Tax Resolution Options When a Spouse Owes Back Taxes
Once you say, ‘I Do,’ it means you’ll be sharing life with your spouse in more ways than one. If your spouse owes back taxes (even from before you were married), and if you file a joint return, you have the joint liability of the taxes. Depending on the situation, you have several tax resolution options available to get relief from your spouse’s back taxes.
Can Your Spouse Debt Affect You?
Yes. Typically, when you and your spouse file joint returns, you’re both responsible for the tax, interest, and penalties associated with that return.
So, what if there are errors?
Each spouse is required to provide documentation to verify the tax return.
Not all marriages are perfect unions. The IRS provides exceptions to the joint liability through several tax resolution methods.
4 Tax Resolutions to Get Relief from Your Spouse’s Tax Debts
Read on to find about how you can be exempted from the general rule of joint liability.
Innocent Spouse Relief
Though rare, Innocent Spouse Relief is one of the tax resolution methods of gaining full debt forgiveness from the IRS. But you must prove your spouse (or ex-spouse) incurred a tax debt without your knowledge.
The tax debt can come when your spouse or ex-spouse failed to report income, underreported income, or claimed deductions fraudulently.
Of course, the process is more than simply saying you didn’t know about the tax issues when you signed for the joint return.
- First, complete Form 8857, Request for Innocent Spouse Relief. Remember, if you lie on the form, you can be filed with perjury.
- Once submitted, the IRS contacts your spouse (or former spouse) to get the information they require.
- You will not qualify for relief if the IRS learns you knew about the issue when you signed the joint return.
- If the IRS finds no evidence of being knowledgeable, you’re eligible for total forgiveness on all the tax debts owed.
- The relief includes the taxes, interests, and penalties as well.
It’s a popular type of relief. The most significant difference of equitable relief from innocent spouse or separation liability is it allows you to get relief from understatement or underpayment of tax, which you knew.
It’s unfair to hold you liable for the underpayment of taxes. However, to establish this fact, the IRS may consider several factors, including:
- Your marital status
- If you were a victim of domestic abuse
- If you didn’t challenge any items on return for fear of your spouse retaliating
- Your mental health when you filed returns or when requesting relief
- Whether you would suffer financial hardship without the tax relief
- To whom the tax debt is attributed to
- If you made an effort to comply with income tax laws following the tax
- If there’s a legal obligation under the divorce decree to pay the tax
To qualify for equitable relief, you must meet the following conditions:
- You were denied (you were still married) or you’re not eligible for innocent spouse relief or separation of liability
- You and your spouse did not transfer assets to each other to avoid taxes
- If you failed to file a tax return, you never had the intention to commit fraud
- The tax debt relates to an item attributed to your spouse (there are exceptions)
Separation of Liability
The IRS separates the tax liability (includes interest and penalties) between you and your spouse/ ex-spouse.
You’re no longer jointly responsible for the debt. Instead, you’re accountable for debt allocated to you based on the amount of income and deductions to your assets or earnings. In this tax resolution, you can’t get a refund if you’ve already paid the tax debt.
To qualify for separation of liability, you must meet ONE of these conditions:
- You’re no longer married to (or legally separated from) the spouse with whom you filed jointly.
- Widowed, technically you’re not married.
- Not be a member of the same household as your spouse/ex-spouse with whom you filed a joint return. You’ve been living apart during the last 12months starting on the date you filed for separation of liability.
IRS considers you as part of the same household if you:
- Reside with your spouse in the same dwelling
- Your or your spouse is temporarily absent from the household, and there’s the reason they’ll return. Examples include military service, vacation, business, prison time or sickness.
Since the separation of liability is one aspect of an innocent spouse tax resolution option, you’re required to file IRS Form 8857.
Injured Spouse Relief
Injured Spouse Relief is ideal when you feel you’re entitled to your share of a refund taken to pay your spouse’s tax debt. To recover your refund:
- You have filed a joint tax return with your spouse
- The return had a return due (all or part of which it was used to satisfy your spouse’s debt)
- You reported income on the tax return
- Your spouse owes the entire debt
- You made estimated tax payments or had your income withheld to pay taxes or you claimed the Earned Income Tax Credit (EITC) or other refundable tax credits on your joint return
Here are the steps you take to request for injured spouse relief:
- Complete Form 8379, be sure to attach copies of all forms 1099 and W-2s (yours and your spouse’s as well). Also, include your spouse’s Social Security number, and you must sign the form.
- File Form 8379 with your tax returns or include it if you e-file your return.
- The IRS will review your submission and attached documents to determine if you qualify for injured spouse relief.
- You will receive a response within 8 weeks to14 weeks.
- If your requests are approved, you’ll receive the refund (equal to the taxes you paid personally on that return).
As Enrolled Agents, True Resolve Tax understands resolving tax debt can be difficult, and the process can be complicated. We’re familiar with the requirements of each of these tax resolution methods. We can help you with the process and improve the chances of your tax relief request being accepted.