To give background, myself (US Citizen) and spouse (UK citizen) left the US in 2012. At that time our house was so 'underwater' with the mortgage (spouse is listed as primary mortgage holder) we were advised by our attorney to do a 'deed in lieu' and return the keys to the bank. Despite numerous certified letters from our attorney to the bank, the bank never communicated with our attorney and deliberately sent the property into foreclosure through the courts. The property was finally foreclosed on last year. I found work and the spouse stayed home with the kids in the UK.
For Tax year 2012 we filed our joint return as normal and my spouse also filed the Immigration forms and IRS 8854 relinquishing green card accordingly. For tax year 2013 my accountant filed my tax return without my spouse being listed as they are adamant that any UK earnings, if any, are none of the IRS's business.
Come 2014 Tax returns, we received a 1099 from the bank for the underwater mortgage debt, which listed spouse as primary and their ss#. Our accountant has stated that to be able to write of the mortgage debt from our primary residence we need to file jointly. Even though the spouse has earned $0, begrudgingly has agreed to add their name to the tax return, which is about to be filed shortly.
As the kids are old enough my spouse is about to receive a job offer to return to the workforce, adamant that any earnings are none of the IRS's business. Ethically and morally they are 100% correct.
Our dilemma now is how to proceed with the IRS from here onwards.
Can my spouse be just left off of next years tax return, is this a red flag?
Should they refile an 8854? If they need to refile the 8854 do we need to refile the 2013 tax return and add them on, as the 8854 asks if the last 5 years worth of tax returns have been complete. On that basis in 2013 I believe there may have been just over $10,000 in their UK bank account at some point, we would have to go back and check the statements as we transferred money from my account in the US to the spouses (not joint) account in the UK. If we have to refile the 8854 and 2013 tax return then we should have filed the FBAR form, what are the implications as they were not originally required to file this form.
Any advice would be appreciated.
