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An amended return was submitted to reflect that the client's marriage was annuled and the tax return went from a married/joint filing to HOH filing. The original married return had a refund of $6200. In the HOH amended return I split the $6200 refund to reflect CA community property law in effect for the married return. The IRS sent back a notice allocating the total $6200 refund to the HOH amended return so my client now owes tax instead of getting a refund.
The IRS states that "the amount of an overpayment on a joint return is allocated according to the commuity property laws of the state in which the taxpayers are domiciled." The Tax Advisor says "an absolute decree of annulment ends the marital community in all community property states. The IRS notes that although a decree of annulment indicates that no valid marriage ever existed, usually does not nullify community preoprty rights arising during the marriage. But it cautions that state law should be checked for exceptions"
So, my question is whether it's proper to 1) allocate the total $6200 refund to the HOH amended return, 2) split the original return and assign half of the return $3100 to the HOH amended return or 3) allocate the refund according to the separately filed returns - in this case the HOH is allocated $3875 and the "ex-spouse" receives $2448. Note that filing single and HOH results in an additional refund of $123 than filing Married/Joint.
Any thoughts are much appreciated - I'm responding to the IRS and would appreciate an expert opinion to back me up!