If you’re going through a divorce and IRS debt from owing past taxes, certain little-known tax risks can have disastrous consequences for the unprepared.
Who pays back taxes may be more complicated than who gets the house or the dog in the divorce. So, suppose you’re under the impression that you’re clear because the divorce decree stipulates that your ex-spouse is responsible for paying back taxes on joint tax liability. In that case, I’m afraid you might be in for a rude awakening.
I know you want to get on with your life after the divorce. But, when the IRS sends you a notice demanding payment of taxes your ex-partner should be responsible for according to the divorce decree, you will have to deal with it.
And if you get caught off guard, you might become a sitting duck for some of the most IRS ruthless collection tactics. Again, should you pay your ex’s IRS debt?”. And “Does it make a difference what the divorce order says about who is answerable?”
Everything you need to know about IRS debt and divorce
Divorce decrees do not chain creditors. In a divorce decree, both spouses are responsible for outstanding debts. It is a binding obligation. If your spouse doesn’t fulfill their divorce decree obligations, there are solutions available to you.
However, divorce decrees do not affect creditors, including the IRS. The IRS is a creditor. The IRS does not care who the divorce decree says is responsible for the taxes.
The IRS only cares about who owes them money. If you owed the IRS money before the divorce, you would still be responsible after the divorce.
However, the tribunal can hold your ex-partner accountable and enforce it. But, the IRS may still pursue you.
How can you deal with tax debt during divorce?
Most spouses usually combine their incomes, assets, bank accounts, and other financial affairs in their marriages. Additionally, the majority of married couples file combined tax returns.
Whether amicably or acrimoniously, that knot of financial life can be tough to disentangle when spouses divorce. Adding a shared tax burden to the equation adds to the separation spouse’s stress and conflict. So, this is what you should understand about divorce and IRS debt if you find yourself in this situation.
The joint and several liability
You are answerable to the IRS if you filed tax returns together when you were married. Therefore, any spouse can be held responsible for 100% of the debt (taxes, interest, and penalties.
It is called “joint and several liability.” The IRS doesn’t care who earned money or is responsible for the tax debt.
In the case of divorce, if the ex-partner obligated to pay does not do so, the remaining spouse is still responsible. The IRS can garnish wages, put a tax lien on the property, or seize assets to collect the debt.
When you decide to file a joint tax return with your spouse, you share responsibility for the taxes, interest, and fines. Remember, a divorce in no way absolves either party of their tax obligations to the Internal Revenue Service (IRS).
However, the joint and several liability can result in various sorts of relief. In addition to enforcing the divorce statement, you can also petition for relief from the IRS.
The essential thing to remember regarding tax collections after a divorce is that the divorce decree or any arrangement reached between the ex-spouses does not influence how the taxation authorities handle the debt. Yes, you read that correctly. What your divorce decree says is irrelevant to the IRS and state revenue authorities.
So, how can you limit IRS tax debt for the non-responsible spouse? Below are your best options.
Get the innocent spouse relief with the IRS
Suppose your spouse (or ex-spouse) wrongly reported or omitted things on your tax return. In that case, you might get absolved of obligation for paying tax, interest, and penalties by obtaining innocent spouse relief.
You need to file Form 8857 (Request for Innocent Spouse Relief) with the IRS to request innocent spouse relief.
If the IRS approves your request for innocent spouse relief, you will no longer be liable for paying the tax, interest, and penalties.
However, you must fulfill all of the following requirements to be eligible for Innocent Spouse Relief:
- Your joint return shows an understatement of tax solely due to your spouse’s faulty item. For example, income received by your ex-spouse but not included on your joint tax return. When not reported correctly on the joint return, defective items may consist of deductions, credits, and property.
- You should prove that you had no knowledge or reason to know that there was a tax understatement when you agreed to sign the joint return.
- It would be unreasonable to hold you accountable for tax understatement based on the facts and circumstances.
- There was no fraudulent property transfer between you and your spouse (or former spouse). The innocent spouse relief considers the term fraudulent as conspiracy to cheat the IRS or another third party, such as a business partner, ex-spouse, or creditor.
You must request relief no later than two years from the date the IRS first began collection activities against you.
As stated in your divorce decree, the assignment of tax duty does not bind the IRS. Nonetheless, the law may assist you in demonstrating to the IRS particular reasons that they take into account.
These factors include;
- Abuse by your spouse, whether physical, mental, or verbal.
- The state of your physical and mental health when either of you signed the joint return.
- To what degree you did or did not benefit from the unpaid taxes.
- Information regarding the payments.
- You must provide evidence that you have not transferred any assets to your spouse (or former spouse) to avoid payment of taxes.
When discussing your divorce settlement, it is advisable to have your divorce attorney consult with a skilled tax relief expert. It will help ensure that your best interests are protected and that you fully understand all of the potential implications of your divorce on your tax obligations.
Obtain separation of liability relief from the IRS
With this type of relief, you and your spouse (or ex-spouse) split any understatement of tax on your joint return. Generally, the amount you are responsible for is the understatement of the tax allocated to you.
You must meet all of the following specifications to be eligible for separation of liability relief:
- There is no longer a marital relationship between you and your former spouse, or you are legally separated. (In the case of widowhood, you cease to be married.)
- The spouse you’ve filed the joint return was not a member of the same household (explained next) during the 12 months ending on the date you filed Form 8857.
You might not qualify for separation of liability relief if:
- You were aware of the item that led to the understatement of tax when you signed the joint return.
- You don’t apply within two years of the IRS’ first attempt to collect taxes from you.
- You transferred an interest in property to your spouse (or former spouse) to avoid taxation.
- You were aware of the understatement of taxes when you signed the joint return.
File for equitable relief
You could get an equitable relief if you are not eligible for the separation or innocent spouse relief. To qualify for equitable relief, you must show that it would be unreasonable to hold you accountable for a tax deficit or underpayment based on all facts and circumstances.
You may qualify for equitable relief when anything was not correctly reported on a joint return and was typically attributable to your spouse.
If the sum of tax reported was correct but not paid with the return, you may be eligible for this relief.
The IRS may consider the following reasons when deciding whether or not to give equitable relief. The following is a partial list:
- Your current marital status
- Your physical and mental health during the return filing.
- There must be a reasonable belief that the tax would get paid when your spouse signed the return. The requesting partner also needs to consider whether the understatement was known to them or if they had cause to be aware of it.
- IRS can consider your inability to afford essential living expenditures due to your current financial distress.
- The legal responsibility of spouses is to pay the tax due under the terms of a divorce decision or an agreement to pay the debt.
- One spouse must not have transferred assets to the other to avoid payment of taxes.
- You must not have benefited from the unpaid taxes.
- IRS can consider your compliance with the income tax laws following the taxable year or years relating to the request for relief.
- Abuse by the other spouse.
- The requesting spouse must not have filed a petition for bankruptcy protection in the year before filing Form 8857 or during the pendency of the request for equitable relief.
- You must not be a convict of a federal crime related to the joint return’s underpayment or understatement of taxes.
- You must not have signed a waiver giving up the right to request innocent spouse relief from the IRS.
Understanding equitable relief
You must seek equitable relief while the IRS has the opportunity to collect the tax from you.
If you want a refund of the tax you paid, you must do it within the refund statute.
This period usually lasts three years after the return gets filed. Two years after the tax gets paid, whichever comes first.
Community Property States– If you resided in a community property state and did not file as married filing jointly, you could qualify for relief from the state’s community property legislation.
These states have community property laws: Arizona, Idaho, California, Louisiana, Texas, Nevada, Washington, New Mexico, and Wisconsin.
What if you cannot receive IRS relief?
What can you do if you are still liable to pay taxes and your ex-spouse refuses? To settle your IRS debt, you have all the options available to other taxpayers. Here are some of your options:
- Installment Agreements– A monthly payment plan is often the easiest way to pay off large debts, including tax liabilities. Several payment arrangements and installment agreements are available through the Internal Revenue Service (IRS) to help you eliminate your tax debt. By submitting Form 9465, you can request a new installment agreement online through the IRS website.
- Offer in Compromise– You can negotiate with the IRS to pay less than you owe. An offer in compromise permits you to pay less than the entire amount of your tax bill. If you cannot pay your entire tax debt or if doing so would put you in financial difficulty, it may be a viable choice.
- Currently not Collectible Status– This status is a temporary measure the IRS may put in place if you cannot afford to pay your taxes. The IRS may agree to suspend collection action until your financial situation improves. The IRS will review your account every year to determine if your financial circumstances have changed and whether or not they can begin collecting the debt.
- Bankruptcy– You can use default to eliminate some or all of your IRS debt. It is usually a last resort, as it will have a significant negative impact on your credit score and make it challenging to obtain new lines of credit.
- Penalty Abatement– You may be able to get some or all of your penalties removed if you can prove that you made a good-faith effort to comply with the tax laws but were unable to do so.
Divorcing spouses must address a variety of tax concerns. When a marriage has unpaid taxes, the divorce attorney and the divorcing couple must figure out the legal repercussions of handling the due taxes—putting off those tough conversations until after the divorce or when the IRS comes after you will make the tax problem more painful and expensive.
If you owe money to the IRS with your ex-spouse or need to employ the innocent spouse clause, it’s a good idea to seek the advice of an experienced tax professional.
Paying back taxes and completing an appropriate tax return may be difficult, especially if one spouse was in control of tax files while they were married. Using the services of a professional tax attorney helps ensure that the procedure gets completed correctly and without errors.
An ounce of prevention is worth a pound of cure, especially when divorce and taxes are concerned.