The Elder Law Forum by Professor Michael Myers Social Security corrects $43,000 underpayment
Occasionally the federal bureaucracy and the laws it enforces contain an element of fairness and equity.
We discovered such a provision within the Internal Revenue Code while researching a tax problem posed by a caller to the USD Senior Legal Helpline (1-800-747-1895; email@example.com). She said last year the Social Security Administration discovered it had been underpaying retirement benefits to her husband during the past 16 years.
To rectify its error, the SSA recently paid him a lump sum of $43,000. "Our concern," said the caller, "is that we will have to report the full amount as 2004 income and have to pay more tax than had he received it as he should have." She correctly pointed out the unfairness of being required to pay more tax because of the IRS mistake.
I informed her that in 1986 Congress eliminated the popular income-averaging feature of the code, which permitted taxpayers to average their incomes over a period of five years. Preliminarily, I advised, it appeared they may be required to report the lump sum as 2004 income only.
That initial assessment was proven wrong after consulting with USD Law School Tax Professor Frank Slagle who researched the issue and emailed the caller: "You can elect (choose) to report only so much of the lump sum payment as would have been taxable in each of the prior years, going back to 1988. In other words, you can recalculate your income for each of those prior years to determine if any amount of the added
benefit would have been taxable in each of those prior years.
"For each year that your gross income would have been increased, you would include only that amount of the increase in your 2004 tax return. You would do that for each and every year."
To take advantage of the rule, the caller and her spouse will have to obtain copies of their joint returns over those 16 years and recalculate each return as though the correct amount of Social Security had been received. "We keep good financial records and I believe we have most of all of our tax returns," she advised. If not, they can obtain copies from the IRS, subject to a service fee.
It may be worth the effort. Combined income of more than $34,000 will subject 85 percent of their Social Security benefits to taxation. "Retrieve those returns and go to work," I advised. "It will be the best hourly rate you will earn all year."