What is Head of Household Status? Warning for Chapter 13 filers!

I have seen a rash recently of clients filing for Chapter 13 relief to save their homes and problems arising when their tax returns are reviewed by the Trustee.  What’s the problem?  These are married people filing separately and one of them is filing as Head of Household.  Why is this a problem?  It is an incorrect and potentially fraudulent tax return because, if you are married, you mostly cannot be the head of household.

The Code of Federal Regulations at 26 C.F.R. §1.2-2(b)(1) states that “A taxpayer shall be considered the head of a household if, and only if, he is not married at the close of his taxable year…” and has a qualifying dependent.  Most of my clients have the qualifying dependent, but are married.  This causes my Chapter 13 Trustees to have conniption fits.  The clients then have to amend their returns to correct the issue and submit the amended returns to the Trustee.

Where have I seen this done?  Mostly in urban environments where there are lots of non-accountant tax preparers who offer cheap rates and barely adequate service.  Clients who file on their own will often do the same thing.  How to avoid this:  use an accountant, you will pay more, but the return will be correct and it will save you a lot of grief later.

It’s not fatal to a Chapter 13 case to have this issue, but it will delay confirmation of a case.  The takeaway is this:  if you are NOT single or separated, you cannot file your taxes as Head of Household.  If you do and the Chapter 13 Trustee sees it, expect aggravation.