Am I Liable for My Ex-Spouses’ Unpaid Taxes?

There are various ways your ex might incur liability to the Internal Revenue Service (“IRS”) for unpaid taxes. They simply may have just not made payments or filed tax returns. Or, in the more likely scenario, there has been an audit, and it’s been determined they improperly took deductions or underreported income.

If your spouse’s underpayment occurred after your divorce, you are not liable. However, if it occurred during the marriage, you may be. Your liability to the IRS for taxes is determined by the IRS, not by the divorce court, no matter what your judgment of divorce declares. In general, if you sign a tax return, you are liable for it. The IRS holds both spouses liable for returns they both sign. The good news is there are some exceptions to this rule, which you may fall under.

Please note government policies are subject to change and thus this blog may have outdated information based on when you’re reading. Always consult with your lawyer.

Innocent Spouse Rule

The IRS will not hold you liable for unpaid taxes on a joint return if you are determined to be an innocent spouse. An innocent spouse is someone who is found to be unknowledgeable about some or all of the tax return mistakes and is not held liable for some or all of the unpaid taxes.

You qualify as an innocent spouse if you meet the following benchmarks:

1. The unpaid taxes due are because of an error made on the tax return. In other words, there was not an intent to hide or underreport income or take incorrect deductions. Instead, it was just a mistake.
2. You did not participate in fraud against the IRS or a third party (such as a creditor or business partner) by transferring assets.
3. You had no actual knowledge of the error on the taxes and had no reason to be aware of it when you signed the return. This means:
   1. You did not know about income that was received and not reported;
   2. You did not know that a deduction or a credit was taken in error on the return; and/or
   3. You did not know that an expense that was deducted either didn’t happen at all or was reported at an incorrect higher amount.
4. It would be unfair for you to be held liable for the unpaid taxes based on your case’s facts and circumstances.

In making this determination, the IRS considers your background, experience, whether the items also appeared on past returns, and whether it would have been reasonable for you to be suspicious about the information provided on the return. The IRS will also look at whether you are currently separated or divorced and how the underpayment personally benefitted you.

The IRS will consider each item on the return individually when making this determination, so you could be held to be an innocent spouse for some items but not for others. You have two years from the date the IRS notified you of the underpayment to file for innocent spouse relief.

Separation of Liability Relief

In this situation, the IRS will separate out your liability from that of your former spouse. You’ll each be assigned a separate amount you personally are responsible for repaying, instead of both being responsible for the full amount.

To qualify for this type of relief, you must meet the following requirements:

1. You filed a joint return with your spouse when you were married
2. You are now divorced or separated (or you are widowed)
3. For the twelve months before you asked the IRS for relief, you did not live with your former spouse
4. You did not commit fraud against the IRS or a third party by transferring assets
5. You did not have actual knowledge of the mistake that was made on the joint taxes (see above for detailed definition of actual knowledge)

If you satisfy the IRS that you meet those requirements, your personal liability will be reduced to only a percentage of the amount owed to the IRS. You have two years from the date the IRS notified you of the underpayment to file for separation of liability.

Equitable Relief

In this situation, the IRS determines that it is not fair to hold you responsible for unpaid taxes even though you did not qualify as an innocent spouse or for separation of liability. The qualifications involved are:

1. You were not the person who paid the taxes (your spouse made the payment)
2. The underpayment did not occur due to fraud
3. The problem with the return stems from an item that is your spouse’s responsibility (such as income they earned or a deduction they are responsible for)
4. You were not aware of the mistake made on the return

The IRS looks at all the circumstances of your situation, including your current marital status, what your divorce decree said, what you knew and did not know about the return, what kind of benefit you received from the underpayment, and what kind of hardship would be created for you in being responsible for the payment. You must request this kind of relief within ten years of the IRS’s attempt at collection.

Injured Spouse

Another important detail of tax law you should be aware of is called injured spouse relief, in which you seek a portion of a tax refund.

In this situation:

1. You are currently married
2. You filed a joint return with your spouse
3. The return resulted in a refund
4. That refund was automatically applied to your spouse’s debts, such as unpaid taxes, student loans, or child support payments

You can ask the IRS to give you your portion of the refund as an injured spouse. You must request this two years after the tax was paid or three years after the date the return was filed.

Tax laws are complex, and liability for unpaid taxes can result in serious consequences. Be sure to consult with a divorce attorney experienced in high net worth divorce and tax concerns if you are in this situation.