Although you will be affected by your spouse’s tax debt, the severity of the impact depends on several factors. You may be fully culpable for helping to pay off the debt, or you may be free and clear of any responsibility. However, some of your assets may be used for collective action, even if you are not liable for the tax. The main way that the IRS determines your liability is your filing status.
Separate or Joint Returns
The first consideration to determine your liability for your spouse’s federal tax debt is whether you filed separately or jointly. In the case of a joint return, both parties are 100 percent responsible for any tax debt. This means that any assets, including those solely owned by one party, could be levied or liened to pay off the debt.
Married persons also have the option to file separate returns. In this case, each spouse is only liable for his or her own tax liability and subsequent debt. In this scenario, only property owned by the spouse with the tax debt is culpable for seizure in the case of unpaid taxes.
Most married couples file their tax return jointly because it typically offers financial benefits. However, if one spouse is self-employed, owns a small business, or otherwise may be more susceptible to an audit or high tax debt, then it may be better for each spouse to file a separate return to protect the other spouse from potential penalties.
Jointly Owned Assets
Even if you file your tax return separately, your assets may still be seized or have a lien placed on them to pay for your spouse’s tax debt. Any asset owned by a taxpayer, including those co-owned by taxpayers that do not owe any debt, is susceptible to collective action. This means that any property that you and your spouse own together may be levied to pay the tax liability, even though you do not owe money to the IRS. However, as a non-guilty party, the IRS will compensate you for the asset. Your credit history will also not show the lien or other collective action.
Innocent Spouse Relief
Even if you jointly file your tax return, there is one other caveat where you may not be liable for your spouse’s, or ex-spouse’s, tax debt: Innocent Spouse Relief. This rule typically applies to a tax debt accrued based on an audit that shows an erroneous understatement of the tax liability for that year. You can apply for relief with the innocent spouse rule, or Internal Revenue Code 601(e), only under the following circumstances:
• The understatement on the return was due to errors by your spouse
• You had no knowledge, and no reason to know, about the errors
• It is deemed unfair for you to be held accountable for the liability for your spouse
As an innocent spouse, you must be able to prove all three circumstances apply to your case, and the tax return must be for a date after July 22, 1998. Taxes prior to this date cannot use this ruling. If it can be proven that you had knowledge of any misdeed and still signed, you remain culpable unless you can prove that you signed under duress. The majority of people who file for Innocent Spouse Relief are divorced, although current spouses can use it.
Even if you and your assets are not affected by your spouse’s tax debt, you will most likely still feel the repercussions since your family’s financial circumstances will change, whether you have to sell a house, take out a second mortgage, or reduce your expenses so that you can afford to pay off the debt. The extent of the impact on you and your credit history depends greatly on your filing status, the amount of debt, whether it occurred after an audit, if you are still married, and other factors.
If you or your spouse have a significant tax debt and are unsure what steps to take, then call our Innocent Spouse Relief Specialist, John Bright at 714-700-7369 and get a free consultation on your specific situation. He can help you to understand your situation and find the right resolution for you.