When the IRS Can Disregard Community Property Rules
In certain circumstances, the IRS retains the right to disregard community property rules. Details about these situations have been outline here.
Sec 66(b) Denial of Community Property Benefits
If a taxpayer acts as if he or she is solely entitled to the community income and fails to timely notify his or her spouse of the nature and amount of the income, IRS may deny any benefit of community property laws to that taxpayer (Reg Sec. 1.66-3(a)).
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Timely Notification – Taxpayer fails to notify the other spouse of the nature and amount of the income before the due date (including extensions) for filing the return for the tax year in which the income was derived.
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Acted as if Solely Entitled to the Item of Income - Whether a spouse has acted as if solely entitled to the item of income is based upon facts and circumstances. This determination focuses on whether the spouse used, or made available, the item of income for the benefit of the marital community.
“ Where a spouse's wages are deposited into a joint bank account from which both spouses pay bills and household expenses, the wage-earning spouse isn't acting as if solely entitled to the wages (Reg Sec. 1.66-3(c), Example 1)). ”
- Example 1
“ Same as example #1 except the wife had a savings account that was not known to the husband and did not share the 1099-INT from the account with him and used the funds to help support her unemployed brother. In this case the wife is acting as if solely entitled to the interest income (Reg Sec. 1.66-3(c), Example 1)). ”
- Example 2
CAUTION
This rule can be used only by IRS in order to disallow the benefits of community property laws to a taxpayer and cannot be used by a taxpayer to avoid his or her liability for tax on community income paid to and/or earned by the taxpayer's spouse.