Taxes are scary enough but to add this into your divorce is the last thing you want to deal with. Good news is that there are ways to manage your unpaid tax debts. Understanding how taxes affect your divorce and how to handle tax debts in the process can help ensure that your finances get on and stay on track with divorce and after.
How do taxes affect your divorce?
All marital liability are a factor in your divorce including IRS and State taxes. You need to be concerned and aware of two separate tax issues:
1) Taxes accrued in your marriage that have not been paid; and,
2) The tax consequences to you in your new separate estate from the property division, sale of real estate, encumbering or cashing investment account, and alimony and child support. It is best to rely on a tax professional, a CPA who specialized in the division of marital estates before during and after divorce.
Joint and Several Liability
If you filed joint tax returns when married, both parties are jointly and severally liable for the tax, penalties and interest. If you were liable to the IRS for tax debt before your divorce, you will still be liable after the divorce. That means the IRS can collect 100% of the tax, penalties, and interest from either spouse even if the divorce decree assigned tax responsibility to a specific party. How do you protect yourself?
While divorce does not eliminate each spouse’s responsibility to the IRS, there are some claims for relief that you might consider. With each of the claims for relief it is best to employ the services of a tax lawyer or CPA who is accustomed to arguing in front of the tax board and has experience in all of these defenses.
How can you limit your tax debt if your divorce decree states that you are not responsible for the debt?
1. Separation of Liability Relief
If you’re no longer married or living together, you may be able to avoid paying your ex-spouse’s share of his tax liability that should be assigned to your spouse from a joint tax return by requesting the “Separation of Liability.” Your tax bill may be divided between you and your spouse based on your own incomes, assets, and taxes you paid. It is possible that you will remain responsible only for your share of the tax bill.
Please note that “Separation of Liability” relief does not provide a refund for taxes you already paid. It only relieves you from paying additional taxes due on your spouse’s income and assets. It is best and we highly recommend to employ the services of a tax lawyer or CPA who is accustomed to arguing in front of the tax board and has experience in all of these defenses.
2. Innocent Spouse Relief
If your spouse understated taxes due on your joint tax return and you were not informed or left unaware of the errors and omissions, the “Innocent Spouse Defense” can relieve you from paying additional taxes.
Innocent spouse relief only applies to taxes due on your spouse’s income from employment or self-employment. You can’t claim relief for taxes due on:
- Your own income
- Household employment taxes
- Individual Shared Responsibility payments
- Business taxes
- Trust fund recovery penalties for employment taxes
Please remember that it is best to employ the services of a tax lawyer or CPA who is accustomed to arguing in front of the tax board and has experience in all of these defenses.
3. Equitable Relief
You may be eligible for equitable relief if your spouse understated or underpaid taxes due on your joint tax return and it is clearly unfair to hold you responsible.
Taxes are understated if your spouse:
- Didn’t report all income
- Took deductions or credits they were not eligible for
- Didn’t accurately report the value of assets
You can request relief from tax liability and related penalties and interest by filing Form 8857, if you believe only your spouse, or former spouse, should be held responsible for all or part of the tax.
The good news is you don’t have to try to figure out which type of relief is best for your situation. The IRS will consider all of the information you provide and apply the type of relief, if any, that you may be eligible for, and best fits your situation. Be advised that it is best to employ the services of a tax lawyer or CPA who is accustomed to taking your case in front of the tax board and has experience in all of these defenses.
What if the IRS doesn’t grant you relief?
If you are still liable for taxes and your ex-spouse won’t pay them, you will have to pay them yourself. All the options that other taxpayers have to settle IRS debt are still available to you.
Some options include:
Installment Agreements:
If you owe taxes and can’t pay in full, you can work out a payment plan! The IRS offers several payment plans that allow you to make monthly or quarterly payments until your balance is settled.
Currently Not Collectible Status:
If you are unable to pay your taxes due to financial hardship, Currently Not Collectible (CNC) status may give you some relief. If you are in a CNC status with the IRS, the agency will stop collection actions, and you can suspend payments on your tax balance, however the downside is that penalties and interest may continue to accrue. We recommend that you rely upon the services of a tax lawyer or CPA who is accustomed to arguing in front of the tax board and has experience in all of these defenses.
Offer-in-Compromise:
An “Offer in Compromise” (OIC), or tax settlement, can help you reduce or eliminate your tax debt. The process is complex and can take up to two years to complete. So the amount of taxes must justify this timeframe. The IRS will evaluate your financial situation when reviewing your request for an OIC. This includes your income, assets and expenses. We highly recommend that you retain the services of a tax lawyer or CPA who is accustomed to arguing in front of the tax board and has experience in all of these defenses.
Abatement of Penalties:
If you cannot meet your tax obligations due to circumstances beyond your control, you may qualify for penalty relief, also known as “IRS Penalty Abatement.”
As you can see, taxes are a complicated issue in life and even literally more “taxing” in divorce. It is important that both spouses understand their obligations and responsibilities when it comes to filing taxes, especially if there is a large debt owed. A tax debt may be a factor in your divorce but it doesn’t have to be an insurmountable obstacle. If you are considering filing for divorce and have questions about how taxes might impact your case please contact us today.
McMurdie Law and Mediation will work closely with the Parties’ tax lawyer, CPA and/or preparer, incorporating their recommendations in all legal documents that require it. McMurdie Law and Mediation does not provide tax advice. The information in this blog is for a general understanding of the issue of late or back-tax debt that must be addressed during a divorce or legal separation in Arizona.
McMurdie Law and Mediation can help you navigate the process of divorce by scheduling a no-obligation, no-cost initial consultation and case evaluation. Call us today at 480-777-5500.