It’s tax time again! I know this because I am cleaning closets at home to avoid pulling my taxes together. If you are in the middle of a divorce, you need to be careful about how you file your taxes. Jennifer Green, my very knowledgeable tax colleague, has some suggestions for this.
Married spouses who are in the process of seeking a divorce should think twice about filing a joint income tax return. That decision should not be made in haste. Although you can amend your income tax return to change your filing status from married filing separate to married filing joint, once you file a joint income tax return, you cannot later change your mind and amend your tax return for that year to change your filing status to married filing separately.
Many married couples choose to file a joint income tax return in order to take advantage of certain tax credits and other benefits attributable to this filing status. However, there is major disadvantage in filing a joint income tax return. As joint filers, both spouses are jointly and severally liable for the tax and any additions to tax, interest or penalties for that tax year even if the couple later divorces. A divorce decree stating that a former spouse will be responsible for any amounts due on previously filed joint income tax returns does not prevent the IRS from seeking full payment from both spouses.
What happens if the IRS seeks collection from you on a joint income tax return where your former spouse omitted or under-reported income or claimed improper deductions or credits without your knowledge? Although you may no longer be married to your spouse, the IRS will still hold you liable for the taxes, interest and penalties attributable to the joint income tax return, unless you can establish that you qualify for spousal tax relief. You may be entitled to spousal tax relief if you did not know (and had no reason to know) of the understatement of tax (deficiency) and if, considering all the facts and circumstances, it would be unfair to hold you responsible for the understatement.
Below is a brief overview of the three types of spousal tax relief:
(1) Innocent spouse relief: Relieves you of all responsibility for paying tax, interest and penalties if your former spouse failed to report income, reported income improperly, or claimed improper deductions or credits. You must meet all of the following conditions to qualify:
- You filed a joint return that has an understatement of tax that is solely attributable to your spouse’s erroneous item. An “erroneous item” includes income received by your spouse but was omitted from the joint return. Deductions, credits and property basis are also erroneous items if they are incorrectly reported on the joint return;
- You establish that at the time you signed the joint income tax return you did not know, and had no reason to know, that there was an understatement of tax; and
- Taking into account all facts and circumstances, it would be unfair to hold you liable for the understatement of tax.
(2) Separation of liability: Provides for the allocation of additional tax, penalties and interest owed between you and your former spouse or your current spouse from whom you are separated because an item was not reported properly on a joint return. Under this type of relief, you separate the understatement of tax (plus interest and penalties) on your joint return between you and your spouse (or former spouse). The tax allocated to you is the amount for which you are responsible, and then the IRS goes after your former spouse for the amount in which he/she is allocated. To qualify for “separation of liability relief“ you must have filed a joint income tax return and must meet one of the following requirements at the time you request relief:
- You are divorced or legally separated from the spouse with whom you filed the joint return; or
- You are widowed; or
- You have not been a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period ending on the date you file the request.
If, at the time you signed the joint return, you had actual knowledge of the item that gave rise to the understatement of tax, you may not qualify for separation of liability relief.
(3) Equitable relief: If you cannot prove eligibility for the first two provisions, you may qualify for this category of spousal relief. To qualify for equitable relief you must establish that, under all facts and circumstances, it would be unfair to hold you liable for the understatement or underpayment of tax. There is a substantial list of qualifications and factors that are considered when requesting this type of relief.
Before you agree to file a joint income tax return with your spouse, make sure you understand the tax consequences of that decision.