Whose Back Taxes? IRS Pursues Ex-spouses
Senate investigates a repeal of IRS rules, looking to protect 'innocent' partners.
WASHINGTON — For Josephine Berman, the nightmare began in 1972 when an IRS agent showed up at her New Jersey home and threatened the divorced mother of three with eviction.
Nearly 30 years later, Mrs. Berman is still being held liable for a debt of $62,000 - now $400,000 with interest and penalties. The IRS says she signed the joint tax return in which her ex-husband improperly claimed deductions in 1968, 1969, and 1970.
And the ordeal continues. Most recently, another IRS agent strode into the Maplewood, N.J., dental office where Berman works as a receptionist and announced the seizure of her $40,000 retirement account.
"Twenty-five years ago I worked my way off welfare," Berman, a senior citizen, testified in an emotional Senate hearing this week. "With the final indignity of stealing my retirement money, the IRS insured that is where I will end up."
Berman is not alone. Each year an estimated 75,000 to 80,000 American taxpayers, the majority of them women, are wrongly pursued by the Internal Revenue Service for their spouses' tax debts, according to the Government Accounting Office (GAO).
Today, however, as Congress moves to overhaul the powerful tax collection agency, pressure is mounting for legislation that would repeal the 60-year-old joint liability rule and protect the so-called "innocent spouses." Women's advocates, taxpayer rights groups, and bar associations have joined forces to lobby for the change.
One leading proposal under consideration by Senate lawmakers would eliminate joint liability and require instead that all married people be taxed only on their own individual incomes, even when they file joint tax returns. Under the proposal, issued by the American Bar Association (ABA), the tax rate structure would remain unchanged.
"I certainly plan to press ahead with the ABA proposal," Sen. William Roth (R) of Delaware, chairman of the Senate Finance Committee, told the committee hearing on Wednesday. He called the IRS pursuit of innocent spouses "shocking" and "outrageous."
"Clearly, let's stop harassing these women and move on to something else," agreed Sen. John Chafee (R) of Rhode Island.
As it looks to shift away from joint liability, Washington is following a trend well established in other developed nations. For example, no marital liability for income tax is imposed in Canada, Australia, Japan, Italy, Sweden, and the United Kingdom. The French and Germans face only limited liability.
Indeed, according to the ABA, the United States is the only developed country that allows the taxes owed by one spouse (for example, the husband) to be collected from the other spouse (the wife) - without first exhausting remedies against the husband.
Nevertheless, the IRS and its manager, the Treasury Department, have defended shared liability for couples who file jointly as "sound policy." Problems with innocent spouse protections can be solved through training, public education and minor modifications of the rules, they argue.
Under the US joint liability rule enacted by Congress in 1938, if a married couple files a joint tax return, each member is liable for all taxes owed that year. The rule was intended to stop married couples from unfairly escaping taxation.
But with the surge in divorce rates since the 1960s, some experts charge that the IRS has used the rule as a sweeping tool to squeeze taxes inequitably from divorced women - who are not responsible but are often easier to find (because they remain in the family home) and target than their male spouses.
"Joint liability ... is now a huge national problem," testified Richard Beck, a professor at New York Law School. "It permits the persecution of women through the tax system," says Mr. Beck, who cites cases of the IRS pursuing divorced mothers on welfare.
NEARLY all US married couples file joint returns in order to receive a slight tax benefit, although few are aware of the large liability risk, which is not mentioned on the standard 1040 tax form, Beck says.
Moreover, gaining freedom from liability under the existing innocent spouse test is extremely difficult, tax experts say. Among other things, it requires a spouse meet two "negative" burdens of proof: that he or she (1) did not know of and had no reason to know of the tax understatement, and (2) did not benefit from the tax understatement.
Elizabeth Cockrell of New York knows this first hand. A Canadian who married an American commodities broker in 1979, Ms. Cockrell says she was shocked when, nine years after her divorce, the IRS came to her for half a million dollars in back taxes owed from her ex-husband's investments in sham tax shelters.
In tax court, however, a judge ruled that Cockrell did not meet the innocent spouse test. "The judge said that because I had a bachelor's degree I should have known [about the tax shelters]," she testified. "He believed I didn't know, but I should have known."
Cockrell, whose case is now before the Supreme Court, says she was also dismayed by the IRS refusal to tell her what actions - if any - it has taken to collect the taxes from her ex-husband. Last year, she founded an organization called Women for IRS Financial Equity (WIFE) and says she has received letters from dozens of women with similar experiences.
One of the women Cockrell met is Sveltlana Pejanovic. An exchange student from Yugoslavia, she married an American in 1982 but was divorced in 1986. Several years later, in 1993, the IRS phoned her to tell her she was responsible for $200,000 in back taxes from a decade before. Her husband had been receiving mail from the IRS for years, but had not told her.
The IRS placed a lien on her home, seized her checking and retirement accounts, and threatened to confiscate all her belongings. Meanwhile, she says her husband, who had quickly placed his assets with his previous wife and children, "is of no interest to the IRS."
"The actions of the IRS against me were not unlike actions that took place in my former communist homeland," the petit woman testified in a heavy accent. "The IRS is too powerful, and responsible to no one."
Another woman who testified, Florida schoolteacher Karen Andreassen, told how the IRS had rejected her claim of innocence even when it knew that her ex-husband, a former IRS field auditor, had forged her signature on joint returns. Today, the mother of three is hoping to receive a refund from the IRS, although a lien remains on her home.
As for Berman and thousands of other women, experts say their only hope is that Congress will make any legislation repealing joint liability retroactive.