How a ‘Gorgeous’ Dior Bag Cost a Widow $61,000 in Tax Court
As Tax Day approaches, here’s something married filers often overlook: It’s perilous to sign a joint tax return if your spouse is committing tax sins.
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A widow recently discovered just how much so. Her late husband had told her that he had “dealt with” their overdue income taxes—but he hadn’t.
She ended up in Tax Court with the Internal Revenue Service. Now, she owes the IRS $61,000 of tax. With interest, her bill is about $93,000.
Sydney Thomas owes this tax because when married couples sign a joint income-tax return, the law holds each spouse liable for everything on the return. The IRS can pursue either one for taxes due.
“The liability comes as a shock to people because they think the IRS will allocate responsibility between the spouses,” says Megan Brackney, an attorney with the Kostelanetz firm who represented Thomas pro bono.
About 54 million couples, or one-third of total filers, submitted joint returns in 2021, according to the agency’s latest data.
Spouses who think they’ve wrongly been blamed do have a way out: It’s called an innocent-spouse claim, and it can be used with the IRS or–if that fails–in Tax Court. Successful claims absolve a person from paying taxes owed due to their spouse’s misdeeds.
But innocent-spouse cases are hard to win, as Thomas’s case shows. And whatever the outcome, the relief request means tax authorities will delve deeply into a filer’s financial and personal history. Details matter: One factor in the ruling against Thomas was a blog post about her designer purses.
Through her lawyer, Thomas declined to comment on the case. But the decision is a cautionary tale for all who sign joint returns, so here are key facts.
Mired in debt
Sydney Chaney married Tracy Thomas in 1994. Over time, they had two daughters and bought a four-bedroom home in an affluent San Francisco suburb plus a three-bedroom second home near ski resorts in the Lake Tahoe area. Sydney Thomas stayed home to take care of the children, and at one point Tracy Thomas bought his wife a 5-carat diamond ring she still owned at the time of the Tax Court trial.
Then the marriage began to break down, especially after Tracy Thomas stopped receiving regular bonuses about the time of the 2007-2009 recession. He left his job with an oil-field services firm for others; the couple became mired in credit-card and mortgage debt. To help pay it, they took early retirement-account withdrawals totaling about $263,000 during 2012, 2013 and 2014.
But they didn’t pay the IRS the full amount of tax due for those years. Meanwhile, Sydney Thomas earned money as a part-time instructor at the University of California, Berkeley; as the owner of a sailing-apparel company; and as a gig worker doing projects like home staging. Later, she rented the second home during ski season.
In 2016, Tracy Thomas texted his wife that the “taxes and mortgages have been dealt with,” which proved false. The couple also argued about finances, including a Paris trip for Sydney Thomas and one of their daughters. Then Tracy Thomas died in July of that year, leaving his wife as sole heir of the couple’s assets, debt and tax problems.
A loss in Tax Court
In 2019, Thomas asked the IRS for innocent-spouse relief from unpaid taxes for 2012-14. The agency denied the request. So, too, did Tax Court Judge Emin Toro after he considered her banking records, assets like home equity, rental income from the ski house, and her blog posts, among other things.
What counted most against her claim were two issues joint filers should note.
Number One: Did Sydney Thomas know about the unpaid taxes, or should she have known about them? The judge said yes, because she signed the return and discussed the taxes with her husband. He also questioned whether her claim that she believed her husband paid the taxes was reasonable, given the couple’s financial history.
Number Two: Did Thomas derive significant benefit from the unpaid taxes? Again, the judge said yes. While the IRS awaited her taxes, she paid for travel to Europe and elsewhere, plus a daughter’s $1,000 ticket to Hawaii.
On her blog, she also discussed buying her daughter “a gorgeous bottle-green Dior bag” for her 18th birthday and mentioned other designer bags she owned.
These two factors outweighed evidence that Tracy Thomas abused his wife verbally and physically, making her afraid to ask about the taxes. While the judge admitted this evidence, he questioned whether Sydney Thomas was as afraid of Tracy as she claimed because she expressly disagreed with him about financial decisions on several occasions.
Also, he said, she never stated on the record that she disagreed with the nonpayment of taxes. So Ms. Thomas must pay up.
Be wary of ‘bling’
“What tanked this case was that the wife spent lavishly while she knew about the tax problems. Other innocent spouses should be wary of how bling will look to the IRS,” says Josh Ungerman, an attorney with Meadows Collier in Dallas who has handled many innocent-spouse cases.
By contrast, in 2018, a factory worker named Rick Jacobsen won innocent-spouse treatment in Tax Court after his then-wife embezzled $500,000 from her employer. Arguing his own case, he convinced the judge that he was ignorant of the theft and didn’t benefit because his wife gambled away the stolen funds without his knowledge.
What can partners do if they’re worried about a spouse’s tax misdeeds? Ungerman says a good start is often to switch to “married, filing separately” status. This severs joint liability, although it can reduce some tax breaks.
This move may not work if the couple lives in a community-property state like Texas, California or Washington. In such states, each spouse is typically deemed to earn half the income, and a wayward spouse’s correct information may be hard to obtain.
Ungerman also advises seeking help from a tax lawyer right away, because the IRS can go back many years in investigating a case. He adds that innocent-spouse claims aren’t an area for do-it-yourselfers, calling Jacobsen’s victory a “unicorn.”
Write to Laura Saunders at Laura.Saunders@wsj.com
