October Tax Season: If My Ex-Spouse Owes Income Taxes Am I Liable, Too?

Wasson and ThornhillBankruptcy and Divorce

You’re usually completely liable for debts resulting from joint tax returns, regardless of a divorce decree saying you’re not. But the IRS may give you relief.

 

For Joint Tax Returns, You Are Generally Fully Liable

If you filed joint tax returns, you are both usually liable. Each of you is legally obligated to pay the tax (and all interest and penalties) in full.

You may have heard the term: “joint and several liability.” To quote the IRS: “Joint and several liability means that each taxpayer is legally responsible for the entire [tax] liability.” Whatever your spouse or ex-spouse does not pay, you have to pay.

This is true even if all or most of the income on which the tax is based was earned by the other spouse. It is generally true even if the other spouse or ex-spouse claimed improper deductions or tax credits on joint tax returns.

Divorce Decree Has Very Limited Effect

You may have a very rude surprise after a divorce. You might find out that your divorce decree’s clear statement ordering your ex-spouse to be responsible for an income tax liability carries very little weight.

Although your ex-spouse is personally bound by that order, the IRS (and the state) is not. Simply put, if your ex-spouse does not pay as ordered per the joint tax returns, the IRS/state can force you to pay that tax.  This means the entire amount—regardless that the decree says otherwise.

Tax Returns Not Filed Jointly

Before panicking about this, the situation is the opposite if your ex-spouse filed separate tax returns for whatever reason. Maybe he or she owned a business, or wanted to hide income from you.  A divorce decree which orders your ex-spouse to pay an income tax based on a separate tax return is “effective” for that purpose.  Most importantly, in the eyes of the IRS/state you were not liable on that debt anyway.

Asking for “Innocent Spouse Relief”

Even if you DID file  joint tax returns for the tax at issue, in limited circumstances you can get out of being liable. (The rest of this blog post focuses on the IRS.  Many of the states with income taxes have similar forms of relief but each state’s will be at least somewhat different than the IRS’s.)

“Innocent spouse relief” is more limited than you might think. If you have heard this term and want to use this “relief” simply to get out of owing a tax that you believe your ex-spouse should pay, you’re probably on the wrong track.

“Innocent spouse relief” only applies to 1) that portion of a tax owed because of your ex-spouse’s improper reporting of income or claiming of deductions or tax credits, 2) which you did not know about and had no reason to know about when you signed the joint tax return, and 3) under all the circumstances it would be unfair to hold your responsible for that portion of the tax.

Note that under this type of relief, you are still liable for the remaining portion of the joint tax, if any—that which you would owe unrelated to your ex-spouse’s improper reporting.

Asking for “Separate Liability Relief”

This a similar type of possible relief although, unlike the “innocent spouse relief.” It applies only if you are divorced or legally separated, or have not been living for 12 months in the same household at the time you ask for the relief. It also applies only to the portion of the tax affected by the improper reporting.  It requires that you did not have actual knowledge of the erroneously reported item(s) on joint tax returns.

Asking for “Equitable Relief”

This final type of possible relief is probably the one that most people are thinking of when they hear the term “innocent spouse relief.” It doesn’t just to that portion of a tax liability related to an ex-spouse’s errors on joint tax returns.  It also applies to the rest of the liability based on the correct reporting of income, deductions and tax credits. In other words, you can get relief from the entire tax owed.

To qualify for “equitable relief” you must “establish that, taking into account all of the facts and circumstances, it would be unfair to hold you liable for the understated or underpaid tax.” The IRS provides a detailed list of relevant factors in Publication 971. Factors include whether:

  • you were in poor physical or mental health when you signed the tax returns
  • you were being abused
  • you knew about or had reason to know about the circumstances that caused an understatement or non-payment of the tax
  • you were involved in family financial matters, and the degree of your ex-spouse’s deceit towards you
  • requiring you to pay the tax would result in you being unable “to pay your reasonable basic living expenses”
  • you benefitted from the unpaid or understated tax, such as through unusual expenditures or purchases

Conclusion

You may be able to qualify for one of these forms of relief and solve your problem stemming from joint tax returns. But if you don’t qualify for tax relief, or if even doing so still leaves you with an unmanageable debt burden, bankruptcy may be able to provide surprisingly good relief, even with taxes. We’ll address this in the context of ex-spouses in our next blog post in a couple days.