Your Spouse’s Tax Liabilities Are Yours

Telling Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.

Congratulations to all of you newlyweds — you are now on the hook for your spouse’s taxes. You remember, “For better or for worse?” Your tax liability, known or unknown, is now a joint responsibility as well.

These liabilities include back federal and/or state taxes, child support, and unpaid student loans.

The IRS wants all couples to know that:

1. Tax, interest and penalties are a joint responsibility — even after divorce or death.
2. A divorce decree, written in stone, that your ex is responsible for your joint taxes, does not mean the IRS won’t hold you liable.
3. Even if none of the income on your joint tax return is yours, the IRS can still come after you.

For example, in 2010, you were a W-2 employee and your spouse was self-employed, and you filed a joint tax return. In 2011 you divorced, and your spouse left for parts unknown. Several months ago, the IRS audited your 2010 joint tax return and determined that not all of the income from your spouse’s business was reported.

The IRS agent is going to say that you are responsible for the tax plus interest and penalties, and your wages are going to be levied to pay this debt.

There can be relief, however, if you can prove that you are an “innocent spouse.”

1. If the understatement of tax was due to cheating, or what the IRS calls “erroneous” items, and
2. When you signed the return, you didn’t know, or have reason to know, of the underreported income, and
3. You did not benefit from that income, and
4. It would be unfair to hold you liable.

The IRS considers an erroneous item to be unreported income, or incorrect deductions. These include unreported cash income, as well as unsupported deductions like claiming expenses that were never incurred.

Not knowing, or not having reason to know, refers to:

1. The nature of the item. This means that if your spouse had unreported gambling income, and those records were totally maintained by your spouse;
2. Your educational and business background. In other words, should you have known or should you have questioned.

Did you benefit? Are you living in a $1,000,000 house with reported income of only $100,000?

Being unfair to hold you liable includes whether you received a significant benefit from the understatement, whether your spouse deserted you, and whether you are divorced or separated.

There are two other types of relief — separation of liability and equitable relief.

Under separation of liability relief, you divide the understatement, including penalty and interest, between the two of you.

This relief covers unpaid liabilities due to tax understatements. The requirements are that you are legally separated or divorced, including widowed, and you did not live with your spouse for the past twelve months.

Equitable relief is provided if you do not qualify for either of the other two, and require, amongst other things, that you did not intend to commit fraud, and were not involved in a fraudulent scheme to defraud the IRS, a creditor, business partner, or ex-spouse, that it would be unfair to hold you accountable, and the income was not yours.

Advice: If you are in the process of a divorce, or if you think your spouse may be underreporting income, file separately.

Quip: There is, finally, conclusive evidence that Osama bin Laden and Muammar Gaddafi are dead. Yesterday, they both registered to vote in Chicago.

Have a good week.

Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.