Breaking down assets in a divorce is likened to splitting delicate strands of a spider’s web, according to one client. It might feel like an impenetrable mess trying to comprehend the entire divorce process; especially when you have to deal with the IRS later. Use this guide to effectively navigate the tax-related issues often caused by divorce.
Although it’s not usually the first thing we think about, taxes have a big impact on divorce. After getting married, most couples file their taxes under “married filed jointly” because of the financial benefits. But if there are inaccuracies in the report, both spouses may be held liable.
When a taxpayer files alone, it is usually obvious who should shoulder the debt discovered. However, when two people’s tax returns are submitted together, things get more complicated.
If a joint tax return is filed, the tax liabilities connected to it are shared between both taxpayers. (IRC 6013(d)(3)) This implies that you and your soon-to-be former spouse are both responsible for the full tax liability until it is paid or reimbursed.
If you’re facing divorce, you’re probably already aware of the many financial challenges that come along with it. One less-obvious issue to be aware of is your tax liability. Depending on the specifics of your situation, you may be liable for taxes that your spouse incurred during the marriage.
This is known as joint and several liability. Joint and several liability means that each spouse is jointly responsible for the entire tax debt, even if only one spouse earned the income or incurred the expenses. This can become an issue if one spouse has unpaid taxes from before the marriage, or if one spouse incurs significant tax debt during the divorce process.
Innocent spouse relief
Requesting innocent spouse relief may be available if your spouse or former spouse filed a joint tax return and you are not responsible for the underpayment or understatement of tax. Joint and several liability means that each person who signs a joint return is individually responsible for the entire tax liability. This is true even if you later divorce or legally separate from the other person.
If you qualify for innocent spouse relief, you will not be held liable for any unpaid tax, interest, or penalties related to the underpayment or understatement of tax on the joint return. To qualify for innocent spouse relief, you must meet all of the following requirements:
– You did not know, and had no reason to know, that there was unreported income, an underpayment or understatement of tax when you signed the joint return;
– Taking into account all the facts and circumstances, it would be unfair to hold you liable for the underpayment or understatement of tax; and
– You have not been granted relief as an innocent spouse in a previous proceeding, or you did not waive your right to relief in a previous proceeding.
Separation of Liability Relief
You may qualify for this relief if, on the date you signed the joint return, you believed that there was no underpayment or understatement of tax and:
– You have filed for divorce or separate maintenance, OR
– You are no longer married or legally separated from the spouse with whom you filed the joint return;
Equitable Relief: If you do not qualify for innocent spouse relief or separation of liability relief, you may still be relieved of all or part of your liability if it would be unfair to hold you liable. To qualify, you must demonstrate that:
– It would be unfair to hold you liable because, considering all the facts and circumstances, it would be inequitable to impose the entire tax liability on you;
Equitable Relief
Equitable Relief may be granted if you prove that:
– You did not know, and had no reason to know, that the tax return was incorrect when filed; and
– It would be unfair to hold you liable considering all of the facts and circumstances.
If you think you may qualify for Equitable Relief, you should complete and attach Form 8857 (Request for Innocent Spouse Relief) to your tax return or submit it separately to the IRS.
For additional information about Joint and Several Liability, Innocent Spouse Relief, or Separation of Liability, please see Publication 504 (PDF), Divorced or Separated Individuals.
Exception to Lack of Knowledge Requirement (Spousal Abuse)
If you do not meet the requirements for Innocent Spouse Relief, you may still qualify if you were the victim of domestic abuse or spousal abandonment and were not aware of the unpaid tax liability. You must meet all of the following conditions.
– You must have filed a joint tax return;
– The tax liability increased on the joint tax return as a result of an error or omission by your spouse;
– At the time you signed the joint tax return, you did not know, and had no reason to know, that there was an underpayment of tax; and
– Taking into account all facts and circumstances, it would be inequitable to hold you liable for the deficiency in tax for which relief is sought.
Part D. Equitability
If relief from joint and several liability under Parts A or B is not available, you may request equitable relief from joint and several liability. You will be granted equitable relief only if the IRS determines that it would be unfair to hold you liable for the unpaid tax. Factors that the IRS will take into consideration in making this determination include:
– Whether you received any significant benefit from the unpaid tax;
– How difficult it would be for you to comply with the tax law if relief were not granted;
– Whether you had a financial interest in the item giving rise to the unpaid tax, or whether you had signature authority over the account or asset out of which the unpaid tax was paid; and
Factors for Determining Whether to Provide Equitable Relief
The IRS will analyze all elements of your case, including any circumstances or facts. They’ll also consider the Equitable Section of the Innocent Spouse Relief and whether full or partial relief should be granted.
How long does a taxpayer have to seek innocent spouse relief from the IRS?
A taxpayer must request relief no later than 2 years after the date of the first collection activity. This means that a request for innocent spouse relief cannot be made after the 2-year period.
What if a taxpayer remarries?
If a taxpayer remarries, the new spouse is jointly and severally liable for any taxes due on joint returns filed during the marriage, even if the couple later divorces. Joint and several liability also applies to community property states.
What is form 8857?
Form 8857 is the form used to request innocent spouse relief from the IRS.
Who can file form 8857?
A taxpayer who believes he or she meets the requirements for innocent spouse relief can file Form 8857.
Can both spouses file form 8857?
If both spouses believe they qualify for innocent spouse relief, each spouse must complete and submit a separate Form 8857.
What happens after a taxpayer files form 8857?
Once Form 8857 is filed, the IRS will review the information provided and determine if the taxpayer qualifies for relief. The taxpayer will be notified of the decision in writing.
Can a taxpayer file Form 8857 electronically?
Yes, taxpayers can file Form 8857 electronically using IRS e-file. Taxpayers who qualify for Innocent Spouse Relief may use this filing method. To do so, they must have tax preparation software or use the services of a professional tax preparer who offers electronic filing.
What if a Joint Return was filed but my spouse and I are not married?
If you lived together in a common law marriage recognized by the state in which you resided on the date your return was due, you would be considered married for Innocent Spouse Relief purposes. Otherwise, you would not be considered married and would not qualify for Innocent Spouse Relief.
Can Tax Court Decide if I Qualify for Innocent Spouse Relief?
The Tax Court can hear cases for taxpayers who believe they qualify for Innocent Spouse Relief and have received a notice of deficiency from the IRS.
What if I Disagree with the IRS Decision on my Innocent Spouse Relief Request?
If you disagree with the IRS decision on your Innocent Spouse Relief request, you have two options:
– Request a review by Appeals
– File a Tax Court petition
If you choose to request a review by Appeals, you must do so within 30 days of the date of the Notice of Deficiency. If you choose to file a petition in Tax Court, you must do so within 90 days of the date of the Notice of Deficiency. Keep in mind that the IRS will also involve the non-requesting spouse in its decision. The IRS may request information from the non-requesting spouse. The non-requesting spouse can also appeal any innocent spouse application approval.
If you want to discuss your options regarding Innocent Spouse Relief schedule a free strategy session with me: https://calendly.com/jola-biegaj