Joint and Separate Liability for Taxes Between Divorced Spouses
When a taxpayer files separately, it is clear who will bear the burden of any tax liability assessed by the IRS. However, it may not be as intuitive when a tax return is filed on behalf of two taxpayers.
If a joint return is filed, the liabilities linked to this return are held joint and several between both taxpayers. (Internal Revenue Code, IRC 6013(d)(3)). This means you are both on the hook for the entire tax liability, until it is paid or released.
For a clearer understanding of joint and several liability, consider the analogy of an egg toss; where each losing two-man team pays the winning team $10 dollars in total. In an egg toss, both teammates are individually responsible for keeping the egg intact.
Regardless of whether player A makes a wobbly pass or player B fumbled the catch, if the egg is dropped the $10 must be paid up. If player A only has $3 dollars, joint and several liability means that player B can expect a visit from the winning team for the remaining $7. Regardless of the fact that player A was the one who cracked the egg.
Similar to the winning team in our example, the IRS does not care whether it collects the liability from taxpayer A or taxpayer B (or both); if they can collect the entire amount from you alone then they likely will.
If you file a joint return with your spouse and generate $50,000 in taxes owed, both spouses are individually responsible for this $50,000 until it is paid. Again, one spouse could potentially foot the entire bill if the IRS decides to pursue that spouse.
This applies to married couples, and it also applies to former spouses if the tax owed comes from a year where the formerly married couple filed a joint return.
To add insult to injury, the IRS does not follow divorce decree arrangements. Meaning they will still go after both spouses for the entire amount due, even if your divorce judgement or agreement allocates tax liability to one spouse entirely. Even some lawyers fail to understand that family court rulings do not supersede the tax code.
The IRS will continue to pursue either spouse or both, until the liability is paid or released. These tax bills often include the unpaid tax assessed, interest, and associated penalties for every year under review.
This could leave a spouse or former spouse in a very vulnerable financial position. Especially if that person relied on their significant other at the time to handle the finances. The unfairness is typically apparent when one spouse is self-employed, and the other spouse tends to the domestic responsibilities of the home.
Although this is not the only time it would be unfair for a spouse to should the responsibility of their spouse’s action, fortunately there are exceptions which allow relief for individuals in similar circumstances
When clients come in for tax consultation relating to their ongoing divorce, the first step taken is to determine whether it is possible to work with the former spouse to resolve the liability.
While some may understandably hope to shoulder the task alone, here are a few reasons why working with a former spouse is usually the best first approach when available:
- Facilitates understanding––When both spouses are on the same page and fully understand the amount and reason for the liability they are also facing, they are much better equipped to handle that liability.
- Prevents miscommunication–– Being on the same page also helps intercept and correct misunderstandings which could otherwise be leveraged against you by the IRS.
- May help reduce amount owed–– The other spouse may have valuable information needed to reduce the liability owed overall or help vindicate you from liability.
That said, it may not come as a surprise to hear that spouses are not always willing to work together during or after divorce. If your spouse had not been honest about finances during your marriage, you may not expect them to be forthcoming now.
Perhaps there are other reasons why you would prefer to avoid entanglement. For some, working together with a former spouse just is not in the cards. If this sounds like the hand you were dealt, resist the urge to fold. You may have other options available. In either case, we next consider whether our client may qualify for any of the following exceptions to liability.
Here are the three options available to provide relief from joint and several liability under a joint return:1. Innocent Spouse Relief –– This exception provides relief if your spouse (or former spouse):
- failed to report income;
- reported income improperly; or
- claimed improper deductions or credits.
2. Separation of Liability Relief –– This exclusion provides relief by allocating the liability between you and your former spouse; you then pay only what you owe.
3. Equitable Relief may provide relief when you don't qualify for innocent spouse relief or separation of liability relief for something not reported properly on a joint return and generally attributable to your spouse.
You may also qualify for equitable relief if the amount of tax reported is correct on your joint return, but the tax wasn't paid with the return.
If you are divorcing and have questions regarding any tax debt accrued during your marriage, give my office a call. Together we’ll work to find an equitable solution — whether the split was amicable or not.