An overview of the issues of spousal liability in the world of income tax.
John and Jane divorced after five years of marriage and two children. Jane got the children, the house, and the right to receive child support. But the payments stopped when John left town. The bad news continued when Jane received a notification from the IRS that John had not reported all of his income in one of the returns they filed while they were married. Since she filed a joint return, she has to pay the tax.
This pattern of events occurs over and over again, with many variations. Sometimes the husband is deceased; in other cases, he may be alive and well, but bankrupt. Sometimes the wife pays the least tax, and the husband keeps the bill. The common thread is that the IRS charges a fee to someone liable simply because they signed a joint return.
Before the law was changed in 1998, Jane could only get relief if she qualified as an innocent spouse. If successful, she would be released from the obligation to pay. The idea/trick was to qualify. You had to fight your way through a maze of arbitrary rules. Many taxpayers have lost on several technical aspects. Those who met the requirements were the lucky few; the rest suffered an unfair tax burden.
Congress intervened in 1998 to facilitate tax avoidance that a spouse or ex-spouse would have to pay. There are three forms of relief. One is based on an improved version of the old innocent spouse rules. Another has softer provisions but is only available if you are separated from your spouse or no longer married. The third comes into play if it is unfair to collect taxes from you, but somehow you do not qualify for either of the first two provisions.
It is important to understand that you will not always receive compensation under these rules. If you think there is a problem with your joint tax return, do not sign it. If your spouse does not agree to make a correct declaration, it is advisable to file separately.
This usually means paying more tax in the short run, but signing the wrong tax return can mean paying a lot more in the long run.
The rest of this article will explain the rules for joint returns and separate returns. The following pages provide more details on how to get help.
Joint and Several Responsibility
By signing a joint tax return, you accept joint and several liabilities. Shared responsibility means that you and your spouse are responsible; several responsibilities mean that everyone is responsible for the full amount. In other words, if you do not qualify for the exemption described, you can end up paying the full tax amount, not just your contributions.
Plus, the IRS does not even have to charge your spouse. They only collect where it is faster and easier. Why is the IRS so heartless? Because that's how the law is written. They have to collect taxes in line with the law.
What if you possess a divorce decree that says your ex-spouse must pay? The IRS can still charge you. The Internal Revenue Service was not part of the divorce process, so the decree does not bind them. You can use this clause in your executive order to bill your ex-spouse after paying the IRS. But in several cases, the reason the IRS has come to you is that it's difficult or impossible to get the funds from your ex-spouse.
It might make sense to include these provisions in your decree, but you have to admit that they may be unnecessary.
Filing jointly or separately
If you are married filing separately, neither of you will be liable for the other taxes. Here are some points to consider when filing together or separately:
Filing jointly is a choice. You don't need to file a joint statement unless you agree to do so (as part of a divorce settlement, for example).
In uncommon cases, you pay fewer taxes when you file separately. But for over 90% of taxpayers, filing a separate tax return means paying more taxes. Tax charges are less favorable, and some tax benefits available to individual filers and joint filers are not available to married couples filing jointly. This is why it is almost automatic for couples to file a joint return.
If you file your taxes separately, you and your spouse can change your mind and file a joint return later (usually within three years of the original return's due date). This allows you to take a wait-and-see attitude when you have reason to be concerned about filing a joint declaration. But the reverse is not true. If you file a joint refund, you won't be able to file a separate refund (unless you do so immediately before the refund is due), even if your spouse accepts the decision.
Even if you file separately, you may be liable for income tax on your spouse's income if you live in a community-owned state. But there are also separate provisions for taxpayer exemption in community-owned states.
The IRS might collect taxes from your spouse if they transferred assets to you to evade taxes. This is true whether you submitted a joint return or filed separately. The exemption provisions do not apply in this case because you are participating in a plan to defraud the tax system.
Forms of Relief
There are three ways to avoid paying the taxes your spouse should have paid:
The innocent spouse rule: This is a new and improved version of the rules for innocent spouses in the previous law. If you qualify, you can get an exemption even if you are still married and live with a spouse who did not correctly file his/her income tax. Some of the more random provisions have been removed, but some people will find that they are not yet eligible.
Separate Liability Election: There is a new rule that you can choose separate liability even if you have signed a joint statement. This form of assistance is only available if you are divorced, widowed, or legally separated or if you have lived in a house separate from your spouse for at least a year. By fulfilling this condition, you will avoid liability in situations where the innocent spouse rule does not apply.
Equitable Relief: There may be circumstances where it is unfair to tax a spouse who does not qualify for either of the first two rules. The new law allows the IRS to assist in these cases.
Community-owned states
Whatever form of exemption you request, community property laws do not apply in determining how much tax you must pay under these rules. Therefore, the spouse's income is treated as the spouse's income and not 50% of yours. This requires special rules, which are described in the Community Property States.
Injured Spouse Rule
There is another type of relief available for a slightly different type of situation. Suppose you qualify for a tax refund, but the IRS grabs it because your spouse owes money. If this is your refund and not your spouse's, the injured spouse's rule may provide relief.
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