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An important consideration for a separation or divorce is taxation. During marriage, spouses can be in the dark regarding their household finances and, more specifically, anything their spouse may be hiding from the IRS. This may come to bite the spouse post separation when the IRS sends you a notice of proposed deficiency, attempting to hold you liable for underreported income to the IRS while you were together.
In this article, we cover the following topics:
- What can I do if the IRS sends me a Notice of Deficiency for my ex’s nonpayment?
- What kind of tax debt relief is available for me?
- What if I applied for tax debt relief but was rejected?
- What are the differences between types of tax debt relief?
- Are there limits to when Innocent Spouse Relief is available?
- What is Equitable Relief?
What can I do if the IRS sends me a Notice of Deficiency for my ex’s nonpayment?
Generally speaking, spouses filing a joint tax return are both held responsible for any tax debts that would come up from that tax return. Tax debts can come from underpayment of taxes or understatement of taxes. Understatements are when the tax returns says you owe one amount when you actually owe more. In instances where your tax return doesn’t report all of your income or claims a credit that you can’t take, this can cause an understatement of tax. The IRS may ask for payment from one spouse but they can legally hold both spouses to the entirety of the tax bill. In other words, should your ex-spouse owe $10,000 to the IRS and they are unable to pay, the IRS can go after you for the entire amount. This is called joint and several liability.
Note: Filing jointly isn’t required for married couples. To avoid potential liability from a spouse, you can file your taxes separately. That being said, it’s important to discuss the implications of filing separately with a tax professional.
What kind of tax debt relief is available for me?
A spouse who has been left with tax debts from their ex-spouse have a few avenues available to potentially seek relief. They are innocent spouse relief, relief by separation liability and equitable relief. The first two types of relief must be requested within two years of when collection activity begins. The final avenue for relief, equitable relief, can be requested until the deadline for the IRS to collect the debt has expired.
What if I applied for tax debt relief but was rejected?
If you were denied relief because you filed too late, you may be able to file a new application. Today, you can request this type of relief until the IRS can no longer collect on the debt.
What are the differences between types of tax debt relief?
To qualify for Innocent Spouse Relief, the IRS requires that you didn’t know about the improperly reported income, credit or expense nor did you have any reason to know about it. The error has to be an item of your spouses, such as their income or their business expenses.
Under Equitable Relief, the IRS will consider your knowledge of the violation in deciding whether you get relief, though they will make additional considerations. If your spouse omitted reporting an account that may have even been in your name, without your knowledge, you might still be eligible for Equitable Relief.
Are there limits to when Innocent Spouse Relief is available?
Innocent Spouse relief isn’t available when you correctly reported your income, expenses and credits but your spouse underpaid your taxes when they mailed in your return. Equitable Relief is available in underpayment situations.
Separation of Liability only is available in situations when you are divorced, legally separated or living in a separate household for the entire year prior to filing a request. If you know of the problem with the IRS filing, Separation of Liability isn’t available to you. You cannot qualify for a refund of payments made before you requested Separation of Liability. The form you need to file to use this relief is Form 8857.
What is Equitable Relief?
The final type of relief is Equitable Relief. This form of relief is mainly for those who don’t qualify for either other form of relief.
The IRS will consider the following factors in deciding whether to grant you relief:
- Whether you are no longer married or separated and not just temporarily living apart from your spouse.
- Whether you did or didn’t have actual knowledge or the problem or whether you had reason to know of the problem
- Whether you are a victim of abuse
- Whether you were in poor physical or mental health when you signed the return or filled out the application for relief.
- Whether you would suffer hardship if relief isn’t granted.
- Whether the requesting spouse has a legal obligation to pay the debt through a divorce agreement/decree.
- Whether you have tried to follow the tax laws in the tax years following the year which you requested relief.
If your ex-spouse has stuck you with a tax bill, relief may be available. It is important to review your options with a professional and decide which is best for you.