The Affordable Care Act (ACA) raises interesting procedural issues. One such issue relates to victims of domestic abuse. The tax law as generally written does not reflect the realities of taxpayers who are victims of domestic abuse. Domestic abuse connects to tax issues in myriad ways, most prominently in connection with requests for relief from joint and several liability. It also can effect eligibility for many credits which are generally not available for taxpayers who file as married filing separately(MFS).
The IRS has addressed this problem in the context of the ACA in Notice 2014-13. The Notice expands eligibility for those credits to victims of domestic abuse who are unable or unwilling to file a joint return due to the abuse. Below I discuss the issue and illustrate how the Notice solves the problem. The IRS solution for this problem raises a question in my mind as to whether the IRS will open this procedure up to taxpayers who wish to claim other credits that are not generally eligible to MFS taxpayers, such as the EITC.
read more...The Issue
Eligible individuals who purchase coverage under a qualified health plan are entitled to receive tax credits under Section 36B. An eligible individual is a taxpayer (1) with household income for the taxable year between 100 percent and 400 percent of the federal poverty line for the taxpayer’s family size, (2) who may not be claimed as a dependent by another taxpayer, and (3) who files a joint tax return if married (within the meaning of § 7703).
The Notice addressed requirement 3. The problem with the law is that there may be circumstances where someone who is married for state law purposes may be unable to or unwilling to file an MFJ return. There is a general way for married taxpayers who do not file joint returns to file a return other than an MFS return. As the Notice describes, under Section 7703(b) someone who is married for state law purposes will not be treated as married for tax purposes in certain circumstances:
[A] married taxpayer who lives apart from the taxpayer’s spouse for the last six months of the taxable year is considered unmarried if he or she files a separate return, maintains as the taxpayer’s home a household that is also the principal place of abode of a dependent child for more than half the year, and furnishes over half the cost of the household during the taxable year.
The Problem
The problem, as the Notice also describes, is that a spouse’s abuse or other circumstances may make it difficult or impossible to meet some of the requirements:
However, § 7703(b) does not apply to many individuals who are victims of domestic abuse. For example, the abuse may have occurred in the last six months of the taxable year, the victim may not have the financial means to furnish over half the cost of a household, or the victim may not have a dependent child.
The Solution
The Notice recognizes this reality and provides a way for taxpayers who file MFS returns to still receive the premium tax credits:
For calendar year 2014, a married taxpayer will satisfy the joint filing requirement of § 36B(c)(1)(C) if the taxpayer files a 2014 tax return using a filing status of married filing separately and the taxpayer (i) is living apart from the individual’s spouse at the time the taxpayer files his or her tax return, (ii) is unable to file a joint return because the taxpayer is a victim of domestic abuse, and (iii) indicates on his or her 2014 income tax return in accordance with the relevant instructions that the taxpayer meets the criteria under (i) and (ii).
The IRS flagged this issue in proposed regulations issued in 2012. The Notice indicates that IRS will issue more formal guidance in final regulations. The preamble to the proposed regulations and the Notice identify some of the issues IRS will have to address, including what documentation victims will have to submit to establish eligibility.
Parting Thoughts
This is an important and fair development. While adding administrative costs to the IRS, it allows taxpayers caught in an untenable situation a way to get deserved benefits. It raises the question as to whether IRS will expand the application to other valuable credits, such as the EITC. While victims of domestic abuse who would otherwise be eligible for the EITC are more likely to satisfy the current statutory rules to be treated as unmarried, those rules are not a perfect fit and leave many forced to file an MFS return. Perhaps it is time for a legislative fix on marital status issues. TAS has recommended Congress revisit the marital status issues—see for example the 2012 Annual Report Recommendations to Congress. The current rules do no reflect the reality for many, especially those who are victims of abuse.
About Leslie Book
“(ii) is unable to file a joint return because the taxpayer is a victim of domestic abuse, . . .”
And who decides such inability? Does the other spouse get involved? A truly abusive spouse might protest that he really wants to file a joint return, because it means a bigger refund, and it always goes to his bank account. Then, as any police officer who answers and investigates calls involving domestic violence will tell you, it’s not unusual for the abuser to claim to be the victim.
IRS has the time to investigate these cases, as long as they reallocate resources from other duties. Let’s hope they don’t take money away from the people who have already had years to foresee and resolve this problem.
I suspect the standard will be similar to that IRS has established in determining whether abuse exists for purposes of requests for equitable relief, in rev Proc 2013-34–reproduced below. I am not sure what you mean by ” Let’s hope they don’t take money away from the people who have already had years to foresee and resolve this problem.” Who is the “they”? Who are the people who have “years to foresee and resolve?” As you now, there is no obligation for anyone to file a joint return. IRS would keep information relating to the supposed abuse confidential. I suspect IRS will investigate principally with respect to facts in control of the abused spouse.
Standard from equitable relief revenue procedure:
Abuse comes in many forms and can include physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate the requesting spouse, or to undermine the requesting spouse’s ability to reason independently and be able to do what is required under the tax laws. All the facts and circumstances are considered in determining whether a requesting spouse was abused. The impact of a nonrequesting spouse’s alcohol or drug abuse is also considered in determining whether a requesting spouse was abused. Depending on the facts and circumstances, abuse of the requesting spouse’s child or other family member living in the household may constitute abuse of the requesting spouse.