In a marriage dissolution (divorce) and property division, it is common that the assets and liabilities of the marriage are split between the divorcing parties. When the divorcing couple owes federal income tax, frequently the divorcing couple allocates the payment of the tax liability to one of the parties, often the party that earned the money generating the tax. However, allocating the obligation to pay outstanding federal tax can lead to various tax repayment issues that the parties to the divorce should keep in mind and address during the dissolution proceeding.
- IRS not bound if there is joint and several liability. If the delinquent federal income debt is owed to the IRS jointly by the divorcing spouses, the IRS is not bound by a divorce decree requiring one spouse to pay the tax debt. Under principles of joint and several tax liability, the IRS may collect from either spouse without regard to the divorce decree. The common scenario where joint and several tax liability arises is where the parties had filed Married Filing Jointly tax returns. If the IRS collects from the spouse who was relieved of payment of tax under the divorce decree, the parties must then address amongst themselves how to provide reimbursement to the spouse obligated under the divorce decree to pay. This can lead to costly legal proceedings following the divorce and contempt of court proceedings to obtain funds from the spouse liable under the divorce.
- Obtain tax account transcripts. During the divorce process, the divorcing couple should obtain up-to-date IRS tax account transcripts showing the balances owing on any delinquent taxes. That way, the divorcing couple can address the repayment of taxes during the divorce process and not have any surprise tax liability arise later following the divorce.
- Possible innocent spouse relief. If one spouse believes that the other spouse should be exclusively obligated for the joint tax liability under principles of innocent spouse relief, it can be helpful to have the divorce decree contain language requiring one spouse to pay the tax and list other grounds supportive of innocent spouse relief, such as allegations of domestic abuse and to secure the consent of the paying spouse to not oppose an innocent spouse petition. While these points are not binding on the IRS to obtain innocent spouse relief, they are factors that the IRS takes into account in determining if innocent spouse relief may be granted.
Practice Point. Divorcing spouses have multiple tax issues to consider. When the couple has outstanding tax liability, it is critical that the divorce attorney and divorcing couple work through the legal ramifications of how the delinquent tax will get paid. Putting those hard discussions off until after the divorce and when the IRS comes collecting will only make dealing with the tax matters more painful and expensive.
About the Author. Jared M. Le Fevre is a 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, 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.