Same Sex Couples Need to Act Soon to Preserve Possible Refund Rights

Originally Published on forbes.com on February 19th,2012

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Same sex couples who were married as of December 31, 2008 need to act soon to preserve their possible right to a refund of federal income tax.  Section 3 of the Defense of Marriage Act holds that for purposes of all federal laws, a marriage must be between a man and a woman and spouses be of the opposite sex.  Under DOMA though a couple is married under state law, they are not entitled to file a joint federal return nor required to file as married filing separately.  They file as either single or head of household depending on their individual circumstances.

Gay and Lesbian Advocates and Defenders (GLAD) has been the leading force in litigation to have Section 3 of DOMA declared unconstitutional.  So far they have been successful, prevailing in a decision in federal district  court in Massachusetts.  The Obama administration decided that the constitutionality of Section 3 of DOMA was indefensible and abandoned the appeal, but Congress picked up the gauntlet so the uncertainty continues.  In the mean time, it is till the law.

Here is the sticky part.  If DOMA is ultimately declared unsconstitutional and you would have saved money by filing a joint return, you can only get that money back by filing a timely refund claim.  For 2008, that means now.  (Actually you have until around April 15th and somewhat longer if you extended your 2008 return.  I’m not going to discuss the fine points of the exact day, because there is no excuse for not doing it sooner.  Also, be absolutely certain to mail it return receipt, even though you are allowing lots of extra time.)

GLAD has provided comprehensive guidance on the statements and attachments that should go in with your refund claim. Since they are so on top of this, I hesitate to disagree with anything they say, but I do question one bit of their advice.  They advise that if the IRS issues a refund check in response to your claim you should not cash it.  I asked them for their reasoning on that point and this is the response I received:

I spoke with our Gary Buseck, our legal director, about our advice for folks to not cash their refund check. Gary pointed out that if a couple gets a refund check based on a married filing jointly effort to amend, the bottom line is that the IRS made an error (which they will eventually correct).  So, if you cash the check, then you are subject at least to interest on the amount for the time you hold it (and God knows penalties might be imposed as well – as you tax payments are now short of your payment obligation).  Interest owed to the IRS is quite high and, as you know, interest on money we put in the bank is tiny. Hope this is helpful. Be in touch if you have further questions.

The current underpayment rate is 3%, which is quite high, relative to what you can get on deposits, but my experience is that the IRS will probably treat you as if you cashed the check even if you don’t.  Getting things like that fixed in their computers is like unscrambling an egg.  Also in order to recover an erroneous refund, they have to sue you, whereas if this continues to linger, you may have to take further action to pursue your refund claim.  Regardless, GLAD would like to hear from you if you do decide to amend and the date that the IRS denies your amended return (From that they can advise you when you will have to take further action to preserve your rights).  You can also call them for advice if you do receive that refund check.  Here is thecontact information.

When is a Joint Return Advantageous ?

People with simple lives will generally find that a joint return would have been better than two single returns if there is a significant difference in income.  You really need to run the numbers, though, because there are a host of things that can change the result one way or the other.  I have a mythical couple, Robin and Terry, whose role in life is to help me with awkward pronoun problems.  Robin and Terry are of the same gender and were married in Massachusetts in 2008.  What besides an income difference might affect the decision to file a joint return ?  Robin is a physician and has real estate losses from buildings which Terry, a realtor, is managing.  Those losses, now suspended, might be currently deductible on a joint return.  Terry has very high deductible medical expenses.  On a joint return, more of those deductions will be lost due to the higher adjusted gross income.  Robin is a genius investor with lots of capital gains.  Terry has capital losses.  You want to “marry” those losses to the gains.  Here is the one that many advisers neglect – the dark side of joint returns – joint and several liability.  Robin loves Terry very much but thinks that maybe Terry is a little careless and kind of forgets to report maybe half of Terry’s gross income.  Robin should not be signing a joint return with Terry, even if DOMA is repealed.

Civil Unions and the Like

My impression is that the general thinking has been that DOMA is not really relevant to civil unions and registered domestic partners.  Even if DOMA were repealed, the thinking goes, people in those type of arrangements are not married for state purposes and accordingly are not married for federal purposes, regardless of gender.  There is a rather obscure development that calls this thinking into question which I pointed out in my piece on 2011 LGBT tax developments. The IRS issued a letter to a taxpayer that indicated that if a state civil union relationship for an opposite sex couple has the same legal effect as marriage, then the couple will be considered spouses for federal income tax purposes.  So maybe couples who were in same sex civil unions or registered domestic partnerships should consider amending 2008.

Community Property

There is no longer controversy here, just loads of aggravation.  Beginning in 2010, registered domestic partners and same sex married couples in community property states were required to follow community property law in filing their federal returns.  This meant that Robin reported half of Robin’s income and half of Terry’s income and Terry did likewise.  Just considering rates (i.e. ignoring things like offsetting gains and losses), this is likely a better deal than filing a joint return – unless you consider all the aggravation, because nobody was set up to handle it.  Nonetheless, when the IRS announced this rule, they made filing amended returns for earlier years optional.  Robin makes a lot more than Terry, so Robin will be filing for a refund.  Terry, on the other hand, will have a balance due.  If Robin amends, then Terry is also supposed to amend.  The entertaining question is what if Robin and Terry split up in 2009 and are no longer speaking to one another. Last April, Patricia Cain, who has a great blog that focuses on same sex tax issues strongly advised against the advice given by “some people”  to consider just filing the refund return.  The IRS has since announced that they don’t want one without the other, but if Robin and Terry are just not speaking, what is Robin supposed to do ?  Of course a community property same sex couple might also consider amending to a joint return.

Don’t Procrastinate

I really encourage everyone to not procrastinate on getting their tax information together.  Just like the hygienists always tell us to floss regularly.  Did you know that if you floss regularly it adds a year to your life expectancy ?  The only downside is that you spend a substantial portion of that extra year of life flossing, so it is not clear how much ahead you are.  At any rate, same sex couples really do need some extra time.  As I explain here a New York couple to be thorough might need to prepare five federal returns, two of which will be filed, if they have a complicated life.  Then there are the people in California with the community property laws.  Don’t get me started.  There are, however, reasons why you might not have all your stuff together yet, so you may just have to wait, but there is really no excuse for not taking care of amended returns sooner rather than later.  Check in withGLAD.  By the way GLAD has been doing quite a job in this area on relatively modest resource as I pointed out here.  If you are with them, you might want to consider lending some support.

You can follow me on twitter @peterreillycpa.