Here's an income-tax question to taunt wives who leave all that stuff to their husbands: What happens to you, if your husband is underreporting his income or buying into fraudulent tax shelters?
You sign the joint tax return, so you are culpable right along with him. If the tax dodge is caught, you both have to live with the consequences. Assuming that you are still married, the cost of the fraud comes out of your joint income and assets. But what if you have separate property in your own name? Or what if you're now divorced? Do you have to ante up for a tax liability that your husband cannot, or will not, pay?
The same question arises in cases where husbands don't know what their wives are doing with their own earnings. If your wife is cheating on small-business taxes and bringing home more income than is proper, might you have to pay for her when she's caught?
In most tax cases, the answer to that question is yes. The Internal Revenue Service assumes that both spouses know what they are about when they file an income-tax return. Your signature affirms that you're responsible for paying the tax. If you underpay, the property of either spouse is forfeit to the overdue tax and penalties.
But there are some cases where the spouse (usually the wife) is absolutely innocent of any knowledge or suspicion of the tax evasion. She signed the tax return in good faith, and it would be grossly unfair to charge her for her husband's sins.
To get such spouses off the hook, Congress created an "innocent spouse" rule, and recently expanded its protections. Formerly, she could get relief only if her husband omitted income. Now she can also avoid an unfair liability for taxes arising from large overstated deductions and credits.
You're an innocent spouse if you meet all of the following tests:
* You did not know, and had no reason to know, about the tax dodge.
* It would be inequitable to hold you liable for the tax.
* You received no significant benefit, directly or indirectly, from the extra income obtained illegally. The new law gives the IRS some leeway in interpreting this provision, but generally speaking you benefit if the tax dodge gives you a markedly higher standard of living. You don't benefit if your spouse uses the money to support a lover or buy property in his own name.
* In community property states, earned income can be treated as if it belonged separately to the spouse who earned it, if the other spouse had no information about the income and the couple filed separate tax returns . But each spouse is still deemed to own one-half of the income from jointly owned property, such as rental income from real estate. So even if you're separated and one spouse is pocketing all that money, the other is liable for his or her share of the tax.
* Even if you're required to pay the overdue tax (plus interest and penalties), you are not liable for the 50 percent fraud penalty, if assessed, if you in no way contributed to the fraud.
The more liberal rules apply to future cases and past cases still open. But they cannot help spouses whose cases have already been decided against them by the courts.
Yet even an innocent spouse, who meets all those tests can be hit for her husband's tax liability if the dollar amount is relatively small compared with her income. There are two ways the IRS can get you.
You still must pay if the tax shortage is $500 or less. "That small an amount isn't a tear-jerking case," John McCoy of Arthur Andersen in Atlanta told my associate, Virginia Wilson. "The law doesn't expand protection for spouses with substantial means." If the missing tax arises from overstated deductions or credits (as it might in the case of a fraudulent tax shelter), the situation is more complicated. Whether or not an innocent spouse has to pay depends on the size of her personal income (or her joint income with a new husband, if she has remarried) for the year before the IRS sent out its tax-deficiency notice.
If your adjusted gross income was $20,000 or less, you have to pay if the tax (plus interest and penalties) is less than $500 or 10 percent of your income, whichever is greater. If your income was more than $20,000, you have to pay if the tax owed is less than $500 or 25 percent of your income, whichever is greater. In other words, even an innocent spouse (and her new husband) can still get socked for a big tax bill run up by another.
Gerald Portney of Peat Marwick in Washington says an innocent spouse should get an accountant or tax attorney to represent her. She should put together an affadavit presenting her position and submit it to the IRS. The issue is "what did you know and when did you know it." To wiggle away from an income-tax return you signed, you need a pretty strong case.