4 Tax Options When a Spouse Owes Back Taxes

    

spouse owes back taxes

Getting married means sharing your life with your spouse in more ways than one. You may be combining two separate households, including your finances. If you did not talk about it before you said, “I do,” you may want to discuss those finances before you receive a surprise wedding gift from the IRS.

If your spouse owes back taxes, even from before you were married, and if you file a joint return, you will be on the hook for those back taxes, too. Unless you can file for spousal tax relief.

Depending on your circumstances, you have several options available for tax relief from a spouse’s back taxes. This post provides information that you can use to investigate which option will work for you.

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Where Did the Tax Debt Come From?

Owing debt or being in arrears on taxes are not romantic topics people want to discuss right before marriage. However, uncomfortable or not, you deserve to know your marriage partner’s financial situation. 

  • Is he behind in child support payments?
  • Is she late paying her student debt?
  • Is there a court judgment pending that remains unpaid?
  • Are there any state debts awaiting payment?

The IRS can garnish wages and seize tax refunds to pay any of these debts. If you file jointly, you forfeit the joint refund. It won’t matter that you were not initially responsible for the debt. In the eyes of the IRS, a joint return is fair game. Once each of you has signed, you are each jointly and individually responsible for any tax, interest, or penalties incurred by the other.

The IRS also plays by rules, some of which allow a spouse relief from a partner’s poor financial decisions.

Innocent Spouse Relief

Innocent Spouse Relief is one of the rare methods of gaining full tax forgiveness from the IRS. You must prove your spouse (or a former spouse) incurred a tax debt without your knowledge. The tax debt can come from a variety of circumstances. 

  • Your spouse or ex-spouse failed to report income.
  • Your spouse or ex-spouse underreported income.
  • Your spouse or ex-spouse claimed deductions or credits fraudulently.

Of course, it’s more complicated than simply saying you didn’t know about these issues when you signed the joint tax return.

First, complete IRS Form 8857 - Request for Innocent Spouse Relief. Understand that if you lie on the form, you can be charged with perjury. Once you have filed, the IRS will contact your spouse or former spouse to obtain any relevant information they require. 

  • If the government learns you had knowledge of the issue when you signed the joint return, you will not qualify for relief.
  • If the IRS finds no evidence that you were knowledgeable, you can receive Innocent Spouse status, which makes you eligible for full and total forgiveness on all tax debt owed on that specific filing.

The relief includes not only taxes but interest and penalties as well. One caveat: Innocent Spouse Relief only applies to individual income or self-employed taxes. It does not include household employment taxes, individual shared responsibility payments, or business taxes and trust fund recovery penalties for employment taxes.

The good news is that the IRS will calculate the taxes you are responsible for, you don’t have to.

Separation of Liability

Separation of Liability is only available for unpaid liabilities resulting from underpayment of taxes. You are allocating (separating) the understatement of tax (plus interest and penalties) on your joint return between you and your spouse (or ex-spouse). After that, you are only responsible for the tax allocated to you.

You can only file for separation of liability if you are no longer married to, or are legally separated from, the spouse with whom you filed jointly. Being widowed is included. Also, you cannot be a member of the same household as the spouse you filed jointly with at any time in the 12 months before the date you file for separation of liability.

File IRS Form 8857 - Request for Innocent Spouse Relief. Separation of Liability is one aspect of the innocent spouse option.

Equitable Relief

If the IRS determines you do not qualify for innocent spouse or separation of liability, you may be eligible for Equitable Relief. The government gives consideration for equitable relief only after denying innocent spouse relief or relief by separation of liability.

The difference between equitable relief and innocent spouse or separation of liability is that you may receive the relief from an understatement or underpayment of tax of which you had knowledge. Equitable relief judgments consider all facts and circumstances to determine whether to grant relief. For example, if you were the victim of domestic abuse before you signed the joint return, and due to the abuse, did not challenge any items on the return for fear of retaliation from your spouse.

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Injured Spouse Relief

Injured Spouse Relief differs from Innocent Spouse Relief in that the IRS considers someone took money that was rightfully yours (injured you) as opposed to committing wrongdoing on a joint return of which you had no knowledge (you are innocent). The Treasury Department Offset Program can collect for a range of debt:

If the U.S. Treasury Department takes some or all of your joint refund through the Offset Program, money you expected to receive, and applies it to the debt owed by your spouse, you may be eligible for Injured Spouse Relief to recover your share of the refund.

To apply, file IRS Form 8379 - Injured Spouse Allocation as soon as you know your refund will be affected by a spouse’s (or ex-spouse’s) qualifying debt. You will need to file a form for each tax year where your refund was impacted, but you only have three years from the due date of the original return or two years from the date the offset was taken.

There you have it. If you can prove you had no knowledge of the debt liability, such as back taxes, created by your spouse or ex-spouse, you may qualify for innocent spouse relief or relief by separation of liability. If you are not eligible for either, you may still be qualified for equitable relief, depending on your circumstances.

If you do not receive an expected refund for the same reason, you may qualify for injured spouse relief.

If you are concerned about the potential for issues with a joint return, you can always file separately and avoid the problem. Alternatively, your spouse can increase the number of exemptions to increase the amount of tax withheld from his or her wages to cover the debt before you file jointly. Then you won’t need injured spouse relief.

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