The IRS may grant relief from tax liability to an “innocent spouse” when one spouse did not know or have reason to know of understatement of tax or nonpayment of tax by the other spouse by demonstrating the elements set forth in IRC § 6015. This tax relief is known as “innocent spouse relief.” In an often encountered innocent spouse scenario, one spouse is entirely in charge of preparing and paying the taxes and files incorrect returns or fails to pay, while the innocent spouse has little opportunity to be involved with the tax preparation and payment. The spouses may also jointly own real property, such as the family home.
What happens if the IRS files a Notice of Federal Tax Lien for unpaid income tax, which lien encumbers a jointly owned home, the spouses later divorce, wife files and is granted IRS innocent spouse relief, and the divorce court awards her sole ownership of the marital home. Does the wife take the home subject to her ex-husband’s tax lien, or free from the tax lien?
Unfortunately for the innocent spouse, the answer is that the innocent spouse’s property, formerly jointly owned, remains subject to the ex-husband’s tax lien.
This issue was addressed in United States v. Kraus,[1] where the ex-wife was granted innocent spouse relief but the IRS was still permitted to foreclose the ex-husband’s federal tax lien on their jointly owned house. The Court stated,
While innocent spouse relief prevents the assessment of a tax against [ex-wife] individually in any separate property she may possess, it does not affect the ability of the Government to pursue collection remedies against [ex-husband]’s interest in community property. Even though [ex-wive] [is] an innocent spouse, the liens still arose against all of [ex-husband]’s property, and all of the community property available to satisfy [ex-husbands]’s debt.” (Internal citation and punctation omitted)[2]
While Kraus dealt with property that remained jointly owned after the divorce, even if the innocent spouse obtained the former jointly-owned property as a separate property interest after divorce, such as through a division of property in divorce, “she could only take that separate interest subject to any preexisting liens or mortgage”[3], such as the ex-husband’s federal tax lien.
Practice point: The unfortunate result is that while the innocent spouse may be relieved of personal responsibility for federal income taxes, property awarded to her in the divorce may still be encumbered by her ex-spouse’s tax lien. The tax lien may prevent the property from being sold or refinanced and may subject the property to federal tax foreclosure proceedings.
If taxpayers believe that they are wrongfully being held responsible for the tax liability of a former spouse, they should contact Jared Le Fevre to discuss innocent spouse and lien removal options.
Jared M. Le Fevre is a tax attorney and partner in the Tax, Trusts and Estates Practice Group of Crowley Fleck PLLP. Mr. Le Fevre represents taxpayers before the IRS, IRS Independent Office of Appeals, Tax Court, Federal District Court and state tax agencies throughout Montana, Wyoming, North Dakota, Idaho, and Utah. Mr. Le Fevre is involved in federal and state and local tax audits, appeals, and tax resolution throughout these western states. Mr. Le Fevre also advises clients on the tax effects of business and real estate transactions.
[1]United States v. Kraus, No. C16-5449 BHS, 2018 WL 1610225 (W.D. Wash. Apr. 3, 2018).
[2] Id. at p. 6.
[3] Id.