By Shelli Dodson, CPA
How many times have you worked with a client who is severely delinquent in their tax filings because the other spouse “was supposed to do that?” Generally speaking, we know that a couple in Texas will file a married, filing joint return. But did you know a married individual in a community property state can file a separate tax return even if their spouse will not provide the information needed to file? To do so, however, there are specific rules and procedures that must be followed.
Federal Law: Community Property States and Separate Returns
General Rule for Community Income
In community property states (including Wisconsin, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington), if married individuals file separate returns, each spouse is generally required to report half of all community income and all of their separate income on their individual return. This includes wages, business income, interest, dividends, and other income earned or received during the marriage and while domiciled in a community property state.
Problem: Uncooperative or Unavailable Spouse
When one spouse refuses to provide the necessary information (such as their income, deductions, or credits), the other spouse faces a practical problem: they cannot accurately determine and report their share of community income and deductions.
IRS Procedure for Uncooperative Spouse
The IRS recognizes this issue and provides a procedure for the cooperative spouse:
- Notification and Request: The cooperative spouse should notify the uncooperative spouse of the amount and nature of their own income and deductions and request the same information in return.
- If No Response: If the uncooperative spouse does not provide the needed information, the cooperative spouse should report their own income, deductions, and individual withholding, ignoring community property law principles (i.e., report and pay tax on 100% of their own income).
- Disclosure Statement: The cooperative spouse should attach IRS Form 8275, Disclosure Statement, to their return. The statement should explain that although the taxpayer may be responsible for reporting marital property income not shown on the return, income, deductions, and tax payments are being reported on a common law basis because it is impossible to determine the community income share.
IRS Audit and Relief
- If the IRS audits the return and determines the taxpayer qualifies for relief under Internal Revenue Code (IRC) § 66, no changes will be made to the return.
- If the taxpayer does not qualify for relief under § 66, the IRS may recalculate the tax due using community property principles.
- If the cooperative spouse provided a complete and accurate statement of income and deductions to the uncooperative spouse before the return due date, and included Form 8275, no penalties will be assessed for failing to report half of the other spouse’s community income.
IRC § 66: Relief Provisions
IRC § 66 provides relief in certain situations where community property rules would otherwise require a spouse to report income they cannot access or know about:
Section 66(a): “Living Apart All Year” Rule
If all of the following apply, community income is not split, and each spouse reports only their own income:
- The spouses are married at any time during the year.
- The spouses live apart at all times during the year.
- The spouses do not file a joint return.
- One or both spouses had earned income that is community property.
- No part of such earned income is transferred between the spouses during the year (except for child support or de minimis amounts).
If these conditions are met, the cooperative spouse reports only their own earned income, and not half of the other spouse’s community income.
Section 66(b): IRS Discretion to Tax 100% to One Spouse
If a spouse treats community income as if they were solely entitled to it and does not notify the other spouse of the nature and amount of the income by the due date for filing the return, the IRS may require that spouse to report 100% of the income.
Food for Thought: What if there is a business involved, both spouses worked in the business and the cooperative client had access to the books and records but never filed returns? That’s a topic for another day!
Section 66(c): “Traditional Innocent Spouse” Relief
If a spouse did not file a joint return, did not report an item of community income attributable to the other spouse, did not know or have reason to know of the item, and it would be inequitable to require them to include the item in gross income, the IRS may grant relief. The spouse must file Form 8857 to request this relief.
Key Points
- You can file separately even if your spouse is uncooperative.
- You must make a good faith effort to obtain and share information.
- If you cannot obtain the information, report your own income and attach a disclosure.
- IRS and state relief provisions (IRC § 66 and state equivalents) may protect you from liability for unreported community income you could not access or know about.
- You may be required to provide evidence of your efforts to obtain information and to notify your spouse.
While filing a separate tax return in a community property state like Texas can be daunting if your spouse is uncooperative or withholds necessary information, taxpayers are not without options or protections. Ultimately, even in difficult circumstances, you can fulfill your tax responsibilities and protect your interests by following IRS guidance and making a diligent effort to comply with the law.