An overview of spousal liability issues in the world of income tax.
Table of Contents
Jane and Ted divorced after five years of marriage and two children. She got the house and the kids — and the right to receive child support payments. But the payments stopped when Ted skipped town. The bad news continued when she received a notice from the IRS saying Ted hadn’t reported all of his income on one of the returns they filed when they were married. Because she signed a joint return, Jane would have to pay the tax.
This fact pattern comes up over and over, with many variations. Sometimes the husband has died; in other cases he may be available but bankrupt. Sometimes it’s the wife who underpaid her taxes, and the husband who’s getting stuck with the bill. The common thread is that the IRS is collecting tax from someone who’s liable only because he or she signed a joint return.
Before the law changed in 1998, Jane could get relief only if she qualified as an innocent spouse. If she succeeded she would escape the requirement to pay. The trick was to qualify. You had to work your way through a maze of arbitrary rules. Many taxpayers lost on various technicalities. Those who could meet the requirements were a lucky few; the rest were stuck with an unfair tax burden.
Congress acted in 1998 to make it easier to avoid paying taxes that should have been paid by your spouse or former spouse. There are three forms of relief. One is based on a much-improved version of the old innocent spouse rules. Another has more lenient provisions, but is only available if you’re no longer married — or you’ve separated from your spouse. The third one applies if it would be unfair to collect the tax from you, but you somehow fail to qualify for either of the first two provisions.
It’s important to understand that you won’t always get relief under these rules. If you believe there’s something wrong with your joint tax return, don’t sign it. If your spouse won’t agree to file a correct return, you should file separately. You’re always entitled to do that. It usually means paying more tax in the short run — but signing an incorrect tax return can mean paying a lot more tax in the long run.
The remainder of this page explains the rules for joint returns and separate returns. Subsequent pages provide more details on the rules for obtaining relief.
Joint and Several Liability
When you sign a joint income tax return you consent to joint and several liability. Joint liability means you and your spouse are both liable; several liability means you’re each liable for the entire amount. In other words, if you don’t qualify for the relief described in these pages you can be stuck paying the full amount of tax, not just your own share.
What’s more, the IRS doesn’t have to even try to collect from your spouse. They simply collect wherever it’s fastest and easiest. Why are they so heartless? Because that’s the way the law is written. They have a duty to collect tax according to the law.
What if you have a divorce decree that says your former spouse has to pay? The IRS can still collect from you. The IRS wasn’t part of the divorce proceedings, so they aren’t bound by the decree. Perhaps you can use this provision of your decree to collect from your former spouse after you pay the IRS. But in many cases the reason the IRS came to you in the first place is that it’s difficult or impossible to collect from your former spouse. It makes sense to put these provisions in your decree, but you should recognize that they may end up being worthless.
Filing Jointly or Separately
If you and your spouse file separate returns, neither one is liable for the other spouse’s taxes. Here are some things you need to know about filing jointly or separately:
- Filing jointly is an election. You don’t have to file jointly, except perhaps if you’ve entered into an agreement to do so (as part of a divorce settlement, for example).
- In rare cases you pay less tax when you file separately. But for well over 90% of taxpayers, filing separately means paying more taxes. The tax rates are less favorable, and some tax benefits that are available to unmarried filers and joint filers aren’t available to married people who file separately. That’s why it’s almost automatic for married couples to file jointly. But there’s no rule that says you have to file the way that results in the lowest tax.
- If you file separately, you and your spouse can change your mind and file a joint return later (generally within three years after your original return’s due date). That allows you to take a wait and see attitude when you have some reason to be concerned about filing jointly. But the reverse isn’t true. If you file jointly, you can’t switch back to separate filing (unless you do this immediately, before the return’s due date) — even if your spouse agrees with the decision.
- Even if you file separately, you can be liable for tax on your spouse’s income if you live in a community property state. Generally in this guide we’re discussing relief for people who file joint returns. But there are relief provisions for separate filers in community property states, too.
- The IRS can collect your spouse’s taxes from you if your spouse transferred assets to you in an attempt to evade taxes. That’s true whether you filed jointly or separately. Relief provisions don’t apply in this case because you’re participating in a scheme to defeat the tax system.
Three Forms of Relief
You now have three possible ways to avoid paying taxes that should have been paid by your spouse:
- Innocent spouse rule. This is a new, improved version of the innocent spouse rules that appeared in prior law. If you qualify, you can obtain relief even if you’re still married to, and living with, the spouse who failed to report taxes properly. Some of the more arbitrary provisions have been eliminated, but some people will find that they still don’t qualify.
- Separate Liability Election. In addition to the innocent spouse rule, there’s a new rule under which you can elect to have separate liability even though you signed a joint return. This form of relief is available only if you’re divorced, widowed, or legally separated — or if you live in a separate household from your spouse for at least a year. If you meet that requirement you may be able to avoid liability in situations where the innocent spouse rule doesn’t apply.
- Equitable relief. There are bound to be situations where it’s unfair to collect tax from a spouse who doesn’t qualify for either of the first two rules. The new law permits the IRS to provide relief in these cases.
A report from the Government Accounting Office indicates the IRS has recently done a better job processing requests for relief than in the past — but it still takes roughly a year, on average, to get a final answer.
Community Property States
Regardless of which form of relief you seek, community property laws don’t apply in determining how much tax you have to pay under these rules. So income earned by your spouse is treated as your spouse’s income, not 50% yours. That calls for special rules, which are described in Community Property States.
Injured Spouse Rule
There’s another type of relief that’s available for a somewhat different type of situation. Suppose you have a tax refund coming but the IRS grabs it because your spouse owes money. If it’s really your refund, not your spouse’s refund, the Injured Spouse Rule may provide relief.