It does not come as a surprise that usually after a divorce spouses do not want to work together. However, if divorced spouses filed joint tax returns before divorce this means both spouses are liable to the IRS. The IRS can collect tax debt including penalties and interest owed from either of the spouses. The IRS may pursue either of the spouse or both up until the entire tax liability is paid.
Divorce alone is a complex process adding tax debt can make it even more complicated. Here are things you need to know and how to get equitable relief:
What happens to IRS debt after a divorce?
There is huge confusion about what truly happens and about the effects of a joint tax return after a divorce. The truth is, the IRS may not honor the divorce decree. Thus, a divorce decree although legal and legitimate does not change or modify agreements with the IRS.
In most marriages, couples combine their assets, income, investments, and other financial affairs. Plus, in most cases, they file a joint return. This becomes a chaotic scene once couples decide to part ways. Disagreements arise over which former spouse will have ownership over things that what was once shared.
As mentioned above, the IRS has the power to pursue either of the spouses. The most important thing to understand here is that after a divorce. Divorce settlement, divorce decree, or any form of agreement between ex-spouses does not bind the IRS or the state, or any taxing authorities. Meaning you will be liable even after divorce if you were liable before the divorce.
Payments made by either of the spouses are credited to the liability. The tax debt is resolved once the payment is received by the IRS and paid off the full joint liability.
How to separate IRS debt after a divorce?
The IRS creates a payment plan for anyone who owes taxes. The IRS considers the tax return and not necessarily what the divorce decree states to determine whose party’s responsibility it is to pay debts owed.
Thus, it is best if you would first consult with a tax relief attorney. There are several ways to bid for separation of liability relief:
- Innocent Spouse Relief: This exception usually provides relief to a spouse (or an ex-spouse) if you failed to report income, failed to ensure sufficient withholding, claimed improper deductions, and other tax mistakes. It is important to understand that typically innocent spouse relief is granted only when the requesting spouse is abused and or was forced into filing a joint return without paying the tax.
- Offer in Compromise (Tax Settlement): This exception creates an offer based on verification that a taxpayer is not able to pay the entire liability. However, if the accounts are mirrored then IRS will check the finances of each spouse separately. In the same way, if one spouse files a successful Offer, then the other spouse will not benefit from the relief, except to the extent that the funding of the successful Offer is mirrored to the former spouse’s liability. An Offer requires two offers that are both successful and funded separately to resolve an ex-couples joint tax liability relief.
- Separation of Liability Relief: By its name, under this relief separates or allocates the liability of both spouses and only pays what you owe. Requirements for this relief include that you are no longer married and that you aren’t in the same household at any time within the 12 months ending on the date you filed for relief.
- Installment Agreement: Establish an IRS Payment Plan (Installment Agreement) before the finality of divorce, in the decree assign monthly payments to your ex-spouse who is responsible for the tax debt. Let’s presume the spouse responsible for the liability can pay in full, the IRS will probably never look at the case again.
- CNC Status (Currently Not Collectible): Though the debt exists, the IRS has acknowledged that any form of the collection will cause financial hardship for the person thus making any collection on halt for a year or two.
If the tax debts remain unpaid the IRS may invoke ways to collect the money. Unpaid taxes owed may force them to seize properties owned by the former spouses such as houses, vehicles, bank accounts, and in extreme cases, passports and other licenses are subject to seizure.
How does IRS know if you are divorced?
Before you assume that the IRS would not know, they will. The IRS has a paramount database of personal information on American citizens. Also, if you noticed, you are required to disclose your marital status when reporting tax.
There are also consequences if you decide not to disclose your current status. Undisclosed assets, income, and other facts will surely be exposed because of a “forensic audit”. These data are forwarded to financial forensics.
The judge is also required to review all the data to determine his/her final judgment. However, the judge is also required to report inconsistencies to the IRS. Thus, the judge is legally demanded to report the data to the IRS for a tax audit.