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Tax Liability Shared by Both |
When you got married, you knew it was for "better or worse." But you might not know about laws that hold you responsible if your spouse cheats on a tax return.
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The Difference Between an "Innocent" Spouse and an "Injured Spouse"
If your current or former spouse has gotten you into tax trouble, you may be able to get help from the IRS.
It all depends on whether the tax agency considers you "injured" or "innocent." You probably think you qualify as both but they are two different legal terms:
An injured spouse files a joint return and loses all or part of a refund because of a spouse's debts.
An innocent spouse claims no liability for items on a joint tax return that belong to a spouse or ex-spouse.
Let's say you and your current spouse file a joint tax return and are expecting a large refund. But you receive a notice from the IRS stating that your refund is being seized to pay a debt owed only by your spouse. For example, back taxes from before you married, past due child support, a delinquent student loan or other federal debt.
You may be able to recover your portion of a joint tax refund that the IRS seized. To qualify, you must have earned your own income and made your own federal tax payments. Ask your tax adviser for more information if you think you qualify as an injured spouse. |
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In One Case . . .
An ex-wife argued she had no reason to know about huge tax shelter losses her former husband claimed for a cattle breeding operation.
The Tax Court determined that a reasonable person would have inquired about the losses. But it did grant the taxpayer a partial victory: Since she had no specific knowledge about the tax shelters, she was entitled to innocent spouse relief under the law, but not to the extent she benefited from the erroneous deductions (Mora, 117 TC. No. 23). |
Married couples filing jointly should be aware that:
- You are both responsible for tax, interest and penalties - even after a divorce or the death of a spouse.
- The IRS may hold you responsible for all the tax due even if there is a divorce decree stating that your ex-spouse is accountable for previous joint returns.
- You can be liable for tax even if none of the income on a tax return is attributed to you.
To illustrate how the law works, let's say you have a wage-earning job and your spouse is self-employed. You file joint tax returns.
Next year, you get divorced and a year later, the IRS audits your tax return. Your ex-spouse is nowhere to be found and auditors determine that he or she didn't report all the income from the business.
What could happen?
You are generally liable for paying the tax due, plus interest and any penalties. Your wages can be seized by the IRS even if you paid every penny owed on your share of the family income.
Fortunately, there may be a way to get off the hook. In some situations, the tax law provides "innocent spouse" relief if you can prove:
- There is a substantial understatement of tax attributable to the grossly erroneous items of your spouse or ex-spouse.
- The hidden income belonged to your ex-spouse and you didn't benefit from it.
- You didn't know or have reason to know about the understatement.
- It would be inequitable to hold you liable.
Advice: Don't count on innocent spouse relief if you know your spouse is cheating. Consider filing separate tax returns -- especially if you're in the process of a divorce. It may save you a bundle in the future.
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. |
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