Being in trouble with the IRS is no one’s idea of fun to begin with and getting divorce can make that problem even worse.
It’s pretty typical in a marriage for one spouse to take on the responsibility for doing the taxes. Often times, the other spouse is all too happy to be relieved of that task.
And then divorce happens …
And then they find out that the taxes they thought had been filed, haven’t …
Or, the taxes they thought had been paid, haven’t …
Or, they hear for the first time that there’s tens of thousands of dollars owed to the IRS.
Joining me for this Conversation About Divorce is Claudia Revermann from Minnesota-based Lucent Tax Relief. Revermann has been practicing law for 16 years and worked previously as a tax accountant. Listen in below or keep reading for a synopsis.
You’re Probably Not Going To Jail
When people first realize they have a problem with the IRS they cry. They feel angry, embarrassed, confused, overwhelmed, foolish. Before Revermann can talk to her clients about a specific issue, she has to reassure them.
“It sounds silly maybe, but I say first of all, your house is not going to be taken from you. You’re not going to jail,” said Revermann. “It’s a very extreme circumstance where those things happen. But those are really valid, big fears of people coming to see me.”
You Are Liable If You And Your Spouse Owe Back Taxes
One scenario I’ve run into is where husband and wife have filed ‘married jointly’ and owe taxes from prior years. The divorce settlement assigned the IRS debt to the husband. Revermann explains that despite that because you filed a joint return chances are that you are still liable to the IRS. Filing a joint tax return creates a ‘joint and several liability’ for the tax. That means that if your now-ex stops making payments to the IRS, the IRS can come after you. Any assets you received in the divorce, any alimony or child support could be subject to levy or garnishment.
It also means that if post-divorce, if you are due a refund, the IRS could keep the refund and apply it to the outstanding debt. One way to avoid this happening is to make sure you don’t over-withhold during the year, so you’ll owe taxes when you do your filing.
“It’s good to watch your withholding,” said Revermann. “We don’t need to have the IRS be our savings account.”
If your divorce agreement does assign responsibility for the IRS debt (or any other debt) to your spouse, consider consulting an attorney before making payments. You may have grounds to pursue legal action against your spouse. That doesn’t mean you’ll get reimbursed but you need to be fully informed so you can make a good decision.
What About Spousal Relief?
You can ask the IRS for spousal relief. Revermann says that in so doing you’re saying to the IRS that it wasn’t your fault that the taxes haven’t been paid. You’re requesting that the liability be reallocated to your former spouse.
There’s three different kinds of relief.
Innocent Spouse Relief
Innocent spouse relief is where the spouse would have had no reason to know that the tax wasn’t due and hadn’t been paid.
Separation of Relief
If you’ve been divorced or living apart from your spouse for at least 12 months, you might claim that you should not be held responsible for the joint liability. This is known as separation of relief.
Revermann describes equitable relief as a deeper level of relief in which you would claim that it is unfair for you to be held responsible.
To be successful claiming any spousal relief you’re going to have to explain how a joint tax return was filed without your knowledge.
“Practically speaking, and especially in an age of e-filing, there are often times where the spouses aren’t checking with each other,” said Revermann. “They may have a relationship with tax preparer where they say just go ahead and file a joint return.”
However, if you truly didn’t sign your tax return and your spouse handled everything to do with the taxes, you likely still benefited from the underpayment of tax. That was additional cash that was available to the household. That’s going to count against you in a claim for spousal relief.
“I will say with regard to the spousal relief, that is probably the very hardest of the reliefs to get from the IRS,” said Revermann. “It’s so fact specific and they receive so many requests where people aren’t really making their case and proving things up.”
Keep Track Of The IRS Debt
Even if your spouse is assigned the IRS debt in your divorce settlement, you’d be smart to track the debt to see that payments are being made. If payments aren’t being made, that debt is going to be increased by penalties and interest.
To do this, you can request a transcript of your tax returns from the IRS for each of the years for which there was a debt. The transcript will show you what payments have been made.
Who’s Name Is Listed First On Your Tax Return?
You might think that because you filed a joint return, it doesn’t matter what order you and your spouse were listed on your tax return. While it’s true that you still have a joint and several liability, the IRS is going to look first to the person who is listed first on the return. Going through the various steps that lead to levies and garnishments takes time.
“Practically speaking, it might take a while for the IRS to go after the second spouse,” said Revermann.
That doesn’t mean your liability goes away but it does give you time to plan and prepare.
Consider Filing Separately If You’re Still Married
When a marriage is ending, communications are often strained. That could be especially true for discussing the current year’s tax return because that does mean sharing financial information. Revermann cautions that if you have any doubt about what your spouse is disclosing on the return, you should not file a joint return.
It might mean you paying more tax but that could be a small price to pay. Filing a joint return create that joint and several tax liability, it will also jeopardize a spousal relief claim.
“Just by her having suspicions, that means she has a reason to know that there was a problem with the return,” said Revermann.
You would have the option later to file an amended return and to file jointly. That might be something that gets negotiated during the divorce. It’s important to note that the reverse isn’t true. If you file jointly, you won’t have the option later to file separately, so it’s better to err on the side of caution.
Resolve The Overdue Tax Filings Before The Divorce
Sometimes, it’s not just the most recent tax returns that have not yet been filed. Sometimes, it can be several or even many years’ returns that are outstanding. The reality here is that you won’t be able to complete your divorce until the tax issues have been resolved. You can’t agree on a settlement if you don’t know the liability.
“This happens a lot where people say I know there’s going to be a tax bill and I don’t have the money to pay,” said Revermann.
In this situation, Revermann recommends still filing a return. This starts the statute of limitations for audit which is three years from the date of filing. If you never file a return, then you’re exposed to an audit.
Furthermore, if the IRS gets really impatient, they will file a return for you.
“This doesn’t mean they did my work and I didn’t have to pay anyone to do it,” said Revermann. “What it means is they will file the return based on the information they have. They’re not going to take the deductions and those other types of tax credits that you probably have coming to you.”
In other words, it’ll be a worst-case scenario filing and it would likely overstate the taxes due. Better to do your own.
Get Professional Help
If you have time, it is possible to handle these tax issues yourself. Revermann says it’s not a complex area of law. One of the services that Lucent Tax Relief offers is to conduct an assessment of your situation. They’ll then give you the steps to follow so you can do it on your own. If you don’t have time or if you’re worried that your emotions will get in the way, then it’s better to have a professional advocate for you. Either way, you have to take action: these issues will not solved themselves.
My guest for this Conversation About Divorce was Claudia Revermann from Minnesota-based Lucent Tax Relief. Revermann has been practicing law for 16 years and worked previously as a tax accountant. Lucent Tax Relief offers a free consult – call 888-589-0474.