YOU CAN ESCAPE LIABILITY FOR YOUR SPOUSE'S TAX DEBT?

            One advantage of being married is being able to file your income taxes using the married filing joint filing status.   Taxpayers filing single typically pay at a rate that is 1% higher than those who file married filing joint.  Taxpayers who file married filing separately typically pay at a rate that is 5% higher than those who file married filing joint.  When a married client wants to minimize the total amount of taxes paid, the married filing joint status is generally a good decision. Both spouses owe any tax liability and if there is a refund due, they share it equally.  When the spouses get along well and trust each other everyone is happy, the return is filed jointly and less tax is paid.

            When the parties do not trust each other, or maybe even hate each other, filing joint can create issues.  One spouses may question whether the other reported all taxable income or exaggerated deductions. With the advent of electronic filing, it is much easier for a spouse to file a return the other spouse never reviewed.   A spouse can try to hide a financial transaction by filing the return without the other spouse seeing the return.  When spouses are separated and/or getting divorced, there are many ways for a spouse to take advantage and create joint liability for a debt that should in all fairness belong to one person.  If that happens, the injured spouse should file an application for relief of an injured or innocent spouse under I.R.C. § 6015 (relief from joint and several liability on a joint return).   The I.R.S. will look at the following factors:

1. whether the requesting spouse knew of the error;
2. whether the requesting spouse should have known of the error;
3. the education of the requesting spouse;
4. whether the requesting spouse has a tax or financial background;
5. whether the requesting spouse was involved with the preparation of the return;
6. whether the requesting spouse obtained a benefit from the error;
7. whether the error should have been obvious;
8. the degree of evasiveness and deceit of the culpable spouse.

          In Taft v. Commissioner of Internal Revenue, T.C. Memo. 2017-66, the Unites States Tax Court granted relief to a spouse whose husband cashed out his company stock for $200,000.00 without the wife's knowledge and spent it all on his girlfriend.  He told the accountant to electronically file the joint return despite knowing the wife had not seen it.  The Court allocated the entire tax due to the husband and allowed the wife to collect a refund based on her income and tax payments.

           This blog does not constitute legal advice.  If you have a specific question please contact competent legal counsel.