MFS income and IRS letter

[Possi]

Regarding a 2008 tax return for my client, I filed for both husband and wife, she came in first and insisted we file MFS because he was neglecting to file.

I did her return in 08, 09 and 10. She itemized every year. I did his return for 09 and 10. He was forced to itemize. I wasn't asked to do the 2008 return until he got this letter.

He was very sick in 2008 and hospitalized 3 times before entering a nursing home in 2009.

Now, he got a letter from the IRS for not filing in 2008, and they included income that was claimed on HER tax return.

They also included 100% of the sale of their home in this letter. The sale of the home was excludable because they lived there 30 years or more. In 08, I did NOT include the sale of the home on her return, nor would I include it on his.

How do I respond to the letter? I have prepared the tax return for paper filing.

I was thinking that I should include a cover letter stating the tax ID number for his wife, the income that was claimed on her return, and the fact that the sale of their home was excludable to both of them.

I also thought I would tell them he was hospitalized 3 times in 08, and eventually was moved into the nursing home. In the midst of all this, all of his original tax paperwork was lost. Then beg for Penalty abatement.

What do you think?

[joanmcq]

It sounds like they filed an SFR on him; all of the income reported under his SSN would be included, and none of the deductions. The IRS doesn't know any of this yet. You need to tell them by preparing the return correctly and having the client submit it. A schedule showing how the income/ expenses were split between the two returns may be helpful. Put the sale on the Sch D, and show it was excludable under Sec. 121. IMHO you should always do this; apparently a 1099-S was filed and his was the SSN it was filed under. That's why the non-inclusion on her return didn't trip the matching trigger. The MFS return links to the SSN and name of the other filer. You can get transcripts of everything filed under his SSN from eservices (although not state tax payments). There isn't a penalty if he doesn't owe. If he does, well, he didn't file, now did he?

[David1980]

Assuming an SFR was filed, you will need to file the return to a special address. I think you also write something like "For Reconsideration" at the top of the return. I would get a POA and call the IRS, get them to fax you the transcripts, whether an SFR was filed or not, and how/where to file a return to replace the SFR.

[Nashville]

Three Column Response

Start with a three-column response.

Column 1 - All income known to be reportable, including sale of the house.
Column 2 - All income reported by wife on her MFS return.
Column 3 - Subtract corresponding items on Column 2 from Column 1.

Begin with proposing to the husband that his return contain column 3. If he is amenable to this, then a simple filing of 2008 for him with Column 3 will resolve everything with a minimum of problems. A letter of explanation could be attached for the IRS, showing the three columns, and thus accounting for all income in Column 1.

If he is NOT amenable to this, then another scenario surfaces which will result in him agreeing to something with his wife (meaning a possible 1040-X for her), or in the alternative, leaving to the IRS to referee (normally a poor option).

[ChEAr$]

Well now, OP only said he got a letter, and not that a SFR was even made up by IRS.

If he truly had no income and fell below the filing requirements, (since sale of house isn't income), no need to prepare a return. Just answer the letter stating the facts.

Just the facts, M'am.

[JohnH]

What about amending her return to a MFJ?

[oceanlovin'ea]

yes, I too was thinking why not amend the return that was already filed and file a MFJ return for them.

Linda,.EA

[Possi]

amend to MFJ?

I don't think she will do that. She doesn't live here anymore and I feel that she harbors some animosity.

He will owe about 10k on the '08 return. He has military retirement and SS income, and some interest and dividends, though not much. He didn't go into the nursing home until '09, he was living in an apartment, no deductible medical expenses, his ex paid all the mortgage payments and took all those deductions. He has a car that he gave to charity. I could take $500 as non-cash charitable, but I doubt he as any receipts. Without knowing what was withheld for state taxes, he has a big fat ZERO for itemized deductions.



Would I have to amend her return to show the sale of the house on the Sch D for matching purposes? That doesn't make sense to me, since all the instructions I read tell me NOT to include it on the tax return. I even worked the Sch D worksheet in Taxwise and the sale is not reflected on the Sch D.

I called today and the IRS agent actually told me that there was an SFR prepared for him. He hasn't gotten it of course.

ihatethis

[taxea]

Assuming an SFR was filed, you will need to file the return to a special address. I think you also write something like "For Reconsideration" at the top of the return. I would get a POA and call the IRS, get them to fax you the transcripts, whether an SFR was filed or not, and how/where to file a return to replace the SFR.

You only need file an original return if one has not been filed. IRS letter is probably computer generated and based on records they received. The conputer does not link to the spouse's filed return.

I agree with the Sch D and there is consideration given if the reason for non filing is medical. Research the IRS site for this info.

[joanmcq]

The thing is about not reporting it is: if a 1099-S was filed, you are going to run into matching issues, regardless of what the instructions say. You report half of it on a MFS return, and show it as 100% gain excluded by Sec 121. Most software will have a box to check to say "show excluded gain on Sch D". All you need to do is find out which unit issued the SFR and file a return to that unit. It may be to a specific person. Its not an audit reconsideration, they just want a frikkin return.

[taxea]

they just want a frikkin return.


that's what I said...only not as clearly