Avoided Marriage Penalty, But Underpaid Taxes. Now What?

Dear Tax Talk, My wife and I are both six-figure-earning individuals. Our accountant always runs the taxes and compares what it would be for all filing statuses, and he recommends that we select the one that pays the least taxes. I recently found out this is not acceptable.

What are my choices here? If I file an amended tax return, do I have to pay the extra taxes plus interest rates on the balance for the last three years? This would be a significant sum. What help can we receive? We reported individual expenses instead of what we could have claimed if we had to consider our joint expenses. Will this also raise a red flag with Internal Revenue Service and initiate an audit? Please help.

P.S. For certain paperwork processing, we have to prove that we have been married for the last three years, which is true, but our taxes don't reflect it, and the processing center is asking for the tax report. We don't have a choice but to change the status. We are just wondering how we can minimize how much we'd have to pay due to the marriage penalty of high-income individuals. Thanks. -- Rush

Dear Rush, Although your accountant gives you a lot of choices, your choice in accountants was bad. I'm guessing you've been filing as unmarried all these years. Just as you know this was wrong, you already know that it is going to cost you back taxes and interest to fix the problem.

The married-filing-jointly tax rates are higher for two-earner couples than the singles' tax rates. If you look at the 2011 tax rates schedule, you'll see that a single taxpayer can earn up to $174,400 and remain in the 28% tax bracket, but if that person had a spouse also earning $174,400, a good part of their nearly $350,000 combined income would have been taxed at 33% (that is, anything above $212,300). That's roughly $140,000 taxed at 5% more or nearly $7,000 in additional taxes.

The tax tables are just one way the tax code punishes marriage. Depending on where you live and your state's view of the marriage penalty, you may have additional state taxes from amending your tax returns.

While taxpayers have a legal duty within any applicable statute of limitations to pay the correct tax, neither the tax code nor the IRS regulations require them to unilaterally correct tax return submission errors or omissions. Instead, the regulations state that upon discovering an error or omission involving an understatement of income or an overstatement of deductions, a taxpayer "should" file an amended tax return and pay any tax due (Treas. Reg. sections 1.451-1(a) and 1.461-1(a)(3)). In Badaracco Sr. v. Commissioner, 464 U.S. 386 (1984), the U.S. Supreme Court said a taxpayer is under no legal obligation or duty to file an amended tax return even after an error or omission is discovered.

However, since you need to show up as joint filers for whatever paperwork you're attempting to complete, you'll need to assess the tax costs of filing the amended tax returns. You could ask the IRS for a payment arrangement once you get all your amended returns filed. Your joint expenses should be the sum of your individual expenses. I can't think of any deduction allowed for married taxpayers that isn't available if you filed nonmarried. If you want to minimize taxes, then you should consider divorce.

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