A large proportion of married business partners who file individual or partnership tax returns are unaware of the potential benefits of a more recent filing option.
A report by the Treasury Inspector General for Tax Administration found that in tax year 2007, approximately 40,000 taxpayers filed a Form 1065 and another 350,000 taxpayers filed a Form 1040 with a single Schedule C showing the profit or loss from their business. However, many of these taxpayers could have potentially benefited by electing to use the Qualified Joint Venture filing option.
The QJV option allows taxpayers to bypass the filing of Form 1065 and the associated Supplemental Income and Loss (Schedule E), and only file two Schedules C and two Self-Employment Tax (Schedule SE) with their Form 1040. Married individuals filing a single Schedule C may allocate the Schedule C income. Thus both individuals receive Social Security credit.
Prior to tax year 2007, joint husband-and-wife businesses with material participation by both spouses were considered partnerships and were required to file Form 1065 annually, as well as their regular Form 1040. Legislation was enacted to make the QJV option effective with the start of tax year 2007 to simplify the filing requirements for husband-and-wife businesses by allowing them to be treated as sole proprietorships rather than partnerships for tax purposes. The option also helps to ensure each spouse gets proper Social Security credit for his or her self-employment earnings.
However, TIGTA found that many potentially qualified individuals were not aware of the QJV filing option. Of the respondents to its survey who filed an annual Form 1065 but qualify for the QJV option, 85 percent were not aware of the option. A smaller percentage of the Form 1040, Schedule C, filers qualified for the QJV option; however, of those who did qualify, 80 percent were not aware of the option. In both categories, most of the taxpayers who were not aware of the option said that they would consider using it in the future.
TIGTA faulted the IRS for not clearly presenting the new tax law provision in some of its publications or providing sufficient outreach to emphasize the tax law change to the paid preparer community. In addition, tax preparation software packages did not adequately prompt or notify preparers about the new provision.
TIGTA recommended that the IRS clarify its discussion of QJVs on its IRS.gov site and include explanations on partnership status and potential spousal benefits when electing the QJV option.
The IRS should also work more closely with tax preparation software vendors to help ensure their software packages adequately alert taxpayers and paid preparers about the QJV election, TIGTA suggested. An outreach marketing plan should be designed for husband-and-wife businesses and tax practitioners to ensure they are aware of the QJV election and its potential Social Security benefits and reduction of taxpayer burden.
IRS officials agreed with all of TIGTAs recommendations. They plan to update their publications and forms, update the content on the IRS.gov Web site to ensure it is accurate and understandable, and enhance their marketing efforts to software industry professionals. They also plan to undertake an effort to ensure the spousal elections, and their impact on Social Security benefits, are clearly communicated to the appropriate taxpayers.
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