When Melinda Resser's husband came home from their accountant's office in 1982, he handed her their joint tax return and said, "Just sign it."
She did, but it was a mistake that would cost her 10 years to correct and more than a quarter of a million dollars in legal fees. However, Melinda's story would also get Congress to fix an unfair law that has penalized millions, particularly women.
How It All Began
Melinda, the mother of two, was a manager at a hospital. She was married to a professional stock trader who made about 11,000 transactions on the Chicago Board of Options every year. She didn't understand options trading, nor did she want to. Also, all those gains and losses made for a very complex tax return, which she left to her husband and their accountant to figure out.
The IRS Gets Involved
The trouble started in 1988 when the IRS came calling with a $391,113 tax bill, plus a $97,778 penalty for an understatement of taxes in the 1982 return. The IRS disallowed the deduction claimed for stock option spread losses.
Because Melinda had signed a joint return, she was held to be just as responsible as her husband.
Requesting Innocent Spouse Relief
Melinda learned from a divorce attorney in 1991 about innocent spouse relief, which at the time was seldom granted.
Back then, the IRS had to prove only that Melinda was a smart woman; therefore, she should have known that her husband didn't lose money in options trading.
In time, innocent spouse relief would save her financial life, but not until she had waged a grueling battle that involved seven lawyers, three trials and reams of court papers.
Congress Takes Action
By the time Melinda finally won her case, her tax bill had ballooned to about $2.5 million.
Her fight caught the interest of Congress, and it eventually led to the passage of the IRS Restructuring and Reform Act of 1998, which made tax relief a truly viable option for innocent spouses. Under the revised law, an innocent spouse who signs a joint tax return that understates the amount of taxes owed has two years to petition for relief from the time the IRS first starts trying to collect taxes.
"I felt like I was living with a guillotine over my neck," says Melinda, who was divorced in 1993. "I still have a hard time believing I'm out of the woods."
To learn more about petitioning the IRS for innocent spouse tax relief, read IRS Publication 971.