Surviving spouse left with big tax bill

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  • #42024
    Peter Mitchell
    Participant

    I’m seeking some help on how to resolve a taxpayer’s tax debt. I’m still in the information gathering stage and just received a signed POA for the surviving spouse and deceased taxapayer.

    The taxpayer is a widow. Her husband passed away on Dec. 5, 2019. Married for 17 years. They filed married joint returns for 2016-2017, the years tax is owed.

    2016 tax due including interest & penalties: ~$14K (Original tax due per return ~$9.5K)
    2017 tax due including interest & penalties: ~$190K (Original tax due per return $164K)

    Background info:

    The deceased husband was a successful salesman until 2016 when he began exhibiting symptoms
    that resulted in 2 different job terminations due to his inability to do his job.

    The deceased husband was diagnosed with stage 4 brain cancer in 2017.

    The surviving spouse is an Australian Citizen. I’m not sure if a US citizen or Greencard holder.

    The tax debt for 2017 appears to be the result of underpayment of tax. There was a retirement distribution of $327K in addition to W-2 wages, including payout from work disability policy totaling $453K (not sure yet of each source amount), most of this income belonged to the deceased husband. The surviving spouse’s income is about $65K/year working as a history professor.

    The 2017 tax return appears to be self-prepared.

    The surviving spouse wasn’t involved in the preparation or filing of the tax return. This appears to be a pattern throughout the marriage.

    The surviving spouse wasn’t aware of the large retirement distribution in 2017. She doesn’t think her husband was in his right mind when he withdrew the money.

    Current income and asset status:

    $65K per year income from teaching
    $400K life insurance proceeds
    $75K mortgage on house (Estimated value $375K)
    $75K student loans

    The husband transferred his interest in the house to surviving spouse in 2017 after being diagnosed with brain cancer.

    The surviving spouse lives in Texas, a community property state.

    The surviving spouse is 62 years old, has no family in the US and plans to work no more than a year, quit her job and return to Australia. This may happen soon. She is distraught after dealing with the quick deterioration of her husband’s health, cancer treatment, and death.

    Thoughts:

    There are clearly enough funds to pay off the tax debt between the life insurance proceeds and home equity so an OIC-doubt of collectability doesn’t appear to be viable strategy.

    Exploring accuracy of tax returns.

    Negotiated IA? Innocent Spouse Relief?

    Any ideas?

    #42026
    Eric Green
    Keymaster

    I would also consider penalty abatement. Given his diagnosis for brain cancer and the job losses I would think there is a good argument for the abatement due to his inability to manage his affairs properly. It was only two years, the money was hidden from the spouse and she never saw the return.

    Innocent spouse might also be an option but in a community property state I am not sure it helps.

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