It’s June.  I know.  But, it’s not smart to wait until December to consider what tax rules or practices have changed.  Both of these two changes I will discuss today affect my clients; I am sure they will affect many of you.
We know that filing jointly typically saves couples money.  For example, you can’t deduct child care expenses, should you file separately.  (Of course, if you are in the top 2% of earners in the US, you won’t be able to deduct those costs whether you file jointly or separately.)  That’s but one savings.  There are many others.  But, that’s not really the topic for today.  I want to remind you all that filing jointly means that both parties are responsible for the tax filing, the tax debt, and any omissions or errors- regardless of who made the money, who computed the tax return, or who got to make the decisions demonstrated on the form.  Typically, the problems start due to one of two circumstances- the couples are separating or the IRS has decided that the tax return is questionable. There may be relief.  There is a document, the Request for Innocent Spouse Relief, Form 8857, that can relieve one party from these joint obligations.  However, there are considerations to its use.  Some of these considerations include:

1. The taxes owed are the spouse’s or ex-spouse
2. The filer was unaware about the items found on an audit
3. The filer thought the spouse paid or would pay the taxes on the filed return
4. The filer did not benefit from the unpaid taxes
5. The filer was subject to abuse during the marriage.

I have filed Innocent Spouse relief for some clients, and they are but a drop in the bucket of the 50,000 such filings each year.  (It’s NOT just the filing of the form; an accompanying letter is useful, which could include is an order of protection, if one exists.)   About 96% of Innocent Spouse requests are approved each year. But, using Congressional rationale, the IRS has been assiduously applying a two year deadline to apply for such relief.   And, The 7^th Circuit Court of Appeals overruled the Tax Court and sided with the IRS about using this 2 year deadline- even if the spouse thought that the other had paid the taxes involved.  Moreover, the IRS is free to disregard a divorce decree that states the one partner is responsible for all the taxes. (Read that last sentence again.) Of course, the best defense is to not file jointly.  However, most of us don’t know we are going to get divorced imminently and some may not know that our spouses are cheating on their taxes.  That’s why Congress provided for innocent (note that key adjective) spouse relief.  So, make sure you understand the stipulations for using the Innocent Spouse relief request- and insure you file the request in a timely fashion. Now, let’s consider what the IRS position has been when auditing small businesses.  The IRS has been targeting small businesses, which don’t have tax professionals on retainer or extensive accounting systems, in its desire to collect more revenue.  (After all,  business is down- someone has to pay to keep the government working.)  And, as part of this process, the IRS has demanded exact copies of the electronic records kept in their business-software programs such as QuickBooks and Peachtree.  This request means that the IRS obtains copies of customer lists, personnel data, client information, and a plethora of unrelated information (to the IRS audit) that is housed in these off-the-shelf software programs.  Moreover, many physicians who use QuickBooks for their billing also  keep confidential patient information in the customer file.  Turning over this information could be a violation of the HIPAA rules. Given the fact that most firms do not start new data files each year, the IRS audit request provides information to the IRS well beyond the scope of the official audit.  (All those other years’ data are in the files.)  There is no requirement that the IRS not examine years not under audit,  once it has obtained access to these data files. The problem become more clear when you recognize that the IRS uses different rules for small businesses than it does for the larger firms. The larger firms are given the right to provide segregated electronic data, using their professional staff and outside professionals, when subject to an audit.  (It also would not be typical for the IRS to possess a copy of the software programs used by larger firms, so they don’t demand full copies of said software records.) Lest you think you can redact years of data from their system after being notified of an audit, note carefully that the IRS position is that such redaction is an illegal act.  This is the reason why each individual year’s data should be backed up annually- before there is a chance of an audit- with a new data file started each year.

addendum:  On the 25th of July 2011, the IRS announced it has dropped the 2 year time limitation in certain cases.   The information can be found here.l

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