This Report is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

JOINT RETURNS = JOINT LIABILITY

There are several differences which must be taken into account before choosing the optimum filing status. Only one of those differences is money.

A married couple who lives together may file a joint return, or MFS (married filing separately).

MFS may cost more tax dollars, but it gives an advantage not found in a joint return: complete freedom from responsibility for anything on the spouse's return.

On a joint return, each spouse is responsible for accuracy, honesty, record keeping, and payment.

Tax liability is "joint and several." If an audit occurs and tax is owed (for either under- reporting income or over-claiming deductions), each spouse is responsible. The IRS will collect from whomever has any reachable funds. See 1998 changes.

"Innocent Spouse Relief" almost never works; mere ignorance or naivete is insufficient. If a family enjoys a lavish lifestyle but reports limited taxable income, innocent spouse relief will not be granted. See 1998 changes.

A recent tax ruling denied innocent spouse relief in a situation where a domineering husband made his wife sign documents (contracts, checks, tax returns) without allowing her to read them. She did not even know what he did for a living, or for what company he worked.

After he pleaded guilty to criminal tax fraud and was hit with a big tax bill, he disappeared. His wife remains on the hook for all the fraudulent tax deductions on their joint return. The Court ruled that:

1. She benefitted from the tax savings by way of the family's lifestyle, and
2. Her husband's secretiveness should have alerted her to the fact of tax evasion.

Another potential problem is in defending an audit after divorce. "My ex-husband took all the records" is not a defense.

Furthermore, if a couple elects in 1992 to "roll over" profit on sale of a residence, intending to buy a new home within 2 years of the sale of the old home, EACH spouse is responsible for the additional tax for the 1992 joint return if either fails to roll over his share.

These are some of the potential problems of filing a joint return. The benefit of a joint return is that the total tax owed is often thought to be less than separate returns, AND it is easier to prepare one joint, rather than 2 separate returns.

But what does this actually mean in terms of cash savings? If each spouse has the same income and deductions, the tax cost is identical whether a joint or separate return is filed. And since California is a Community Property State, each spouse should report 50% of the other spouse's income, potentially equalizing the tax cost of joint or separate returns.

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