One of the benefits of being married is filing joint tax returns and receiving substantial tax benefits. The downside to filing one return is that both spouses are jointly and severally liable for taxes on the return, including any tax deficiencies, interest, and penalties that arise from the joint return, even if they later divorce. This is true even if the divorce decree states that the former spouse is liable for any taxes due from previously filed joint returns. We’ve represented many clients who’ve gone through the divorce settlement process, had a divorce decree that required the ex-spouse to pay back taxes, and yet were still receiving threatening notices from the IRS for payment. Many divorced individuals wonder how this can be.
Here are some basic facts about past due taxes from when you were married:
- Tax debt is treated like any other debt in a divorce.
- Your divorce decree doesn’t bind creditors. This includes the IRS! The divorce decree assigns responsibility between the divorced parties for any outstanding debts. However, that responsibility is only binding between the parties. Your obligation to the IRS doesn’t go away, regardless of what is stated in the divorce decree. When your ex doesn’t live up to the obligations, there are things that can be done, but in the meantime, the IRS has every right to come after both individuals.
- If taxes don’t get paid, penalties and interest will continue to accrue.
If your ex isn’t paying the IRS as directed in your divorce decree, there are a few options that may be available to relieve yourself from liability, including applying for Innocent Spouse Relief, applying for Separation of Liability Relief, or applying for Equitable Relief with the IRS.1 Each of these options has certain requirements to qualify, and requests for relief are not readily accepted by the IRS. If you believe you may qualify for one of these options, it is highly recommended that you retain a knowledgeable tax attorney to help you through the process.
Innocent Spouse Relief
Innocent Spouse Relief provides you relief from the tax you owe if your spouse or former spouse misreported items on your jointly filed tax return. Misreported items can include underreporting any income, or claiming improper credits, deductions, or property basis.2 To qualify for Innocent Spouse Relief, you must satisfy all the following conditions:
- Your joint return has an understatement of tax that’s solely attributable to your spouse or former spouse.
- You didn’t know, and had no reason to know, that there was an understatement of tax when you signed the joint return.
- Considering all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax.
Separation of Liability Relief
Separation of Liability Relief provides for the separate allocation of additional tax owed between you and your former or current spouse when an item wasn’t reported accurately on a join return.3 In other words, IRS separates the tax liability, including interest and penalties, between you and your ex-spouse. This means that you are no longer jointly liable for the tax, instead, the IRS allocates the tax based on your individual liability. To qualify for Separation of Liability Relief, you must not have had actual knowledge of the item that gave rise to the deficiency at the time you signed the joint return. In addition, you must meet one of the following conditions at the time you request relief:
- You’re divorced or legally separated from the spouse with whom you filed the joint return;
- You’re widowed; or
- You haven’t been a member of the same household as the spouse with whom you file the joint return at any time during the 12-month period ending on the date you request relief.
If you don’t qualify for Innocent Spouse Relief or Separation of Liability Relief, you may qualify for Equitable Relief.4 To qualify for Equitable Relief, you must meet all the following conditions:
- You are not eligible for innocent spouse relief, relief by separation of liability, or relief from liability arising from community property law.
- You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, ex-spouse, or business partner.
- Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax.
- You did not file or fail to file your return with the intent to commit fraud.
- You did not pay the tax.
- You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax.
- The income tax liability from which you seek relief must be attributable to an item of the spouse (or former spouse) with whom you filed the joint return, unless one of the following exceptions applies:
- The item is attributable or partially attributable to you solely due to the operation of community property law. If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief.
- If the item is titled in your name, the item is presumed to be attributable to you. However, you can rebut this presumption based on the facts and circumstances.
- You did not know, and had no reason to know that funds intended for the payment of tax were misappropriated by your spouse (or former spouse) for his or her benefit. If you meet this exception, the IRS will consider granting equitable relief although the underpayment may be attributable in part or in full to your item, and only to the extent the funds intended for payment were taken by your spouse (or former spouse).
- You establish that you were the victim of abuse before signing the return and that, as a result of the prior abuse, you did not challenge the treatment of any items on the return for fear of your spouse’s retaliation. If you meet this exception, relief will be considered although the deficiency or underpayment may be attributable in part or in full to your item.
- You established that your spouse’s (or former spouse’s) fraud is the reason for the erroneous item causing the understatement of tax.
To qualify for Innocent Spouse Relief or Separation of Liability relief, you must request relief within two years after the date the IRS first attempted to collect tax from you. For Equitable Relief, you must request relief during the period of time the IRS can collect the tax from you.
Another option is that if you live in a Community Property State and didn’t file married filing jointly returns, you might qualify for relief from the operation of state Community Property laws.
Let Gordon Delic & Associates Help!
Applying for Innocent Spouse Relief can be a complicated process. The attorneys at Gordon Delic & Associates can assist you with back taxes in all phases of a divorce, even if you’ve missed the two-year time limits to file Innocent Spouse Relief or Separation of Liability Relief. We can file the required forms for you, and if your request is denied, we can appeal the IRS decision.