Tax Implications of
Divorce is an extremely difficult time in a person’s life. You’ll go through a whirlwind of emotions and changes in a short period of time, and the last thing you want to worry about is back taxes.
At Delia Law, we’re here to help provide peace of mind if you’re in the middle of a divorce or just concluded a divorce and are now dealing with IRS tax debt.
What You Need to Know About Your Divorce Settlement and IRS Tax Debt
Imagine this scenario:
- You and your husband, Jim, are going through a divorce
- You deal with the hardship of the process and Jim is assigned most of the IRS debt you owe
- Weeks or months later, you receive a letter stating that you owe back taxes
Often, divorcees receive this letter when they’re just starting to heal from the stress of their divorce. Unfortunately, a divorce decree is not binding to creditors. While confusing and complex, you are liable for any IRS tax debt that you had prior to the divorce decree being made.
Yes, the court can make Jim responsible for the debt and enforce the decree to make him pay, but the IRS can still come after you and request that you satisfy the debt.
Divorce decrees do two things:
- Make Jim responsible for the debt
- Allow the court to enforce the obligation
Creditors, on the other hand, can seek repayment from you because the debt was your obligation before the court issued the divorce decree.
What You Need to Know About Joint Tax Filings
Married couples (presumably you and Jim in this example) typically file their taxes jointly. For many couples, there are advantages to filing jointly. However, filing jointly also means that you have an equal debt with your spouse.
In fact, the IRS sees it as you and Jim have a 100% debt because they just want someone to pay:
The IRS wants to be paid. If you pay 100% of the debt and Jim pays 0%, the IRS doesn’t care. Simply put: the IRS wants back taxes to be paid.
Divorce does not absolve you from paying these liabilities. Thankfully, there are three main actions that you can take in this scenario:
1. Innocent Spouse Relief
Innocent spouse relief is a form of relief that the IRS offers if you meet a variety of requirements. According to the IRS, you must meet the following requirements to be eligible for this remedy:
- Your spouse’s error led to a joint return having an understatement of tax. The error must have been the sole result of a spouse’s action, such as not adding certain owed income to your tax return. Incorrect deductions, property basis and credits can also lead to an understatement.
- You had no knowledge of the misreporting and had no reason to know before you signed the joint return.
The IRS will need to consider all of these factors and determine that holding you liable for these debts is unfair. IRS officials may consider whether you benefitted from the unpaid taxes, the extent of this benefit, if abuse was involved, and whether you knew the taxes were not reported properly or that the taxes remained unpaid.
You have two years from the first date that the IRS tried to collect the debt to file for innocent spouse relief.
2. Separation of Liability Relief
If innocent spouse relief isn’t an option, there is also the separation of liability relief, which you may be entitled to. This form of relief will reallocate the tax debt for items that were not included on the joint return
You will need to meet the following requirements:
- You are divorced or legally separated from the person on the joint return
- You’re widowed
- You’re not living in the same house as the person on the joint return with you
If you can prove that you didn’t know about the item omitted in the return and it’s been two years since you were first contacted by the IRS to collect the debt, you can apply for relief.
3. Equitable Relief
Finally, equitable relief may be an option for you, but you must not qualify for any of the other relief options mentioned. Equitable relief is an option that allows you to find relief for a tax that is “generally” attributable to your spouse.
In fact, even if the amount of tax reported is valid, you may still be eligible for equitable relief.
Filing Taxes During a Divorce
If you’re in the middle of a divorce, it may be wise to avoid filing your taxes jointly. The advantage to filing on your own is you avoid taking on your spouse’s debt for that specific tax filing. If you owe other back taxes from previous returns that were filed jointly, you’re still liable for those debts.
In addition, the IRS does have a few recommendations for you to follow:
- Update your withholdings. You can do this by filling out Form W-4 with your employer.
- Agree on child dependency filings. Only you or your ex can claim a child as a dependent on any given year’s tax return. You can come to an agreement on this deduction with your ex if you have a 50-50 custody agreement. Otherwise, whoever has the child for the majority of the time can claim the child on their return.
Contact a Divorce Tax Attorney
Divorce, IRS tax debt and back taxes are all complicated and complex matters. It’s important to know your rights and resolve any issues with your tax debt as soon as possible. Interest and penalties will continue to accrue, and the IRS will not go away until they’re paid in full or in some sort of tax resolution option.
Don’t wait a second longer. A tax attorney can help make an otherwise complicated process much more stress free for you..