Here are some tips to help prevent tax surprises after a divorce

Written by MLHA Team

October 9, 2021

In my last article, I wrote about some of the tax problems that arise from a divorce. We saw that both spouses may be personally liable for the entire amount of taxes due. We also saw that the IRS can seize the property of both of the ex-spouses, as well as the property of the next spouses, to satisfy the tax liability from the prior marriage.

Today, I want to address what most people call the innocent spouse provisions and some of the common misperceptions of their application.

1. Divorce decree

Almost every client that has this issue has told me that he or she should not be liable for the old taxes because the divorce decree lays that responsibility on the other ex-spouse.

I’ve tried to explain in prior articles that the liability for federal taxes is a federal statutory liability. The state divorce court has no jurisdiction or authority over that decision. Only the IRS, and any subsequent judicial scrutiny, makes the relief determination.

So, the bad news is that what your divorce decree says about federal tax liability is really not very important and certainly not binding on the IRS.

2. Lack of knowledge

Again, almost every client that comes into my office tells me that they should not be liable for the tax liabilities that arose in the prior marriage because they didn’t know about the unreported income or the disallowed expenses of the other spouse.

Unfortunately, lack of knowledge is generally only one factor in the IRS determination. Even worse, the IRS will often look not only to your actual knowledge, but also to what you should have known. In other words, they lay a responsibility on you that a reasonable person under your circumstances should have known about the unreported income or the unreasonable expenses.

More:The cost of a broken heart: how divorce can impact tax liabilities

More:Planning a trip overseas? Find out how IRS can impact your passport if you owe taxes

More:Be prepared, taxpayers: A bigger IRS might be coming

3. Community property

More bad news.

Some state laws give ownership of income and assets acquired during the marriage to both spouses, not just the spouse who actually earned that income or acquired that asset. The federal tax law may require that each spouse report some of that income on their return and become liable for the taxes that arise therefrom even if they had nothing to do with acquiring it.

4. Joint returns

An important factor in determining your liability is the type of return that is filed. Typically, joint returns make each spouse personally liable for the entire liability. Separate returns may or may not divide the liability depending upon a variety of factors too detailed to address in this article.

5. Relief from liability

In years past, there was a single statute that may have provided relief for an innocent spouse.

That statute has been repealed and replaced by a variety of different statutes, treasury regulations, tax court cases and IRS promulgations.

Rather than discuss those factors in detail, which would require multiple articles, let me just say this.

There can be relief from the tax liabilities that were incurred during a prior marriage. However, those relief provisions depend on a variety of facts that are different in every case. I have yet to encounter a divorce lawyer who was familiar with these various tax law provisions sufficient to advise their client what type of returns to file and what income or expenses to include on a return to qualify for the relief provisions.

Therefore, I would strongly urge anyone who is going through a divorce and is facing the possibility of unreported income, overstated expenses, or unpaid federal taxes to get with a tax lawyer in advance of filing the return or finalizing the divorce.

There is a lot that can be done with adequate advance planning. And the keyword here is advanced planning.

David Leeper is a board certified federal tax attorney with 40 years of experience. He may be reached at 915-581-8748, davidp@leepertaxlaw.com and leepertaxlaw.com.

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