2010 is the first year that registered or married same-sex couples in California, Washington, and Nevada were expected to file single returns splitting all income, including income from wages and from self-employment. Most couples and tax return preparers that I have talked with have done their best to comply with these income splitting rules. Now numerous taxpayers are receiving form letters from the IRS that appear to challenge this reporting position. If you have received any such letters, you will want to read more of this post.
The most common letter is one that taxpayers are receiving primarily from the Fresno Service Center. The signature of “J. Bell” has been stamped in the signature line and so many of us are referring to these as “J. Bell letters.” This letter states, in part:
Your return includes income or tax liability for more than one taxpayer, other than husband and wife for a married filing jointly return. Each person or married couple must file a separate tax return for each tax period.
That language makes no sense. If you reported half of one partner’s earned income on the other partner’s return, you would be reporting in accord with CCA 2201021050. Many people included a citation to that CCA with their returns for 2010. Nonetheless, they received a “J. Bell letter.” Practitioners have been working with the National Taxpayer Advocate Service to clear up this problem. If you receive a “J. Bell letter” or something similar, you should write back as instructed and say that you were in fact reporting half the community income of your partner on your return as you are required to do by CCA 201021050. If that doesn’t take care of it, contact your local office of the National Taxpayer Advocate for help.
If you had self-employment income and reported that 50/50 in such a way as to indicate on Form 1040 that it was self-employment income to the non-earning partner, that partner (the non-earning one) may get a letter inquiring about his or her liability for self employment tax. That should be no surprise because anyone with self-employment income should file a form SE that will show the liability for self-employment taxes. In an earlier post on this blog, I explained the controversy between the IRS and taxpayers over who should report self-employment earnings for self-employment tax purposes. The IRS takes the position that the earnings must be split 50/50 for purposes of income tax liability and also for purposes of self-employment tax liability. I take a different position. I believe the earnings should be reported by the earner for self-employment tax purposes. That way the earner gets the proper credit for social security retirement purposes. See my post for April 12.
If you want to take the position that only the earner is responsible for self-employment taxes and if you get a letter from the IRS addressed to the non-earning partner claiming that that partner may be liable, the first step should be to respond to that letter. Explain that the self-employment taxes were paid in full by the earner of the income and provide that partner’s social security number. If the IRS insists that the SE taxes must be paid by the non-earner and you don’t want to contest their position, you should ask for a refund of the excess SE taxes paid by the earner. If you want to contest their position, consult Section 1402 of the Internal Revenue Code. This is the section that provides the rule as to who must pay the tax. The IRS construes it one way and I construe it another way. Ultimately, the courts will have to determine which one of us is right.
