Jasper and Crewella Dahvill were married in year 0. They filed joint tax returns in years 1 and 2. In year 3, their relationship was strained and Jasper insisted on filing a separate tax return. In year 4, the couple divorced. Both Jasper and Crewella filed single tax returns in year 4. In year 5, the IRS audited the couple’s joint year 2 tax return and each spouse’s separate year 3 tax returns. The IRS determined that the year 2 joint return and Crewella’s separate year 3 tax return understated Crewella’s self-employment income causing the joint return year 2 tax liability to be understated by $4,000 and Crewella’s year 3 separate return tax liability to be understated by $6,000. The IRS also assessed penalties and interest on both of these tax returns. Try as it might, the IRS has not been able to locate Crewella, but they have been able to find Jasper.
A. What amount of tax can the IRS require Jasper to pay for the Dahvill’s year 2 joint return? Explain.
B. What amount of tax can the IRS require Jasper to pay for Crewella’s year 3 separate tax return? Explain.
The Correct Answer and Explanation is :
A. Tax Liability for Year 2 Joint Return:
In Year 2, Jasper and Crewella filed a joint tax return, and the IRS determined that their joint return understated Crewella’s self-employment income, leading to an understatement of tax liability by $4,000. Since they filed jointly, both spouses are jointly and severally liable for any tax liability on that return, even if one spouse is responsible for the error.
Jasper’s responsibility: Since Jasper and Crewella filed a joint return in Year 2, the IRS can require Jasper to pay the entire $4,000 understatement of tax liability from that return. Under joint filing rules, the IRS is allowed to collect the full tax liability from either spouse, regardless of who made the error. Therefore, even though the underreporting of income occurred due to Crewella’s error, Jasper is still liable for the full amount of the additional tax owed because of the joint filing.
B. Tax Liability for Crewella’s Year 3 Separate Return:
In Year 3, Crewella filed a separate tax return, and the IRS determined that Crewella’s self-employment income was underreported, leading to an understatement of tax liability by $6,000. Since Crewella filed a separate return for Year 3, she is solely responsible for the tax liability on that return.
Jasper’s responsibility: Since Crewella filed separately in Year 3, Jasper is not responsible for the tax liability on Crewella’s return. The IRS cannot require Jasper to pay any of the tax owed due to Crewella’s underreporting of income on her separate return. If the IRS cannot locate Crewella to collect the $6,000 tax liability, they will need to pursue Crewella, not Jasper, for the payment.
Conclusion:
- For the Year 2 joint return, Jasper can be required to pay the full $4,000 tax liability, as both spouses are jointly and severally liable for joint returns.
- For Crewella’s Year 3 separate return, Jasper is not responsible for the $6,000 tax liability because the return was filed separately, and the tax obligation belongs solely to Crewella.