MacPhail’s income from the family business.  When the parties requested a filing extension, it was accompanied by a substantial payment from Mrs. MacPhail’s funds.  When the return was eventually prepared, it showed an overpayment of approximately $300,000 which was designated as a credit against the parties’ tax liability for the following year.  Now divorced, the parties filed separate returns.  Mr. MacPhail filed first, showing a tax liability of approximately $1,000 and claiming the credit.  As a result, the IRS applied the overpayment to his tax liability and issued him a refund check of $299,000.  When Ms. MacPhail later filed her tax return, and claimed the $300,000 credit she thought she thought she had coming, the IRS refused her claim, stating that Mr. MacPhail had already received the refund.  Eventually the IRS acknowledged that the funds had been paid to Mr. MacPhail in error and granted Ms. MacPhail a credit on her separate tax return.  The IRS then demanded payment from Mr. MacPhail but he had already spent  the money and was essentially judgment-proof.  When the issue was further litigated, it was determined that the credit was correctly given to Ms. MacPhail because she was the source of the overpayment and that the IRS was required to look to Mr. MacPhail for repayment, although by this time, a futile act.

In summary, the ownership of a joint federal tax refund belongs to the person who made the overpayment and not necessarily the person who earned the income. 

The upcoming blogs in this series will deal with the tax considerations of alimony, child support and division of property in a divorce.