Client in Distress - Injured Spouse / Student Loans

Facts:

Client walks in with a bundle of papers. She turbotaxed her original 2018 return. Her husband's student loans garnished (offset) what would have been a $10,000 refund. She went to a preparer who filed a 1040x with 8379 Injured Spouse Allocation. This preparer used incorrect numbers on the 1040x and even checked a box wrong on 8379. The IRS will not honor the injured spouse - no reason given - and based on the incorrect 1040x, IRS says client owes $1,000. I review the original 1040 as well as the 1040x. Low and behold there are additional errors on the original 1040 (underreporting early distributions) that are completely different than the errors on the 1040x. All these errors with only two W2s and two 1099Rs. My, hopefully correct, 1040x now shows $1,500 tax due.

Also, Client and Spouse are in the middle of a divorce that began in early 2018 and has not yet reached a conclusion.

Questions:
1. Is there any reason injured spouse would not work in this situation?
2. Let's say injured spouse is rejected for some reason. Is client going to have to write a check for $1,500 or will it be un-offset back to the student loan balance?
3. My next step is help her file the correct 1040x and 8379, correct?

You haven't given enough information to even attempt an answer.

What was the filing status for the original return and what is the filing status for the amended return(s)?

From what was the refund generated?

**What did each spouse make and what was the tax withheld?

**Did either spouse have self-employed income?

**Did both spouses sign the amended return?

Obviously I am making assumptions as to how the returns were filed.

I was surprised to find that injured spouse often does not work in community property states. (Thanks Riley, RIP).

You haven't given enough information to even attempt an answer.

What was the filing status for the original return and what is the filing status for the amended return(s)?

From what was the refund generated?

**What did each spouse make and what was the tax withheld?

**Did either spouse have self-employed income?

**Did both spouses sign the amended return?

Obviously I am making assumptions as to how the returns were filed.

All were filed MFJ.
Refund was withholding, CTC, and EITC.
TP (client) made $11k and paid in $700.
SP made $25k and paid in $1100.
No SE Income.
Both signed all returns.

Also this is TN - not a comm property state.
Only the TP (client) can claim the two under 17 children as dependents for the tax year.

I see nothing about this case that would give rise to a successful injured spouse. Why do you?

I see nothing about this case that would give rise to a successful injured spouse. Why do you?

I do, because it seems to fit this guidance from TheTaxBook:

"File Form 8379 if:

1) The injured spouse is not legally obligated to pay the past due amount, and
2) The injured spouse meets any of the following conditions:
a) The injured spouse made and reported tax payments, such as federal income tax withholding or estimated tax payments.
b) The injured spouse had earned income, such as wages, salaries, or self-employment income and claimed the Earned Income Credit or the Additional Child Tax Credit.
c) The injured spouse claimed a refundable tax credit, such as the Health Coverage Tax Credit or refundable credit for a prior year minimum tax.

Exception: If the main home of the injured spouse was in a community property state, the spouse may file Form 8379 if only item (1), above, applies. "

Specifically, the client (TP) paid in some withholding and also is entitled to some or all of the refundable credits.

basisschedule (or a moderator), could you please change the title of this thread to something more descriptive, per forum guidelines? The term "injured spouse" should probably be included (see guidelines for why this matters). It could even be just "Client in Distress - Injured Spouse".

Facts:

and even checked a box wrong on 8379. The IRS will not honor the injured spouse - no reason given

If a box was marked incorrectly on the 8379 then that may explain why the IRS didn't honor the injured spouse. I filed a 8379 in a community property state where the HB had student loan interest garnished from the joint refund amount. The IRS honored that the amount could not be garnished from the refund amount that belonged to the spouse. Student loan was taken out before marriage.

Andrew, my guess is that you are correct. This is a very similar situation, except not a community property state.

Would you think the best move going forward is to amend the return and attach a new 8379?
Can the TP reclaim the refund that has already been applied to the student loan debt?

How much were the 1099-R's?
Whose are they?
Are they subject to penalty?

Nightsnorkeler, $4k taxable on the 1099-Rs, subject to penalty, and belonging to TP (client). The $400 penalty and effect on EIC resulted in the $1,500 tax due on my amended.

It seems to me that Client has not been injured by the IRS. Instead, client has been "injured" by whichever agency has claimed the refund, which is of no concern to the IRS.

It seems to me that Client has not been injured by the IRS. Instead, client has been "injured" by whichever agency has claimed the refund, which is of no concern to the IRS.

Since the IRS has a form for dealing with it, apparently it is of "concern" to the IRS.

You may be an injured spouse if you file a joint tax return and all or part of your portion of the overpayment was, or is expected to be, applied (offset) to your spouse's legally enforceable past-due federal tax, state income tax, state unemployment compensation debts, child or spousal support, or a federal nontax debt, such as a student loan.

It seems to me that Client has not been injured by the IRS. Instead, client has been "injured" by whichever agency has claimed the refund, which is of no concern to the IRS.

I also found this, which seems to put the ball squarely back in the IRS court...

Treasury Offset of Joint Tax Refunds
If you filed a federal income tax return jointly with your spouse, the entire refund from that return, including the part that came from withholdings on earnings of your spouse, is subject to offset, even though your spouse is not liable for the defaulted loan. Your spouse (referred to in this situation as the “injured spouse”) may reclaim his or her portion of the refund from the Internal Revenue Service (IRS) by filing an injured spouse claim form (IRS form 8379). You may also request this form from the IRS by calling 1-800-829-1040. Only the IRS will be able to answer questions about whether your spouse qualifies for an injured spouse refund and how much he or she may receive. https://studentaid.ed.gov/sa/repay-loan ... nt-refunds

I keep trying to find out how the IRS administers this stuff between the agencies. So far, this is the best I've got...

https://www.irs.gov/pub/irs-utl/refund_ ... efunds.pdf
Non-Tax Debts Information (2010)

FMS will:
• Confirm and verify Federal non-tax debt offset
• Furnish creditor agency information

Creditor Agency will:
• Provide debt balance and establish payment agreements
• Refund any money taken in error
• Remove a debtor or change status of debt from the FMS debtor database

More info...

31 CFR § 285.2 - Offset of tax refund payments to collect past-due, legally enforceable nontax debt.

(f)Offset made with regard to a tax refund payment based upon joint return. If the person filing a joint return with a debtor owing the past-due, legally enforceable debt takes appropriate action to secure his or her proper share of a tax refund from which an offset was made, the IRS will pay the person his or her share of the refund and request that Fiscal Service deduct that amount from amounts payable to the creditor agency. Fiscal Service and the creditor agency will adjust their debtor records accordingly.

(g)Disposition of amounts collected.Fiscal Service will transmit amounts collected for past-due, legally enforceable debts, less fees charged under paragraph (h) of this section, to the creditor agency's account. If an erroneous payment is made to any agency, Fiscal Service will notify the creditor agency that an erroneous payment has been made. The agency shall pay promptly to Fiscal Service an amount equal to the amount of the erroneous payment (without regard to whether any other amounts payable to such agency have been paid).

If the return had been filed correctly, are you saying there would have a been a refund of $8,500 (you said there was a $10,000 refund on the originally filed return and the 1040X shows $1,500 due)?

If the return had been filed correctly, are you saying there would have a been a refund of $8,500 (you said there was a $10,000 refund on the originally filed return and the 1040X shows $1,500 due)?

Correct

Would it be possible for you to email me a redacted complete copy of the Federal return as it should have been filed? There's something I'm missing and seeing the actual return would clear that up.