Financial issues are a leading cause of divorce, and it’s not uncommon for couples to divorce with outstanding tax debt. While your divorce decree may specify who is responsible for the tax debt, this debt can still affect your standing with the IRS, interfere with future tax returns, and otherwise disrupt your finances. Learn more about how divorce affects back taxes and your options for settling tax debt.
Taxes and Assessment Before Divorce: Who’s Liable?
If you divorce with shared tax debt, you are both considered liable for the debt due to a concept called “joint and several liability.” As is the case with other debts, your divorce decree will outline how your tax debt is to be handled. Whether you and your spouse agree on a certain split of the tax debt or the judge decides, responsibility for the tax debt may be shared or given solely to one party. In the eyes of the IRS, you are both still considered liable for the full amount.
Joint and Several Liability: What It Means for Your Taxes
Joint and several liability comes into play when a couple files a joint tax return. It means that the IRS holds the couple liable together and separately. Instead of both parties being responsible for 50% of the tax debt, each party is responsible for 100%—as long as the debt is paid, the IRS isn’t concerned with who pays it. This can be challenging in situations where one party refuses to pay or can’t pay “their share” of the tax debt since the IRS can continue to pursue the other party for the full amount.
The Role of Your Divorce Decree
Your divorce decree should include specific information about how the tax debt will be divided and how long both parties have to pay off the amount assigned to them. It’s important to remember, though, that the divorce decree is an agreement between you, your spouse, and the court. The IRS is not a party to this divorce decree and does not have to respect it.
How the IRS Looks at Divorce Decrees
Since the IRS is not a party to your divorce decree, it does not necessarily matter that the decree states that tax debt is to be split up in a certain way. Furthermore, the divorce decree does not stop the IRS from taking collection actions against both parties. This tends to harm one party more than the other.
Assume, for example, a divorce decree that requires that both spouses pay half of the outstanding IRS debt. Spouse A pays their portion immediately, wanting to avoid future issues with the IRS. Spouse B ignores notices from the IRS, does not set up a payment plan, and has no apparent plan to deal with their tax debt. The IRS will continue to pursue both spouses for the remaining portion of the tax debt.
The agency may use all kinds of involuntary collection actions to collect the debt, including wage garnishment, bank levy, and asset seizure. If Spouse B doesn’t have any assets, the IRS can go after Spouse A’s assets, even though they already paid “their” half of the debt.
Contempt Orders
The IRS will not step in and force both spouses to abide by the terms of their divorce agreement, so what are your options if your ex-spouse refuses to pay their assigned share of the tax debt? This is a family law issue, so you would need to consult your divorce attorney. If your ex-spouse does not follow the divorce agreement terms, the court can hold them in contempt and take other actions to force them to cooperate.
In the meantime, the other spouse may want to pay the tax debt off in full and then seek compensation for what they are owed via the court, or they may want to look into innocent spouse relief or the other options outlined below.
Innocent Spouse Relief
Innocent spouse relief may be available to people held liable for understated taxes due to their spouse’s error, negligence, or fraud on a joint tax return. The IRS may grant the innocent spouse relief from the other spouse’s portion of the tax liability, but generally, it only happens if the spouse does not know about the error and has no real way of knowing about it. The IRS also offers two other types of innocent spouse relief that may be available to you, depending on your circumstances.
Separation of Liability Relief
People who have divorced their spouse may be able to seek relief from tax debt through separation of liability relief. If your ex-spouse caused your taxes to be understated on a joint tax return because of unreported income, wrongfully claimed deductions or inaccurate tax credits, you are typically still liable for those errors. However, if you are granted separation of liability relief, you will only be liable for your share of the debt based on the tax on income you earned.
Equitable Relief
This form of innocent spouse relief covers any other situation where the IRS believes it would be inequitable and unfair to hold a spouse responsible for the other’s tax debt. It’s intentionally broad, so the IRS can use its discretion to decide when to grant relief.
IRS Solutions to Tax Debt
Unfortunately, innocent spouse relief is not always available. Whether you don’t meet the requirements or the IRS believes you had knowledge of your ex-spouse’s tax errors, there may still be other ways to handle your tax debt. After discussing your situation with your divorce attorney and determining if you can hold your ex-spouse accountable via the court, you can also look into IRS relief options, including the following.
Installment Agreement
Setting up an installment agreement may allow you to prevent more aggressive collection actions, such as levies and liens. An installment agreement will stretch your tax debt over as many as 72 payments, giving you some breathing room in your budget. If you are ultimately able to convince your ex-spouse to pay what they are legally obligated to pay, it will decrease the length of the payment plan.
Offer in Compromise
An offer in compromise may be available if you can pay your tax debt in part but not in full. This can get tricky in a post-divorce situation because you cannot necessarily apply on your own. Because you’re both responsible for the tax debt, the IRS will want to know about both of your income and assets before agreeing to settle the debt. However, if you received separation of liability, you may be able to apply an OIC to your portion of the debt.
Currently Not Collectible
If you are currently not in a financial position to pay your tax debt, you may ask the IRS to place you in currently not collectible status. This is a useful option for many recently divorced individuals since divorce can cause significant financial difficulties.
You should discuss any of these options with a tax attorney before applying. Since you are applying for relief from joint tax debt, you want to be sure that you can apply for relief on your own before moving forward.
While knowing that the IRS will still hold you fully liable for joint tax debt can be frustrating, knowing your options can be empowering. Working with a tax attorney can give you further clarity and help you avoid aggressive collection actions. Call us at (404) 233-9800 or fill out our online consultation form to schedule a meeting with one of our tax attorneys today.