An overview of spousal liability concerns in the world of income tax.
To be able to understand this concept better, we will create a scenario where we have imaginary characters.
"For instance, Sarah and Brian divorced after five years of marriage with two children. Sarah got the kids and the house and the right to receive a child care allowance. But payments stopped when Brian left town. The bad news continued when Sarah received a notification from the IRS that Brian did not report all of the income in one of the returns they filed during their marriage. When signing a joint declaration, Sarah had to pay the tax."
This pattern of events repeatedly occurs, with many variations. Sometimes the husband died; in other cases, it may be due to bankruptcy. Sometimes the wife pays the wrong taxes, and the husband is stuck with the bill. The common thread is that the IRS collects taxes from who is liable simply because they signed a joint return.
Before the law changed in 1998, Sarah could only receive help if she qualified as an innocent spouse. If she did, she would escape the obligation to pay. The trick was to qualify. You had to go through a maze of arbitrary rules. Many taxpayers have lost on many technical aspects. Those who managed to meet the requirements were lucky; the rest were affected by an unfair tax burden.
Congress acted to facilitate the payment of taxes that should have been paid by the spouse. There are three forms of relief. One is based on a much better version of the old innocent spouse rule. Another has milder arrangements, but will only be available if you are no longer married or separated from your spouse. The third applies if it is unfair to collect the tax from you, but somehow you fail to meet the conditions of either of the first two provisions.
It is essential to understand that you will not always get an exemption under these rules. If you think there is something wrong with your joint tax return, don't sign it. If one spouse does not agree to present a correct return, it is necessary to present it separately. You always have the right to do so. This usually means paying more taxes in the short term, but signing an incorrect tax return can mean paying a lot more taxes in the long term.
The rest of this page explains the rules for separate and joint returns.
Joint and Several Liabilities
When you sign a joint tax return, you accept joint and several liabilities. Joint liability means that you and your spouse are liable; several liabilities mean that you are each responsible for the entire amount. If you do not qualify to benefit from the relief described, you can be stuck paying the actual amount of tax, not just your share.
Also, the IRS does not try to collect from your spouse. They only collect where it's faster and easier. Why are they so cruel, you may ask? Because that is how the law is written. They must collect taxes in accordance with the law.
What if you have a divorce decree that your ex-spouse has to pay? The IRS can still bill you. The IRS was not part of the divorce process, so they are not bound by the decree. You can use this provision of the decree to bill your ex-spouse after paying the IRS. But in several cases, the purpose the IRS came to you in the first place is that it is difficult, if not unlikely, to recover from your ex-spouse. It makes sense to include these provisions in your decree, but you must recognize that they may become unnecessary.
Joint or Separate Filing
If you and your spouse files separate returns, neither of you will be liable for the other spouse's taxes. Here are some things you should know about filing together or separately:
Joint filing is a choice. You do not need to submit a joint declaration unless a contract has been signed for this purpose (in the context of a divorce agreement, for example).
In exceptional cases, you pay less tax when you file separately. But for more than 90% of taxpayers, filing a tax return means paying more taxes. Tax rates are less favorable, and certain tax advantages granted to individual declarants and shareholders are not available for married persons filing a separate declaration. Therefore, it is almost automatic for couples to file for a joint declaration.
If you file separately, then you and your spouse can change your mind and file a joint declaration later (usually within three years of the initial declaration). This allows you to wait and see the attitude when you have some concerns about filing jointly. However, if you file jointly, it will not be possible to file separately (unless you do this immediately before the return date has expired), even if your spouse agrees with the decision.
Even if you file a separate return, you may still be liable for your spouse's income tax if you live in a community-owned state.
The IRS may collect taxes from you if your spouse transferred assets to you in an attempt to evade taxes. In this case, relief does not apply because you are participating in a scheme to defeat the tax system.
Three Forms of Relief
There are three possible ways to avoid paying the taxes your spouse should have paid:
Innocent spouse rule: This is a new and improved version of the innocent spouse rule presented in the previous law. If you qualify, you can get help, even if you are still married and live with a spouse who did not report taxes properly.
Separate liability election: In addition to the innocent spouse rule, there is a new rule that you can choose to have separate liability, even if you have signed a joint declaration. This exemption is only available if you are divorced, widowed, or legally separated, or if you have lived in a house separated from your spouse for at least one year. By fulfilling this condition, liability can be avoided when the innocent spouse's rule does not apply.
Equitable relief: There may be situations where it is unfair to collect taxes from a spouse who is not eligible for one of the first two rules. The new law allows the IRS to assist in such cases.
A report from the Government Accounting Office (GAO) indicates that the IRS has recently done a better job of handling distress calls than ever, but on average, it takes about a year to get a final response.
Community Property States
Whatever form of exemption is required, community property laws do not apply to determine the amount of taxes payable per these rules. Therefore, the spouse's income is treated as the spouse's income, not 50% of yours. That calls for special rules, which are described in community property states.
Injured Spouse Rule
There is another type of relief available for a slightly different type of situation. Suppose we have a tax refund, but the IRS accepts it because your spouse owes money. If it's your refund, and not your spouse's, the injured spouse's rule can help.
