BobKamman
Level 15
‎03-31-2024 11:53 PM

Are they still living together?  If not, the community has ended.  If so, do they have an agreement to disregard community property law?  I'm not sure it has to be in writing, but a paragraph signed by both of them would probably work.  And then there is Code Section 66(b), which allows IRS to go after the spouse who is benefiting from non-disclosure, but it's better than nothing.  Following is from the Internal Revenue Manual.  I'm not one to turn away taxpayers who are trying their best to comply. 

25.18.2.3.1.2 (02-23-2018)
IRC 66(b) - Denial of Community Property Benefits Where Spouse Not Notified

  1. IRC 66(b) provides an exception to the general rule that community income is taxed one-half to each spouse. IRC 66(b) authorizes the Service to disregard community property laws by denying the benefits of income splitting between the spouses. IRC 66(b) may be applied under the following conditions:

    1. The spouse acted as if they were solely entitled to the community income, and

    2. The spouse failed to notify the other spouse of the nature and amount of the income before the due date of the return (including extensions) for the taxable year in which the income was derived.

     

  2. IRC 66(b) entitles the Service to shift the item of income and assess additional tax against the spouse earning the income. The tax must be assessed in accordance with IRC 6212 (deficiency procedures). Where IRC 66(b) is asserted, it must be clearly reflected on the notice of deficiency. The determination must be supported by evidence that IRC 66(b) applies. If the notice fails to do this, the burden of proof may be shifted to the Service. Shea v. Commissioner, 112 T.C.183 (1999). See IRC 66(b) and 26 CFR 1.66-3(b).

  3. Only the Service can invoke IRC 66(b). It is not a relief provision that can be invoked by a taxpayer to escape liability. Hardy v. Commissioner, 181 F.3d 1002 (9th Cir. 1999); Drummer v. Commissioner, T.C. Memo,1994-214, aff’d without published opinion, 68 F.3d 472 (5th Cir. 1995).

  4. Solely entitled to income: to determine whether a spouse has acted as if he or she was solely entitled to the income, consider the facts and circumstances focusing on whether the spouse used, or made available, the item of income for the benefit of the marital community. See 26 CFR 1.66-3(a). For instance:

    • Where the community property at issue is deposited into a joint account or an account over which both spouses have signature authority, the spouse who deposited the funds did not act as though he or she was solely entitled to the funds. Cox v. Commissioner, T.C. Memo. 1993-559; Drummer v. Commissioner, T.C. Memo. 1994-214, aff’d without published opinion, 68 F.3d 472 (5th Cir. 1995).

    • Where a spouse sends a portion of the funds to the other spouse, that spouse has not acted as though he or she was solely entitled to the funds. Mischel v. Commissioner, T.C. Memo 1997-350; 26 CFR 1.66-3(c), Example 1(ii).

    • If the community income is retained by one spouse and spent at his or her discretion, that spouse has acted as though he or she was solely entitled to the income. See 26 CFR 1.66-3(c), Example 1(i).

     

  5. Notification of nature and amount of income: a spouse who provides a copy of a Form 1099 or Form W-2 to the other spouse satisfies the notification of the nature and amount of income requirement. If notification is done before the due date of the return (including extensions), IRC 66(b) is inapplicable. See 26 CFR 1.66-3(c), Example 2, for additional information.

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