How a 'Gorgeous' Dior Bag Cost a Widow $61,000 in Tax Court

[question everything]

As Tax Day approaches, here’s something married filers often overlook: It’s perilous to sign a joint tax return if your spouse is committing tax sins. A widow recently discovered just how much so. Her late husband had told her that he had “dealt with” their overdue income taxes—but he hadn’t. She ended up in Tax Court with the Internal Revenue Service. Now, she owes the IRS $61,000 of tax. With interest, her bill is about $93,000. Sydney Thomas owes this tax because when married couples sign a joint income-tax return, the law holds each spouse liable for everything on the return. The IRS can pursue either one for taxes due.

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Spouses who think they’ve wrongly been blamed do have a way out: It’s called an innocent-spouse claim, and it can be used with the IRS or–if that fails–in Tax Court. Successful claims absolve a person from paying taxes owed due to their spouse’s misdeeds. But innocent-spouse cases are hard to win, as Thomas’s case shows. And whatever the outcome, the relief request means tax authorities will delve deeply into a filer’s financial and personal history. Details matter: One factor in the ruling against Thomas was a blog post about her designer purses.

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Then the marriage began to break down, especially after Tracy Thomas stopped receiving regular bonuses about the time of the 2007-2009 recession. He left his job with an oil-field services firm for others; the couple became mired in credit-card and mortgage debt. To help pay it, they took early retirement-account withdrawals totaling about $263,000 during 2012, 2013 and 2014. But they didn’t pay the IRS the full amount of tax due for those years.

(snip)

In 2019, Thomas asked the IRS for innocent-spouse relief from unpaid taxes for 2012-14. The agency denied the request. So, too, did Tax Court Judge Emin Toro after he considered her banking records, assets like home equity, rental income from the ski house, and her blog posts, among other things. What counted most against her claim were two issues joint filers should note.

Number One: Did Sydney Thomas know about the unpaid taxes, or should she have known about them? The judge said yes, because she signed the return and discussed the taxes with her husband. He also questioned whether her claim that she believed her husband paid the taxes was reasonable, given the couple’s financial history.

Number Two: Did Thomas derive significant benefit from the unpaid taxes? Again, the judge said yes. While the IRS awaited her taxes, she paid for travel to Europe and elsewhere, plus a daughter’s $1,000 ticket to Hawaii. On her blog, she also discussed buying her daughter “a gorgeous bottle-green Dior bag” for her 18th birthday and mentioned other designer bags she owned.

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https://www.wsj.com/personal-finance/taxes/tax-cheating-husband-wife-court-87d57476?st=tzzpjstj30rk4m2&reflink=desktopwebshare_permalink

[no_hypocrisy]

1. I had a client who filed jointly with his wife.

Even though she only had a high school education, he trusted her to file with Turbo Tax instead of going to a professional tax preparer.

He was supposed to get a refund that year, but he never saw it. She took the money and spent it. To the tune of $4,000 which was excessive of what he was due.

She took the money and spent it on a week's vacation in SC without him.

The IRS caught up with them. Wife said she "left out a number" on the return and made a mistake. IRS was not interested. The agency wanted its $4,000 along with penalties and fines. Now $6,500.

My client trusted his wife, which was a mistake. They filed jointly, so he was just as responsible as she was. And all the money was gone.

I had to do some real negotiating with the IRS and got it down to $1,000.

Epilogue: Wife took the kids, moved out of his house, and moved in with an alcoholic. My client was in denial and still is. They aren't divorced and he lets her keep his refund.

[PoindexterOglethorpe]

2. Although I'm no longer married, then and now I have my taxes done by a professional.

I don't understand why people who are not accountants honestly think it makes sense to spend 26 hours filling out a return, when a pro can do it in an hour or less.

[question everything]

3. Because when you do it yourself you know where the numbers are coming from and you

know where to put them. You can work on them the whole year so you know what to expect.

We pay estimated tax - Federal and State. TurboTax came with a large state refund. How come?

I did not follow the new legislation that exempted the whole, or part of Social Security benefits. So I had to read the always convoluted instructions to understand the numbers.

This year, starting next week, the State estimated tax will be a lot lower.

Would your accountant have alerted you to lower your payments as a result of the new legislation?

It helps to feel comfortable, even to like playing with numbers, though.

[PoindexterOglethorpe]

4. Probably, if I actually paid or had withheld any

significant taxes.

Because my actual taxable income is so very low, I currently pay zero state and less than $500 federal.

I do have some taxes withheld from one of my income sources, and perhaps I could discuss with my financial advisor lowering those amounts. Although it was quite pleasant to get a total of just over one thousand dollars back. It's my financial guy that set up my investments to generate almost no taxes.

There's other details about filing and what's exempt, what's taxable, what the IRS actually gets in paperwork, that my accountant has explained to me. Among the things I like about my guy is that while he's about 15 or more years younger than I am, one of his sons is now an accountant and is also in his business.