Secretive Husband Who Failed to Share Financial Info Is Solely Liable for Deficiency

(Parker Tax Publishing March 2024)

The Tax Court held that a husband who concealed all aspects of his finances from his wife was solely liable for the tax deficiencies and penalties relating to a joint return filed by the couple for 2017. The court concluded that because the couple maintained separate bank accounts and because the wife was not aware of her husband's employment or business activities, she could not have known of the origin of the deductions her husband claimed on their joint return and was thus eligible for innocent spouse relief under Code Sec. 6015. Kraszewska v. Comm'r, T.C. Memo. 2024-26.

Background

When Zofia Kraszewska first met Simon Ricks in 2014, she was living and working in the United States on an L - 1 visa. She left the United States but maintained a long-distance relationship with Ricks. The couple subsequently married in September 2016, and Kraszewska moved to the United States to live with Ricks.

Before the marriage, Kraszewska was consistently employed and earned a comfortable living. However, she stopped working when she moved to the United States, and for the duration of her unemployment she remained financially reliant on Ricks. Throughout the marriage, Ricks was the primary breadwinner and controlled all financial aspects of the household. The couple maintained separate and joint bank accounts. However, Ricks was secretive about his finances, did not share his financial information with Kraszewska, and refused to answer questions about the details of the household finances.

By 2017, Kraszewska had obtained a job and reported income of her own on the couple's joint return. Nevertheless, her knowledge of Ricks finances as reported on that return was limited to the activity in their joint checking account, which was minimal. Their 2017 tax return was prepared by Ricks as "married filing jointly" and electronically filed. Ricks told Kraszewska that he did not want her to be involved in the tax preparation process because she lacked familiarity with the American tax system. Thus, she turned over her relevant tax documents to Ricks and after preparing the return, Ricks instructed her to electronically sign it with a personal identification number which she did. Over time, the marriage became strained. Tensions between the two erupted in March 2019 when Ricks threw Kraszewska out of the house. Kraszewska did not return to their marital home, and her communication with Ricks was limited.

The couple filed their 2017 joint tax return on April 7, 2018. They reported wages of $148,727 and itemized deductions of $77,543, including unreimbursed employee expenses of $30,987 attributable to Ricks and $6,296 attributable to Kraszewska. The IRS subsequently determined a deficiency in the couple's 2017 federal income tax of $6,931 and assessed a Code Sec. 6662(a) accuracy-related penalty of $1,377.

In August 2019, Kraszewska filed Form 8857, Request for Innocent Spouse Relief, requesting relief for the 2017 tax year under Code Sec 6015(b), (c), or (f). She submitted numerous documents in support of her application. She explained that she did not review the return before it was filed because Ricks prevented her from doing so. She further stated that she had no knowledge of the contents of the return, nor did she at any time have any indication that the return contained erroneous items. Her submissions to the IRS also indicated, in relevant part, that Ricks (1) made her afraid to disagree with him, (2) controlled all aspects of their finances, (3) was "very secretive" regarding all financial matters.

In response, Ricks intervened and filed Form 12508, Questionnaire for Non-Requesting Spouse, and a Notice of Intervention. Ricks disputed Kraszewska's assertions and alleged, among other things, that she had (1) helped prepare their tax return, (2) reviewed the return before it was filed, (3) was aware of every step of the tax preparation process, and (4) received part of the tax refund. Although he was asked to submit any corroborating documents, none were provided to back up his claims.

Relying on Kraszewska's statements and documentation alone, an IRS examiner concluded that Kraszewska was unaware of the deductions which gave rise to the deficiency; therefore, the IRS granted her relief for the 2017 tax year under the innocent spouse provisions in Code Sec. 6015(b). Code Sec. 6015(b) provides relief to a joint filer if on the joint return there is an understatement of tax attributable to one of the filers, the other establishes that he or she neither knew nor had reason to know of the understatement when the return was signed, and it would be inequitable to hold that filer liable for the other's error.

Despite granting innocent spouse relief, the IRS subsequently issued a notice of deficiency to both Kraszewska and Ricks for their 2017 tax year. The notice did not incorporate the administrative determination that Kraszewska was entitled to Code Sec. 6015(b) relief. Kraszewska filed a petition with the Tax Court asking for relief and Ricks subsequently became a party to the case, opposing relief. At trial, the IRS agreed with Kraszewska that she was entitled to relief under Code Sec. 6015(b).

Analysis

The Tax Court held that Kraszewska was entitled to innocent spouse relief under Code Sec. 6015(b) because she did not have knowledge or reason to know of the understatement of taxes on the 2017 jointly filed tax return and it would thus be inequitable to hold her liable for the tax deficiency and the penalty attributable to the understatement of taxes.

The Tax Court rejected Ricks' assertion that Kraszewska was sufficiently involved in the preparation of their joint 2017 tax return and had reason to know of the deductions and, therefore, the understatement. The court found that, because of Ricks' concealment of all aspects of his finances from Kraszewska, Kraszewska neither knew, nor had reason to know, of the origin of the deductions Ricks claimed on their joint 2017 return. Because Kraszewska was not involved in Ricks' employment or business activities and the couple maintained separate bank accounts, the court determined that Kraszewska could not obtain any knowledge of Ricks' finances, income, or expenses. Without this information, the court said, Kraszewska could not have had any knowledge of the underlying expenses.

The Tax Court concluded that other than providing Ricks with her tax documents, Kraszewska did not participate in the return preparation and although Ricks solicited Kraszewska's electronic signature, and although she provided it, she was never given the opportunity to examine the contents of the return and may have been prevented from doing so. The court further found that Kraszewska's lack of involvement was by Ricks' design, and with respect to the 2017 joint return, Kraszewska had no actual or constructive knowledge of its contents.

For a discussion of innocent spouse relief available under Code Sec. 6015(b), see Parker Tax ¶260,560.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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