Taxable Talk

I remember the Michael Myers movie, So I Married an Axe Murderer. Today the Tax Court looked at a related issue: What happens if you marry a tax cheat but don't know about it?

The basic facts weren't in dispute. The petitioner's ex-wife was a parking lot cashier at the Philadelphia Airport in the early 1990s. She participated in a scheme to steal money from the airport. She earned about $90,000 in illegal (stolen) income. As you might expect, when the theft was discovered her employment was terminated.

There's no dispute that illegal income is taxable. There's also no argument that when a joint return is filed, both spouses are responsible for paying the tax on the income. In this case, both the IRS and the petitioner agree that about $36,000 in tax is owed.

However, there is a protection for the true innocent spouse. Section 6015(c) of the Tax Code:

"...That section limits an individual’s liability for a deficiency to the portion of the deficiency properly allocable to that individual under section 6015(d). In general, an item that gives rise to a deficiency on a joint Federal income tax return will be allocated to the individuals who file the return in the same manner as that item would have been allocated had those individuals filed separate returns."

Given that when the returns were signed the petitioner knew nothing about the ex-wife's illegal income, all of the income would be attributable to the wife.

However, the IRS disputed whether the petitioner had actual knowledge of the illegal income. If that were the case, he would not be eligible for relief by filing a Section 6015(c) election.

Luckily for the petitioner, for this section of the Tax Code the burden of proof is with the IRS (per Section 6015(c)(2)). While petitioner's ex-spouse testified that the petitioner knew about the illegal income, that was apparently the only evidence that the IRS had. The petitioner also testified that he had no knowledge of the illegal income, and "...we find petitioner’s version of the events to be the more credible. Other evidence supports our finding in this regard. "

So if you marry a tax cheat, don't despair. The Tax Code does actually offer you some protection. On the other hand, if you marry an axe murderer....

Case: Eller v. Commissioner, T.C. Summary 2007-215

The IRS announced today that most taxpayers will be able to file their tax returns normally. However, about 3 to 4 million taxpayers who use just a few forms will need to wait until February 11th. (While about 13.5 million taxpayers use these forms, most do not file early.)

Here are the forms that will cause delays:

• Form 8863, Education Credits;
  
• Form 5695, Residential Energy Credits;
  
• Form 1040A Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers; and
  
• Form 8859, District of Columbia First-Time Homebuyer Credit.

Remember, the forms you get in the mail will be incorrect. Specifically, the exemption amounts on Form 6251 (Alternative Minimum Tax) are wrong. Other forms and instructions that reference these amounts will also be incorrect.

The IRS stated in today's press release that they will need seven weeks to update their computer system for those specific forms, but that individuals who don't use those forms should be able to file normally.

Congratulations to the IRS in working expediently to fix the mess that Congress created. As to Congress, can you do your 2008 AMT patch before Election Day next year?

Last week the IRS announced in Revenue Rule 2008-05 that wash sale rules impact transactions into an IRA. This could have a major impact to the unaware.

A "wash sale" is when you sell shares of stock at a loss, and in the thirty day period before or after the sale you buy replacement shares. When that happens your capital loss is postponed; the disallowed loss increases your basis in the replacement shares (assuming the replacement shares are not purchased in an IRA).

In the ruling announced last week, the IRS determined that if one buys replacement shares in an IRA, the loss is lost forever. This ruling makes doing a wash sale into an IRA a very bad decision.

Other Coverage:
Roth Tax Update
TaxProf Blog

Heading into Christmas, I hope you've completed your shopping. The IRS gave out its list on Friday: A list debunking some of the most popular of the frivolous arguments used by tax protesters.

For example, some have contended that only foreign income is taxable. The IRS debunks this on page 19, noting that Section 61 of the Internal Revenue Code (which is a law, Title 26, U.S.C.) states, "'Gross income' means all income from whatever source derived and includes compensation for services."

So while Santa may be checking his list to see if you've been naughty or nice the IRS will check its list to see if your argument is reasonable or not. It's a shame that Richard Hatch and Wesley Snipes didn't peruse the list before they got themselves in trouble.

Hat Tip: TaxProf Blog

Joe Kristan has the details on an IRS update on the correct procedure for S Corporation's 2% (or greater) owners' health insurance:

"This new Notice is a slight liberalization of the rules. The IRS announced in 2006 that only premiums paid directly by the S corporation qualified for the tax break. The new rule expands the line 29 deduction to premiums paid by the shareholder but reimbursed by the corporation."

Note that there are several 'gotchas' that must be followed; Joe details them.

If any clients have questions about this please call me as soon as possible so that we make sure your payroll service does the correct bookkeeping for your health insurance premiums.